The U.S Won the Oil War

The Oil War Saudi Arabia is not exactly having a good year. This was especially evident last week.

First, Congress overrode Obama’s veto of the bill letting Americans sue the kingdom for its alleged role in the 9/11 attacks. Then, they finally decided to give up its two-year war on energy producers in America by announcing that it was prepared to cut oil production by half a million barrels.

The Saudis thought that they could collapse America’s fracking industry by pumping oil and keeping prices down. They didn’t count on the American ingenuity. Instead, as reported on OilPrice.com, “Saudi’s entire economy is collapsing” — and they are desperate to push oil prices back up again.

This change was a complete reversal of the policy the Saudis have been following since the summer of 2014. Global oil prices began to tumble, and usually major OPEC producer typically reacts to falling prices by slashing production so that demand outstrips supply and prices rise again. But instead, their oil ministry announced that they were going to continue normal production.

The Saudis were watching the fracking boom in the United States from places like the Bakken field in North Dakota and Eagle Ford in Texas. The U.S. was turning into the Saudis’ chief rival as the world’s biggest oil producer (at one point in early 2014 the U.S. even surpassed the Saudis at almost 11 million barrels a day) and they weren’t happy about it.

So, they decided to keep pumping oil even as prices fell. The Saudis thought that a global oil glut would push prices so low that American companies would be forced out of business. After all, the Saudis production are so low, that would still make money even if prices fall to five dollars a barrel. Since, in 2014 the average oil-fracking break-even price was around $60 a barrel, they figured after several months of $40 oil, the Americans would give up, and the Saudis – and OPEC – would once again be in control of the oil market.

So the Saudis kept pumping and pumping and pumping. At one point in August of 2016, they reached their highest-ever monthly production, as the price per barrel settled into a “new normal” in the mid-40s range (compared with over $100 a barrel in June 2014). So. instead of ruining the U.S. fracking industry, the global oil glut is about to ruin the kingdom of Saudi Arabia. It appears that when your entire economic and social system is entirely dependent on oil, it can’t sustain itself at prices that low.

The Saudis have built an enormous welfare state on the back of their oil industry and they had to cut benefits to their citizens. They also had to make plans to lay off some government workers and reduce the salaries of others, and the country’s budget deficit now stands at 13.5 percent of GDP (ours, by contrast, is just 2.5 percent). The Saudi Arabian economy is barely growing at 1 percent, (which makes the horrible Obama economy look like the booming Reagan years).

Not only that, the American oil industry has grown stronger, not weaker, as a result of the price slide. American producers learned to cut costs and be more efficient, even as companies used debt-for-equity swaps to stay in business. During this period, American output has actually continued to rise. Although more than 100 energy companies have had to go out of business, those who learned how to be lean and strong survived. While the break-even price will never be as low as the Saudis, it’s now possible for American producers to make money even at $45 a barrel.

Looking toward the future, the Saudi surrender means that instead of breaking the backs of American energy producers, they made them stronger. In fact, that if the Saudi production cut pushes crude prices back up, American producers will be making more money that can be invested in new energy exploration and development in new technologies like waterless fracking and laser drilling that will make fracking safer, cleaner, and more efficient than ever.

The bottom line is that America has truly reemerged as the world’s energy superpower. No one really knows if the Saudi-led decision at the OPEC meeting last week in Algiers to cut production by some 800,000 barrels a day will really push oil prices higher. That makes no difference. The Americans have beat the Saudis in this crucial round of the oil war despite a U.S. administration that fought them every inch of the way.


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