Oil: a Saudi’s point of view

Posted: December 3, 2014 in Uncategorized

A  similar situation to the current one in 1980s where the price fell from (inflation  adjusted) USD100 to the current equivalent of USD28 a barrel in 1986.

King Abdullah of Saudi was actually regent for the sick King Fahd at the time and it has still nightmares of those times where the real income of Saudis was practically halved in 6 years!

The single biggest mistake at the time was to cut oil production to maintain (failing) high price.

Even without the help of conspiracy theories (Russia, US Shale Oil wipeout), you can be sure King Abdullah will not make the same move. Also OPEC was disunited (Iran/Iraq war) until 1985.

In 1985 the Saudis changed strategy (of cutting production)  and  increased production crashing the price of oil and constricting a lot the North Sea oil production and regaining market share. The price of oil took 16 years to recover and spurring one of the longest US  Bull Market in history 1982-1999)

In the ’80s the drop was led by a reduction of US and European consumption and the rise of the North Sea (UK) oil.

Now it is an easing demand in Europe and China and rising US shale oil production – plus Ukraine (maybe). OPEC is quite disunited, specially Venezuela.

Learning the lessons of the past, Saudis seems to have jumped directly to 1985 and start a price war that, if history tell us, can last year (not so long as now Saudis have 3 time the population of the 80s….so they can last 5 year of low price at maximum.

They need to last at least 2-3 years as a lot of US shale oil producers have hedged the prices for 1 year.

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