Even people who are not generally aware of oil prices have likely heard that oil prices are dropping. This is big news that is impacting not just the United States, but the world at large. When you understand why oil prices are dropping, you understand why this is important news for everyone, including the everyday consumer.
Saudi Arabia Launches a Price War
Over the first weekend of March, the top oil exporter, Saudi Arabia launched a price war. This price war came on the heels of the collapse of the OPEC, which has been led by Russia and Saudi Arabia. The fall out came about as Saudi Arabia proposed to increase the number of barrels to 3.6 million through 2020 in response to lower consumption rates.
Russian President Vladimir Putin would not go along with this proposal as he didn’t want to give American oil producers the upper hand. Russian Energy Minister Alexander Novak gave the impression that a fight is forthcoming as countries battle for the market share, stating that countries could produce as much oil as they would like beginning April 1.
Why a Price War?
The price war has been impending for some time. There has been tension between OPEC partners on how to manage oil markets. These tensions came to a head in a meeting between OPEC and Russia. When Russia stated that they would be leaving the alliance, Saudi Arabia made it clear that it would be a regrettable decision.
Tensions arose when Russia disagreed with continued cuts in production. Mikhail Leontiev, a spokesperson for Rosneft (a Russian oil company) said, “By yielding our own markets, we remove cheap Arab and Russian oil to clear a place for expensive US shale oil and ensure the effectiveness of its production.” He also said the OPEC+ deal was “masochism”.
Russian concerns about giving up ground to the United States is linked to the fact that America has become the top oil producer in the world, with an estimated 13 million barrels pumped a day in the first quarter of the year.
As a result, Saudi Arabia has made their desire to have a part of the market share known. After the implosive meeting, the country slashed prices for preferred customers to between $4-7 a barrel. Saudi Arabia also plans to boost production to more than 10 million barrels a day.
The Effect of a Price War
Unfortunately, a price war during a time of reduced consumption does not allow for industry stability. All the big players in oil production will lose money. Russia appears to be in the best position as its annual budget runs on a $40 per barrel calculation. The Gulf Countries produce at a lower cost, but government spending and subsidies require them to operate at the $70 per gallon range to balance their budget.
Oil dependent states such as Iraq, Iran, Libya, and Venezuela will suffer the most, as has been the case for years. Yet, the United States will not be totally in the clear either, as the low prices will have an impact on the bottom line of oil companies.
Don’t Let Price Wars Slow You Down
Prices are constantly changing in the oil industry. MSI Pipe Protection Technologies can help you position your company to successfully protect your assets and save you money. Speak with one of our experts toll-free today by calling 877-276-9208.