If you are one of the millions of people who use their cars and trucks daily, you are certainly aware that the price for gas at the neighborhood pump is less than it has been for quite some time. That is because U.S. oil companies have been able to mine oil from shale through a process known as fracking. This extra oil has offset OPEC’s stranglehold on the liquid gold. With a positive U.S. oil and gas reserves evaluation and improved fracking procedures, Saudi Arabia is feeling the pinch economically and has capitulated to the pressure by attempting to raise some $27 billion through bond sales to establish more oil wells so that the U.S. companies cannot compete with the Saudis.
In the past, a negative oil and gas risk assessment was enough to frighten away U.S. oil companies, but fracking has proved to be a blessing. Now, oil can be extracted from rock formations that had been considered too dense for mining. The House of Saud thought that by lowering the price of oil, U.S. companies would close up shop and look for other opportunities. This has not been the case. With such high profits at stake, American ingenuity has devised new ways to bleed the oil from shale. The continued evaluation of leads and prospects has encouraged more fracking, which has sent oil prices even lower.
This is great for the average American driver, but it is bad news for Saudi Arabia. Their entire economy is dependent on oil prices remaining at or above $106 per barrel. Other members of OPEC, like Dubai and Abu Dhabi, can withstand $50 per barrel oil, but a high unemployment rate and unrest among the under-30 years of age Saudi population is creating an environment that is on the verge of political revolution.
Riyadh’s plan to raise extra funding for more wells is a sign that it is losing the battle with the U.S., which has turned the situation into a high-stakes poker game. As more oil originates from the U.S., less profit flows back to the Saudis. The U.S. has been at the mercy of the OPEC nations for decades, but now the tables have turned.
Saudi Arabia is also in a constant arms race with Iran. Both nations have invested heavily in their armed forces in an effort to stay ahead of the other country. However, with a predicted budgetary shortfall of some 20 percent in 2015, the standard of living continues to plummet though the stockpile of armaments increases.
Saudi’s aggressive move to increase production and force oil prices down has had exactly the opposite effect than was planned. Now, they find themselves unable to fill in the gaps by selling off their vast oil reserves that at one point totaled over $700 billion. About $65 billion per year of that was directed toward satisfying the Saudi budget and guaranteeing the status quo for future generations. Continuing this trend will only add to the unrest seen on the streets of Riyadh and felt in the households of the average Saudi citizen.
Thanks to its low national debt, Saudi Arabia is receiving the loans at extremely low interest rates. However, just the fact that it has been forced to borrow in an attempt to keep the U.S. oil companies at bay speaks volumes about the U.S. shale industry’s ability to withstand the pressure exerted by Riyadh.
Saudi Arabia’s central bank said that non-OPEC oil producers have not been as vulnerable to the low prices as had been expected. It expects that in time demand will once again force the prices back to where they had been. Given the ever-expanding and improving U.S. oil shale harvest, that could take a long time.