The roller-coaster ride of oil prices is speeding downward, carrying with it bickering members of OPEC, anxious U.S. shale oil producers and a Russia that relies heavily on petroleum revenue.
With a weak global economy, the customary swing producer of oil — Saudi Arabia — has cut prices instead of cutting production, setting off a scramble on world markets. Crude oil prices have tumbled more than 23 percent since June, including a more than 4 percent drop Tuesday. Prices fell below four-year lows to wind up at $81.84 a barrel for the benchmark grade, West Texas Intermediate.
A tidal wave of revenue has shifted with plunging prices. About $200 billion that would have flowed into the coffers of the Organization of the Petroleum Exporting Countries has instead remained in the hands of consumers in oil-importing nations, including the United States, China and members of the European Union.
Lower prices have also pushed the budgets of Saudi Arabia, Russia, Libya and Iraq into the red, and deepened budget deficits in oil-exporting nations of Nigeria, Venezuela and Iran. Last Friday, Venezuela’s foreign minister called for an emergency OPEC meeting; the next one is scheduled for Nov. 27.
The price drop also has taken the wind out of the sails of U.S. shale oil producers, driving down their share prices by about 25 percent on average in less than three months. Texas-based Pioneer Natural Resources, for example, has lost $10 billion in market value in 83 days, even though its chief executive, Scott D. Sheffield, said that the company had hedged against lower prices through next year.
The plunge in prices accelerated Tuesday after the International Energy Agency reduced its forecast for global oil consumption, citing stagnant economies in Europe, slow growth in China and slower than expected growth in energy consumption in other emerging markets.
Meanwhile, OPEC production has climbed to a 13-month high, bolstered by a recovery in Libya and higher Iraqi output.
Over the past four years, Saudi Arabia has stepped in at crucial moments such as this, cutting production to prop up prices or boosting production to restrain price increases. During that time, prices have been stable, albeit at historically high levels surpassed only briefly in 2007-2008 and 1980 (adjusted for inflation).
But the kingdom also has intervened in 1986 and the late 1990s to flood oil markets, punish rival members of OPEC and defend its market share, and Saudi Arabia might be doing that now, too. Because of long time periods needed to start up new oil projects or institute conservation measures to cut oil use, prices tend to lurch in one direction before a response pushes them back in the other.
This year, rising U.S. oil production has cut U.S. imports, and Saudi Arabia finds itself competing more vigorously with West African, Russian and even Alaskan exporters for Asian customers. It is also competing against deeply discounted Canadian oil sands production for U.S. refiners along the Gulf of Mexico.
Philip Verleger, an economist and longtime analyst of the oil world, calls it “oil price war 3.0” and said “the Saudis have to fight this now because they were seeing significant encroachment on their market share.” He said the kingdom is hoping that lower prices will prompt companies to postpone or cancel their most expensive projects.
Pioneer’s Sheffield said that once prices dip below $80, “people will start making decisions to cut drilling.” And once it dips below $70, “you will see significant impacts.” He said the rate of growth in U.S. production could drop by more than half. Eric Lee, an oil analyst at Citigroup commodities research group, warned that U.S. production might not respond quickly because some producers are hedged, while others have committed to spending programs. Although oil prices have been falling, the number of rigs in the United States has been steady and substantially higher than a year ago. If there is a floor to prices, he said, it might be a “soft floor.”
“In the short term, oversupply and lower oil prices clearly have some positive impacts,” said a report by the Center for Strategic and International Studies. “They are good for economies and consumers, helpful for sanctions efforts against rogue states, and serve as buffers against continued political unrest and supply disruptions.”
“But,” the report added, “they also carry the seeds for future troubles, including underinvestment in efficiency and alternative energy forms as well as in future oil and gas” projects, and can have “mixed climatic impacts, and eventually lead to higher prices.”