There is no oil price war

Intelligent Investor

Independent Financial Research

There is no oil price war. The narrative goes like this: oil prices have fallen because OPEC, led by Saudi Arabia, refuse to cut production in response to slower demand. They refuse to cut production because they are concerned about the explosion of supply from shale producers in America. That is rubbish. Saudi Arabia is the world's lowest cost oil producer, able to extract oil at US$5-6 a barrel. The cost of extraction oil from shales ranges from U$35-$100 with an average cost of about US$70 a barrel. Let's assume Saudi Arabia (or any other low cost producer) cut 1m barrels of output. That move would have no impact on prices because high cost producers would quickly replace the lost 1m barrels of production. By cutting output, the Saudis would be gifting additional revenue to higher cost producers. The Saudi's aren't at war with anyone. They are acting rationally, just like any other low cost producer in a commodity market would act. (VIEW LINK)


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Independent Financial Research

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