Shale Oil and the Saudis–The War Continues
Saudi Arabia, once the undisputed financier of the Arab world, has suffered a downgrade in its credit rating. A report at Seekingalpha.com reveals that Moody’s has downgraded Saudi Arabia, Oman and Bahrain credit ratings, which is understandable given the economic realities of maintaining a price war. It only costs about $10 for the company to produce a barrel of oil, but the fiscal break-even point is pegged at $66.7 per barrel. World prices are substantially lower than that benchmark. Saudi Arabia is said to be investigating alternative income-generating sources because a prolonged price war could seriously deplete its reserves.
Saudi Arabia and U.S. Shale Companies Foster a Prolonged Price War
The war continues even though most experts agree that Saudi Arabia failed in its bid to flood the world with cheap oil and disrupt its oil-producing competitors. Most OPEC countries, according to a report at Breitbart.com, face severe economic hardships due to advanced U.S. fracking technologies that should keep prices depressed through 2017. The United States has added 4.5 million barrels per day or more to global oil production despite widespread shale company bankruptcies. Energy companies in states like Pennsylvania, which rely on more conventional extraction methods, face the lowest prices in more than a decade without the commensurate increases in production capacity that the nontraditional fracking companies can produce according to Pennlive.com.
The Continuing Oil Price War Creates Unintended Effects
One of the key effects of the price war and drop in oil prices is that leading economic indicators average lower growth rates, but hard-pressed families certainly see significant increases in the prices they pay for low-end, everyday goods. Artificially low oil prices can be just as disruptive as the rapid increases that occurred during the OPEC oil embargo during 1973-1974. A report posted at TheAtlantic.com points out the following financial issues that low oil prices generate or sustain:
- The Venezuelan economy is tanking, which leads to political turmoil, government oppression and volatile condition that could erupt in civil war.
- The Russian ruble has suffered severe devaluation while stocks have also fallen.
- Exploration companies are cancelling long-term shale and drilling projects due to severely limited capital resources.
- Goldman Sachs reports that investments in energy of up to $1 trillion are at-risk of cancellation or bankruptcy.
- Low prices reduce the development of alternative energy sources and global exploration and production of heavy oil that’s found in remote areas.
The consequences of low oil prices include fewer incentives to explore and develop new fields, and this situation discourages companies from expanding alternative energy solutions and energy-saving technologies. Creative development has suffered a multiyear setback, and when the oil price war ceases, industry and production will lag behind. Oil prices will quickly regain their value due in part to fewer reserves. Coupled with other worrying economic conditions globally, returns to high oil prices could be the spark that ignites hyperinflation or recession and a worldwide economic meltdown of unprecedented proportions. Industry and energy production are years behind where they should be, which would tend to exacerbate any economic crisis.
Questions About the Economic Effects of Artificially Low Prices Confound Investors
In today’s uncertain economic conditions–which include concern about Brexit, the European Union’s stability, deficit spending, low interest rates, sluggish global economies and whether stimulus money will be injected into the world’s economies–lower oil prices delight consumers but hamstring business in many ways that include oil exploration and opening new reserves. This trend adds yet another volatile condition to the mix of troublesome economic news. Revolutionary drops in prices are typically followed by big increases, and the economy could suffer a double hit due to depletion of production capacity and global oil reserves. Find out more about the risks of a financial meltdown and how the oil war between Saudi Arabia and U.S. shale-producing companies could spark the fire that causes an economic meltdown at the PersonalMoneyStore.com.