Saudi Arabia is winning the oil war

With 59 oil and gas companies in the US filing for bankruptcy and several others in the bankruptcy pipeline, it looks like Saudi Arabia is winning the oil war it declared on the US last year. It is reported that the number of closures could exceed the 68 declared by the telecom companies when they went bust in 2002-03. Last year, it looked like the Saudis were losing the war as US shale oil flooded the global markets, bringing down the price of oil to barely survival levels for the Middle East oil-producing countries. But last November Saudi Arabia, which has always been seen as a “swing state” to stabilise prices, flooded the markets by boosting their output to 10.6 million barrels per day. All efforts by the oil-producing states that comprise Opec to control production so that prices could stabilise were in vain as Saudi Arabia, the largest producer, refused to cut production. The economies of these oil-producing countries were in the doldrums and many of them had to raise taxes as oil income literally collapsed as the price went down to $20 a barrel from a peak of $120.

In recent months the Iranians, against whom the US had lifted the trade embargo, insisted on selling their oil in the market to rebuild their economy, and they too would not cooperate with Opec.

The situation looks extremely bleak for shale oil producers as the Saudis are not likely to relent in the near future until they put the US shale companies out of business. According to reports, it costs the Saudis barely $10 to extract a barrel of oil whereas for the Americans the break-even point is $60-$70.

With current oil prices ruling at around $45 per barrel, it is difficult for the US companies to survive, leave alone compete. Even the banks have stopped giving these companies money knowing that they will never be able to return the same. So even mergers of these companies, which had sprouted when the going was good, are not possible because they will not get the funds to finance mergers and acquisitions.

In this scenario, where two oil giants are at war, oil-consuming and importing countries stand to benefit. The good news is that these comparatively low prices stand to last for a while longer. Prices are expected to stabilise around current levels for some time. India, one of the largest oil importers, stands to gain as it has since the past year. Its oil bill has dropped dramatically and this, in turn, has lowered the current account deficit and helped to cut the fiscal deficit. The government’s subsidy to oil marketing companies has also come down and it must make the best of this situation to strengthen economic growth and build up oil reserves.