With OPEC deal to cut output, Saudi signals surrender to U.S. shale

by WorldTribune Staff, December 8, 2016

Saudi Arabia’s strategy to drive U.S. shale out of the energy market has failed.

“The new OPEC deal to cut oil output – the cartel’s first since 2008 – amounts to nothing less than Saudi Arabia’s surrender to the power of American shale,” John Hulsman wrote for UK business daily City AM on Dec. 5.

OPEC widens oil production despite price slumpRelated: Letter from Riyadh: Gas is 25 cents/gallon, princes on edge but hopeful about Trump era, Dec. 6, 2016

OPEC as a whole agreed to cut production by 1.2 million barrels per day (bpd), with Saudi agreeing to cut 500,000 bpd. With the cut, OPEC now accounts for less than half of all energy output in the world.

“Unwittingly, the Saudis have made the Americans the new global energy swing producer, the permanent ceiling for the global price of oil.”

The move by OPEC “is as momentous a shift in global power as the stunning recent Brexit and Donald Trump votes,” Hulsman wrote. “Whereas Brexit showed Europe to be in absolute decline, the election of Trump brings to an abrupt end to 70 years of the U.S. as the global ordering power, the Saudi’s meek surrender brings to a close the long age of OPEC domination of the world’s energy market. This year truly has seen the death of one world order, along with the uncertain birth of another.”

The OPEC deal is contingent on a further 600,000 bpd in cuts from non-OPEC members, with Russia expected to contribute 300,000 bpd to the total.

“OPEC isn’t much of a cartel if it is utterly dependent on major (and generally unwilling) outside players such as Russia to make its internal agreements work,” Hulsman wrote.

Meanwhile, “Iran has held firm that it has no intention of hurting its just unbound economy to take one for the team. In the end, the Saudis had to meekly acquiesce, allowing Iran to continue to ramp up production, helping their sworn enemy in a way that must have put the House of Saud’s teeth on edge.”

The OPEC cuts are estimated to leave global oil production at 32.5 million bpd.

“Even if prices sustainably drift upwards, all this will do is make American shale – far more price sensitive and far more capable of being quickly brought on line than the fixed rigs of the OPEC member countries – turn the spigots back on, with its production rising and the price consequently falling,” Hulsman wrote.

“The Saudis, having utterly lost the plot, are now – as the problems inherent in this deal make all too clear – trapped in a world where they no longer control the global energy scene. It seems even the surrender terms the OPEC deal represents will not be accepted by Riyadh’s competitors. And they have no one to blame for this state of affairs but themselves.

“Along with Europe as a great power, and America as the world’s ordering power, the myth of Saudi energy dominance is the third great dinosaur to be felled by the asteroid that is 2016.”