Historic moment: Saudi Arabia sees End of Oil Age coming and opens valves on the carbon bubble

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Photo: QuotesPictures.net

Photo: QuotesPictures.net

Most analysts believe Saudi Arabia refuses to cut production because it wants to shake out its higher-cost competitors or because it wants to punish Iran and Russia. There may be some truth in those theories, writes Elias Hinckley, strategic advisor and head of the energy practice with international law firm Sullivan and Worcester, but they miss the deeper motivation of the Saudis. Saudi Arabia, he says, sees the end of the Oil Age on the horizon and understands that a great deal of global fossil fuel reserves will have to stay underground to avoid catastrophic global warming. “That’s why it has opened the valves on the carbon asset bubble.”

Saudi Arabia’s decision not to cut oil production, despite crashing prices, marks the beginning of an incredibly important change. There are near-term and obvious implications for oil markets and global economies. More important is the acknowledgement, demonstrated by the action of world’s most important oil producer, of the beginning of the end of the most prosperous period in human history – the age of oil.

In 2000, Sheikh Ahmed Zaki Yamani, former oil minister of Saudi Arabia, gave an interview in which he said:

“Thirty years from now there will be a huge amount of oil – and no buyers. Oil will be left in the ground. The Stone Age came to an end, not because we had a lack of stones, and the oil age will come to an end not because we have a lack of oil.”

Fourteen years later, while Americans were eating or sleeping off their Thanksgiving meals, the twelve members of the Organization of the Petroleum Exporting Countries (OPEC) failed to reach an agreement to cut production below the 30 million barrel per day target that was set in 2011.  This followed strenuous lobbying efforts by some of largest oil producing non-OPEC nations in the weeks leading up to the meeting.  This group even went so far as to make the highly unusual offer of agreeing to their own production cuts.

The ramifications of this decision across the globe, not just in energy markets, but politically, are already having consequences for the global landscape.  Lost in the effort to understand the vast implications is an even more important signal sent by Saudi Arabia, the owner of more than 16% of the world’s proved oil reserves, about its view of the future of fossil fuels.

Since its formal creation in 1960 the members of OPEC, and specifically Saudi Arabia (and in reality the Kingdom’s control over global oil markets is much larger than that 16% of reserves implies as its more than 260 billion barrels are among the easiest and cheapest to extract and before enhanced recovery techniques accounted for a much larger share of global reserves) have used excess oil production capacity to influence crude prices.  The primary role of OPEC has been to support price stability.  There are notable exceptions – like the 1973-1974 oil embargo and a period of excess supply that undermined prices and crippled the Soviet Union in the 1980s (though whether this was a defined strategy or serendipity remains in some question), but at its core the role of OPEC has been to control oil prices. As recent events show, OPEC’s role as the controller of crude oil pricing is coming to an abrupt end.

But in a world where a producer sees the end of its market on the horizon, then every barrel sold at a profit is more valuable than a barrel that will never be sold

In acting as global swing producer, OPEC has relied heavily on Saudi Arabia, which can influence global prices by increasing or decreasing production to expand or reduce available global supply.  Saudi Arabia can do this not only because it controls an enormous portion of global reserves and production capacity, but does so with crude oil that is stunningly inexpensive to produce compared to the current global market.  A change, however, has occurred in Saudi Arabia’s fundamental strategic approach to the global oil market. And this new approach – to refuse to curtail production to support global prices – not only undermines OPECs pricing power, but also removes a vital subsidy for global oil producers provided by the Saudi’s longtime commitment to price support.

Understanding Why

The widely held conventional theory is that the Saudis want to shake the weak production out of the market.  This strategy would undermine the economic viability of a meaningful amount of global production.  The theory assumes that this can be done in some kind of orderly bring-down of prices where the Saudis can find an ideal price below the production cost of this marginal oil production but still high enough to maintain significant profits for the Kingdom while this market correction plays out. The assumption is that following the correction there will be a return to business as usual along with higher prices, but with Saudi Arabia commanding a relatively larger share of that market.   An alternative rationale is that Saudi Arabia is fighting an economic war with oil; a strategy designed to economically and in turn politically cripple rival producers Iran and Russia because the governments of these countries that depend on oil exports cannot withstand sustained low prices and will be significantly weakened.

While there may be some truth to both of these theories, the real motivation lies somewhere closer to Sheikh Yamani’s 2000 prediction.  Saudi Arabia has embarked on an absolute quest for dominant market share in the global oil market.  The near-term cost of grabbing that market share is immense, with the Saudis sacrificing potentially hundreds of billions of dollars if low prices persist.  In a world of endless consumption, this risk would be hard to justify merely in exchange for a temporary expansion of global market share – the current lost revenue would take years to recover with a marginally higher share of global supply.

But in a world where a producer sees the end of its market on the horizon, then every barrel sold at a profit is more valuable than a barrel that will never be sold.  Current Saudi oil minister Ali al-Naimi had this to say about production cuts in late December: “it is not in the interest of OPEC to cut their production whatever the price is,” adding that even if prices fell to $20 “it is irrelevant.”  Implied, if not explicitly stated, is that Saudi Arabia wants its oil out of the ground, regardless of how thin its profit margin per barrel becomes.

Saudi Arabia is seeing a new and massively changing energy landscape. The U.S. and China have agreed to bilateral carbon reduction targets.  2014 is now officially the hottest year recorded in human history, a record set almost impossibly without the presence of El Nino.  And on January 7 a report released in Nature lays bare the fossil fuel climate change equation by concluding that to achieve anything better than a 50/50 shot at keeping global warming under 2 degrees centigrade (the most widely accepted threshold for avoiding catastrophic climate change) 82% of fossil reserves must remain in the ground.  That report puts hard numbers on the percentages of fossil fuels that must “stay in the ground” and calls for 38% of proven Mideast oil reserves to never to be pumped from the ground.  That 38% represents some 260 billion barrels of oil – worth tens of trillions of dollars – much of that not held in Saudi reserves.

Saudi Arabia no longer needs OPEC.  Global action on carbon dioxide emissions is gaining global acceptance and technological advances are creating foreseeable and viable alternatives to the world’s oil dependence

All of these threats to oil use are occurring against a backdrop where the acceleration of costs-effective alternative technologies expands the potential of viable alternatives to our current fossil fuel-based energy economy.  Yamani’s prediction no longer seems a fantasy where no one outside of science fiction writers could envision an alternative to the age of oil, but rather a stunningly prescient analysis of the future risk to the value the largest oil reserve on the planet by a man who once managed that reserve.

Saudi Arabia no longer needs OPEC.  Global action on carbon dioxide emissions is gaining global acceptance and technological advances are creating foreseeable and viable alternatives to the world’s oil dependence. Saudi Arabia has come to the stark realization, as Yamani foretold, that it is a race to produce, regardless of price, so that it will not be leaving its oil in the ground.  The Kingdom has effectively open the valve on the carbon asset bubble and jumped to be the first to start the race to the end of the age of hydrocarbons by playing its one great advantage – a cost of production so low that it can sell its crude faster and hoping not to find itself at the end of the age of oil holding vast worthless unburnable reserves.

The end of the age of oil, of course, remains many years off (and almost certainly well beyond Yamani’s timeline of 2030), but to Saudi Arabia, that end is clearly not so far away that the owner of the largest, most accessible crude resource is willing to continue to subsidize higher prices for other producers at the risk of leaving its own oil untapped one day in the future.

Collateral Fallout

Much has been made of the catastrophic economic consequences to Russia, Iran, Venezuela and other oil exporting nations caused by these low oil prices, as well as, the profound damage to their economies and impending political turmoil.  Meanwhile in the U.S., there has been endless analysis of the impact (or lack of impact) on the nation’s resurgent oil production and speculation about the price at which U.S.  production will begin to decline.

Less well documented is the impact on access to capital for drilling operations (and given the disastrous economics of North American coal, perhaps fossil fuel extraction broadly).  Drilling for oil requires huge amounts of capital with a significant appetite for risk, as both production uncertainty and market volatility can undermine the value of investments.  In the current production boom, market volatility was wildly underpriced.  When combined with pent up appetite for yield due to persistently low interest rates, capital, including tremendous amounts of high-yield debt, has flooded into oil companies.  As low crude prices persist there will be substantial losses by investors.  This will cause volatility in crude oil markets to be re-priced, and access to low cost capital will disappear for all but a select group of oil production investments.

There is a much much bigger story unfolding: the carbon asset bubble is deflating 

OPEC will continue to meet and hold itself out as a cartel that can control the oil markets, but that time has passed.  The cartel was dependent upon Saudi Arabia to use its outsized swing position to control spare capacity in the market.  With the Saudis no longer interested in that role, the influence of the cartel is gone.  It would be no surprise at all to see Saudi Arabia actually increase production (though how much additional output is readily available is unclear) as prices stabilize and begin to climb later this year because excess capacity will be shed from the market and global economic growth will accelerate.

The direct oil markets impact and the geopolitical fallout will likely be the defining headlines of 2015, but there is a much much bigger story unfolding: the carbon asset bubble is deflating.  The value of effectively every asset class on Earth is influenced by the assumption that a fossil fuel-based economy will persist for so long that any potential for future change to asset values can be ignored.  That assumption is wrong.  The global industrial economy operates on an assumption of available and relatively inexpensive energy, either in the form of electricity or liquid fuels.  If the form, availability of, or cost of, those energy sources changes it will fundamentally change the cost to use and produce virtually every other asset on Earth. And that will necessarily change the value of every one of those assets. There will be both positive and negative impacts, and understanding this change, in both scope and speed, will provide insight on one of the largest wealth shifts ever experienced.

The owner of the most valuable fossil fuel reserve on Earth just started discounting for a future without fossil fuels.  While they would never state this reasoning publicly, their actions speak on their behalf.  And that changes everything.

Editor’s Note

This article was first published on Energy Trends Insider and is republished here with permission from the author.

Elias Hinckley (@eliashinckley) is a strategic advisor on energy finance and energy policy to investors, energy companies and governments. He is an energy and tax partner with the law firm Sullivan and Worcester where he helps his clients solve the challenges of a changing energy landscape by using his understanding of energy policy, regulation, and markets to quickly and creatively assemble successful energy deals.

Comments

  1. says

    Thank you for your amazing analysis. The incredible irony of the carbon bubble: countries will produce as much fossil fuels as possible while they still can.

    This means that we will be looking at years or even decades of low oil, gas and coal prices, with all producers wanting to produce as much as possible within the remaining carbon budget. This also means that it is high time to introduce a carbon tax, or country carbon budgets, or any instrument to limit total burnable carbon, to avoid a global race to the bottom. Saudi-Arabia already counts on it.

    • Tom says

      Here we go again, tax this tax that. I am sorry to tell you but there is already a fuel tax on every gallon of petrol that is produced. We pay it at the pump. The EU and the UK have some of the highest and what do we get for it, very little in return. I am awfully tired of you so called progressive environmentalist crying about global warming this and global weather change that. UK scientist are predicting the sun is going to cool down by 2030 and President Obama is crying the sky is falling over global warming. From where I sit, it is all poppycock. What we have is a bunch of chicken little’s running around crying the sky is falling. I can remember that chap Carter I think his name was. Oh we have no oil and yet ships were over flowing with sitting off of the shore of the United States while the citizens of the U.S. paid through the nose for fuel. So go petal your papers somewhere else, I’m not buying your rubbish.

  2. Ali says

    I’m not an expert in this field but I do like to read about it.
    It’s only since prices have dropped that people have really begun seeing this as an opportunity to putting a price on carbon.
    The Saudis know very well how to control prices and I think they have acted as pretty responsible producers over the years. I really don’t think they’re trying to empty Ghawar just so as to avoid a carbon tax. Nonetheless they are destroying both current and future investments in the oil industry nd I’m wondering if they have other (responsible) reasons for this course of action.

  3. Alastair Leith says

    Not all assets have their price determined by energy costs. As Bucky Fuller pointed out decades ago intellectual ‘assets’ (to use the authors jargon) or metaphysical knowledge as Bucky referred to it is not bound by this law of physics. Energy efficiency and software being two obvious examples.

    also with RE already at grid and LCOE parity for solarPV and wind the relevance of controlling FF prices is debatable. so long as carbon pricing can stop the firesale of FFs their price is increasingly irrelevant as RE takes over.

    • Zia says

      Intellectual assets and mataphysical knowledge are generated with the application of time by individuals or organisations who consume energy or operate with assets which were produced by the consumption of energy. Energy price changes, the time value of the individual changes.

      • Alastair says

        There’s no correlation with the energy consumed and the value of the intellectual goods though. Individuals use energy, you are kidding right? Who’d have thought. The important thing is that we make it all GHG emissions free energy ASAP (not to mention air pollution).

  4. Clive Bates says

    I’m not convinced by this analysis… It would imply several things about the Saudis that are not quite plausible:

    1. An outbreak of long-termisim. For this to work, the Saudis would need to apply a low discount rate to favour giving up supernormal profits on current consumption to justify extracting more oil over a longer period at a low price. Demand elasticity of oil is still low in the short to medium term. It’s far from clear that the Saudis are really long-termists.

    2. Belief that climate change policy will substantially curtail fossil fuel consumption in a way that threatens them. That remains a leap of faith for anybody, given what has happened to consumption since UNFCCC was initiated the and current growth in population, economy and trends in energy efficiency. It’s not obvious why the Saudis would rush from laggard to vanguard in this thinking.

    3. Saudi is not the obvious loser from a policy-led decline in the oil market. If CC policy does lower demand, the low cost producers like Saudi, will be the ones supplying it.

    4. A better alternative strategy. Most importantly, this is not the rational approach even if all the assumptions about the end of the oil age are met. What would matter most is the *value* of the revenue stream. It would be better to take higher prices in the short to medium term, and accumulate an income generating sovereign wealth fund (eg. from investments in whatever replaces hydrocarbons or an uncorrelated portfolio) to compensate for revenues that might be locked away in the ground by climate policy – and this approach is much less vulnerable to the risk of being wrong about the end of the oil age.

    Better theses are cock-up, losing control, or political. Saudi officials have stated that if they withdraw production, then they believe supply will come in from non-OPEC sources. Market share unperpins Saudi *political leverage* in the world. I suspect this is more about the threat to that than anything else.

    • Ron says

      I’m in full agreement. I think because the USA can out produce them is also a factor. Ultimately the cost of production is going to dictate who the global supplier is. As long as the Saudi oil can be brought to market cheaper, they will dictate price. Technology will be the X factor in the near future energy markets.

    • Lana says

      But on point (3) it is clear that climate change policy will benefit Saudi Arabia the expense of other oil-producing countries. That is precisely because they can cut the oil price and reduce the extraction of oil elsewhere.

      So if Saudi Arabis can facilitate the move to a low carbon economy then they might try to – it might actually be in their interest economically.

  5. Andrew Allan says

    This article I feel misses some key points that undermine the argument. 1) it is arguable whether OPEC has done anything to control prices in the last 30 years. It is clear that no-one abides by the quotas and the Saudis realise this. 2) while Saudi production costs are low, their break-even costs are very high – perhaps over $100/bbl. They have a highly educated middle class with no jobs. They have a massive investment programme underway to build some of the world’s biggest petrochemical plants to create those jobs. They will need their oil for that. It is clearly not a case of getting it out of the ground asap. 3) the article rightly touches upon US access to capital. This is the real nub here. By allowing oil prices to fall temporarily the Saudis can squeeze out high cost highly leverage debt oil producers in the US. So when prices rise, financial institutions will think twice about lending on ambitious forecasts of oil prices. That leaves the Saudis in a stronger position 4) It is nice think that the UNFCCC will achieve something, but anyone who has been to a COP will realise it has massive issues. The climate negotiations are a bottom up approach now and it is going really slowly. 5) the comment about the stone age was in response to questions about peak oil theory, which was all the rage at the time and threatened to trigger a wave of alternative energy investment. It was the Saudis defence against clean tech, not an argument for it.

    The article looks like a nice piece of publicity designed to expand the practise of the law firm.

    • says

      Expand the practice is a good thought.
      But there is more here. The value of hydrocarbons has decreased. The value of alternatives has influenced price control. The key is storage of alternative energy and thereby balancing intermittent supply with Variable demand. Batteries are a half solution. Hydrolysis and hydrogenation are a Solution after Next. What element added to hydrocarbons (hint) increases the energy content, makes transport easier, and reduces CO2 emissions??
      The hydrogen economy solution was hyped in 1970s and killed by Saudi oil and petrodollar in 1980s. It would be very fitting if the Kingdom of Ibn Saud was dethroned by the hydrolysis of desalinated H2O. The Middle East and also the NA Southwest needs water as much as oil right now. Prices will adjust and as water increases and oil decreases the hydrogenation cost solution will be passed.
      The fact that technology was suppressed for 3-4decades while we pumped twice as much carbon into the atmosphere was very selfish of The Seven Sisters descendants. The same power brokers are trying again. Maybe thirst and basic chemistry will prevail????

      Thomas Hayn

  6. says

    I believe the Saudi role in OPEC has given them expertise in balancing price & production for stability (in their market as much as globally).

    If the oil end-game is their real focus then permanently squeezing out the marginal production sources that have flooded supply at $100+ a barrel also makes sense. While it might mean a shift to long-term thinking, the short-term effect of reducing price for long enough to cause disinvestment in marginal production could be the driver for action now. And as renewables grow, which they inevitably will, then being the low-cost oil supplier with plenty of reserves means they will dominate the end-game for decades. Plenty of time to play that out, provided there are fewer competitors.

  7. says

    2014 was not the warmest year in the last 120 years and the pause of global warming the past 17 years still continues. The planet will wake up to the fact carbon dioxide from burning fossil fuels will not cause catastrophic global warming. There is no need to sacrifice our abundant fossil fuels in order to unsuccessfully alter climate.

    I can’t believe Saudi Arabia is foolish enough to base their production of oil on the basis of no future demand. Planes will not fly on batteries. Renewable sources produce electricity and oil is too expensive to use as that source.

    James H. Rust, Professor of nuclear engineering

    • Chris says

      Here is a quote from Wikipedia about the Heartland Institute, for which this man works:

      “In the 1990s, the group worked with the tobacco company Philip Morris to question serious cancer risks to secondhand smoke, and to lobby against government public-health reforms. More recently, the Institute has focused on questioning the science of human-caused climate change, and was described by the New York Times as “the primary American organization pushing climate change skepticism.” The Institute has organized meetings of climate change skeptics, and has been reported to promote public school curricula challenging the scientific consensus on human-caused climate change.”

    • Steve d'Apollonia says

      “Planes will not fly on batteries.”
      ~ James Rust, 2015

      “I think there is a world market for maybe five computers.”
      ~Thomas Watson, president of IBM, 1943

      “There is no reason anyone would want a computer in their home.”
      ~ Ken Olsen, founder of Digital Equipment Corporation, 1977

      “Two years from now, spam will be solved.”
      ~ Bill Gates, founder of Microsoft, 2004

  8. says

    I get the idea of the 350 ppm carbon budget, which had its roots in the Stern Review. This review, while exhaustive, is not as robust as we might like to believe. If we as a species manage to replace hydrocarbon based energy sources, we could be in for a surprise. We will still need to mine lithium and rare earth elements, we will still need to build linear disturbances on the landscape to move energy, we will still need to build and install infrastructure that changes the land use, and we will still be drilling and fracking rocks for geothermal energy. A more likely scenario will see a transition to natural gas as a feedstock to reduce carbon emissions. In absence of any substantive proof that Saudi Arabia has seen the end of oil and has adopted this as official policy, their stated objective should suffice: to preserve market share and shake up the market. Anything else is just cobbling facts to fit one’s narrative.

      • Alastair says

        Even ‘natural’ convention fossil gas can produce equivalent GHG to burning coal given a 5% fugitive emissions scenario in the extraction, transmission, distribution and appliance chain.

  9. says

    You need to read some history. See what happened to the Saudis in 1980-85, and you will understand that the “Reagan’s son argument” that you link is just more Republic nonsense about the wisdom of a guy with Alzheimer’s. OPEC did not push up the price in 1980, the Saudis did it alone. The rest cheated. Eventually the Saudis were producing 30% of capacity and would have hit zero in another 2 years.

    That’s why they opened the spigot at the end of 1985, undercut the rest of OPEC, crashed the price and took back their market share.

    And that reason still holds.

    As for Yamani’s quote about stones, he’s been saying that for 40 years. Look it up. The Saudi’s did not open the spigot — they just kept it open like they have ever since 1986. They are not going to prop up the bunch of crooks known as OPEC again. Yamani is smart to say what he said — That’s what he wants you to believe. You can get my book, Carbonomics, for free at stoft.com; I think this in chapter 8.

  10. thor says

    This is so ridiculous it doesn’t warrant much of a comment. I surely hope Green energy takes off. But to say the Saudi’s just want to sell all there oil regardless of price make no sense. Surely if oil prices stayed high and they only ended up selling half their reserves but got say X dollars in total they would be much happier than going through all the work to sell ever last drop of oil and only getting some amount less than X. Surely you guys left something out of your argument / article because as is it makes no sense.

  11. says

    This is insane analysis.

    The marginal profit has been traded away for volume means that Saudi’s are giving away the revenues that they can get today for the fear that something that may or may not happen tomorrow.

    This is plain ridiculous.

    http://www.recconshr.com

    • says

      If the Saudis are in a position to produce enough oil to put the world financial markets in a tail spin, its a two sided cut throat for the green and non green investors. Saudis are just sitting back smirking at all this speculation on their motives.

  12. Steve Loxton says

    Why haven’t I seen mentioned the possibility that the Saudis are trying to forestall competition from renewable/alternative energy?

    With grid parity already happening and EVs about to take off (admittedly, still a 15 to 30 year time horizon even at $100+/bbl oil), doesn’t it make sense to push down the price of oil in order to reduce what is probably the greatest driver of renewable development (ie ever higher oil prices)?

    If they wait until RE can compete in the market (which can only happen faster, the higher the price of oil goes), when that tipping point comes, both oil demand and price will take a simultaneous hit, which would be doubly damaging. But, by establishing a new price paradigm now – in effect, pulling the rug out from under the alternatives – they not only forestall their inevitable ramp up, but also reduce the “hit” they take to “just” low prices, now, while demand actually goes up as a result and mitigates the effect of those low prices.

    The strategy may only delay the inevitable. But, it will certainly delay it for years, if not decades and it allows the Saudis much greater control over how it plays out and spreads out the downside risk over a much longer timeline.

    • Brian Bauer says

      I think most people underestimate/don’t fully understand the state of solar energy and electric Vehicles (EV). An excellent (although somewhat overly optimistic) analysis of the transformative nature of solar and EV is Tony Seba’s-see link below. Seba is a Stanford professor who specializes in alternative energy and understanding disruptive technology. As a graduate student who closely studies technology and energy production, I believe Seba’s optimistic projections will come to pass. If this is the case all oil producers are under a great threat and the oil party is already starting to end and will soon be over-by late 20’s, early 30’s. I believe Seba calls for essentially the end of hydrocarbon use by 2030. Even the EIA predicts that by 2020, 18% to 47% of light vehicle sales will be electric-google ‘EIA percentage of US light vehicle sales, for details. Seba notes that in many areas with moderate plus levels of DNI, unsubsidized PV solar is cost competitive with all conventional energy sources. In Australia 12% of residential homes have PV solar. Bottom line alternative energy is a much bigger and greater threat than most people realize-if this is the case it is logical that Saudi’s act as they are to attempt to minimize the impacts of this energy transformation. I believe the logic of Hinckley is overall solid and based on my understanding alternative energy technology like PV and EV the threat to future oil markets is very serious and generally under estimated. http://www.amazon.ca/Clean-Disruption-Energy-Transportation-Conventional-ebook/dp/B00L2M7UK8/ref=sr_1_1?ie=UTF8&qid=1423487473&sr=8-1&keywords=tony+seba

  13. Ron Frank says

    I am suprised no-one has pointed out one of the most flawed aspects of this article: that renewable energy is about to replace oil anytime soon. Much as I would like that to happen myself, I’ve been searching the Internet to corrobrate that data. The best I found was a graph by the IEA showing oil demand will *stop* increasing by 2040, 25 years out.

    And yet the thesis of the article is that the Saudis have made basically a trillion dollar bet to “cash out” of their reserves while they can, then the inflection point of oil demand is not even on the horizon, much less its collapse. I wouldn’t bet the farm (or the Ghawar oil field) on that premise, I’m sure the Saudi’s wouldn’t either.

    The article downplays the idea that the Saudi’s are shaking out weak production, stating: “the near-term cost of grabbing that market share is immense, with the Saudis sacrificing potentially hundreds of billions of dollars if low prices persist.” Well, with the increase of tight oil production in the US, the Saudi’s, realized they were losing the upper hand, and had two choices:

    A) Reduce revenues by cutting back production to maintain the price, knowing that doing so would subsidize competitors, encouraging them to produce more, which erodes your production and revenues even further while they profit handsomely (how distasteful is that from their perspective?)

    or B) Reduce revenues by cutting the price instead, and driving your competitors our of business; and as an added bonus, after a few years, you can raise prices *and* keep your market share.

    And a couple of further bonuses with option B): They’ve implemented a brilliant form of economic terrorism, since very few investors would be willing to dive into capital intensive projects going forwards knowing the Saudis could kill off its profitability by turning up the taps again.

    And they’ve taken the wind out of the sails (and windmills) of the renewable energy, which again has high capital and production costs.

    It’s smiles all around in the kingdom for having found this highly effective strategy!

  14. says

    Well, sounds almost sci-fi but if this analysis is a true forecast of what is to come then I would be looking at what the Saudi’s have under wraps from an R&D standpoint and for those of us in Countries which have fresh water supplies ( my homeland Canada), better start protecting our fresh water supplies if the Planet continues to get hotter.

  15. Amad Uddin says

    Prices will come down, huge margins will vanish, People will loose jobs, lavish lifestyles will come to end.
    Global wealth distribution will change.
    High cost energy producers will go out of business.
    OR

    there will be another war that will stop cease oil production from Middle East and hence other sources of high cost energy resources will win.

  16. Mike McAvey says

    The explanation sounds very believable, but I built a very simple model that showed that OPEC’s market share would have to rise from the current 39% to over 80% within 10 years for for the presumed strategy to make sense.
    Assumptions:
    Global demand is constant.
    Market share rises by 7 points in year 2, 6 in year 3, etc. [no rise in yrs 9 & 10].
    Price remains at $50 through year 4, jumps to $75 in year 5, and to 100 in yr 8.
    The discount rate is 2.5% throughout

  17. says

    What a nonsense.
    Air traffic will double the next 20 years. 600.000 new trucks will hit the Chinese roads each year. Oil will power the transportation sector for at least the next decades, there is no alternative.
    So, predicting the end of the fossil fuel era is completely unrealistic. a delusion.
    Energy transition = storage transition. Coal, oil and gas (and uranium) are sptorages, supplies. Where are these new fuel storages? Nowhere!
    Renewable energy is neglectable and unreliable. It’s a fallacy and will be for the next decades.

    • says

      exactly……….thanks for some reality……………China had 5 million cars in 1990…………….it now has 150 million……..( and they like big SUVs)…………………… I test drove an electric car a few years ago…but we still don’t have the infrastructure for it, because the polititians serve big oil. Look at the world appetite for plastic…….you think that’s going away?………The world is now using up a billion barrels of oil in less than 2 weeks…….we will talk about climate change, but we wont really do much until oil prices skyrocket again……..which they will in a couple years

    • Bruce Milller says

      Vietnam War was Lost to Communists, Vietnam was America’s access to “The South China Seas Oil Basin” (Google this). China buys Saudi Oil with Yuan, perhaps now a preferential currency? US keeps their best warships in the South China seas? Seeking a share of more cheap light sweet crude? to finance another “American Golden Age, like the mid 20th century oil fueled age? Us/Israel and Russia/China provoking Saudis.Iranian conflict? to remove all living things that might oppose gutting of all oil in this region? By selling light nuke weapons to both sides until the Genocide there is complete? Sharing of the region to U.S./Israel and Russia/China? Example: Oil Drilling in Golan Heights, once a richer part of Syria, now considered by corporate decree at any rate a part of U.S./Israel, but still contested by United Nations?
      It seems that the world over, the U.S. thirst for oil will be met even at gunpoint, and at any cost? Saudis are in the cut and run mode?

  18. Nathan says

    The main flaw to this argument is that regardless of our technological advances, distribution, large scale transportation, farming, the war machine, space travel, petroleum byproducts, construction, etc., will not find a new advance within the next 100 years. So, while we may decrease the amount of gas sold via personal vehicles, the amount of oil use in large scale has NO foreseeable end in sight.

    This is all economic warfare and why the US even has an alliance with Saudi Arabia in the first place.

    We are ready for some early phase rollouts for green energy, but we are far from free or past the age of petroleum.

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  1. […] As renewable technologies replace fossil fuels en masse, the fossil fuel industry’s value will only go down. If our global society is to avoid disastrous climate change, the majority of the fossil fuel industry’s reserves is unburnable, and will become stranded assets. And even today we are experiencing the violent swings in the industry’s financial value, with oil prices down almost 50% from just 6 months ago—perhaps in part because OPEC is adjusting to a deflating carbon bubble. […]

  2. […] that as the oil becomes harder to pump up, the cheaper it has become. Do not be fooled by that, there is a lot of politicking going on behind the scenes. And rather than being good news, it may be a sign that countries like Saudi Arabia are lower than […]

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