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After Saudi Arabia, Which country is next ? – Dec 29

December 29, 2015

This is how market works. Nothing is forever, so correction was obvious. Oil for nearly a decade enjoyed $ 75 plus price advantage and by mid-2008 got close to $ 150. It is purely lack of vision if the planners were unable to read the writing on wall, as USA was deeply involved in increasing its shale production.

I am wondering that during all these years, where were the oil experts that have failed to identify US Shale Oil Revaluation and its repercussion on all producing countries. I remember once Prince Waleed spoke/raised the subject in August 2013 warning oil producers to wake-up.

I think USA tricked the oil producing nations by supporting the oil prices to surge to encourage its shale oil producers to increase its rig count and at the same time to raise its domestic production. It took them almost 10-years to arrive at point where cost of shale can become affordable.

Interestingly rig count from 1609, on October 10 2014 peak is down to nearly 538 and yet according to recent eia report, United Sates on an average produces 9.3 million barrels of crude oil per day. It nearly produces 4.1 million barrels per day non-crude petroleum liquids and produces 1.1 million barrels per day of bio-fuel. USA is now the leading producer overtaking Saudi Arabia and Russia.

Initially the world was under impression that shale oil cannot be produced less than USD 100. The cost was gradually reduced to around USD 70 and then some estimates suggest it is affordable below $ 50. Surprisingly oil experts/industry were either helpless to act or made a wrong calculation that falling rigs can become more challenging task to innovate, which did work resulting increase in production per well that had simultaneously reduced the production cost. In-fact shale technology has entered its second phase, which is extremely effective due to introduction of new technology supported with loads of data that has helped to improve overall production and transportation efficiency.

The big question for oil producers is what next? With their ongoing strategy will oil prices ever rise or will cut in oil production do the trick? Or do they have any other option in their sleeves? Or they will wait for Geo-Political condition to worsen to come to their rescue?

I think they are left with no real option. There is a risk that other nations too may start announcing joining shale oil revolution and could export.

Therefore, it is time to take drastic measures and act quickly by slashing all unnecessary spending, subsidy should be given only on essential food items, introduce taxes without any delay. Delay all projects for next 2-3 years until oil prices stabilize or conditions improve.

The idea of oil production cut may not work and will go in waste, as USA has already announced that it has allowed oil export and hence, they will capture the market share. So there is big risk of more misery as oil price war is here to stay.  Any worsening of Geo political unrest could be one time issue and would be short lived.

Refrain from borrowing, instead utilized funds from own reserves as long as possible, as it is web of trap in which every developed nation is entangled and will never be able to come out.

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