"WE DON’T care about oil prices,” Muhammad bin Salman, Saudi Arabia’s deputy crown prince, recently told Bloomberg, a news agency: “$30 or $70, they are all the same to us.” Such comments by the man calling the shots in the world’s biggest oil power should be taken with a pinch of salt. Low oil prices cost the country billions, threaten its credit rating and are turning it from creditor to debtor: this week it set out to raise $10 billion from global banks. Yet the claim is not entirely hollow, either. Saudi Arabia is determined not to give any succour to higher-cost producers, despite the damage the low price does to its own finances.
At a meeting in Doha, the Qatari capital, on April 17th Saudi Arabia blocked an agreement between OPEC and non-OPEC producers, such as Russia, to shore up global oil prices by freezing production at January’s level. The idea that such a deal could have been enforced was fantasy anyway. As Carole Nakhle of Crystol Energy, a consultancy, points out, Russia is pumping at record levels and there was no way to police its compliance with a freeze. Iran, which is vowing to raise output to pre-sanctions levels, had dismissed the notion that it would take part as “ridiculous”.
Prince Muhammad apparently forced his negotiators to shun a deal just as they were about to sign it, insisting that the kingdom would only freeze production if Iran were prepared to do likewise. Some participants were furious at his behaviour. The Saudi delegation “had no authority to decide on anything”, fumed Eulogio del Pino, Venezuela’s oil minister.
For decades Saudi policy has been steered by deft negotiators such as Ali al-Naimi, the kingdom’s oil minister. Now it is under the thumb of the 30-year-old prince, who believes low oil prices will help his drive for economic reform at home and weaken Iran, Saudi Arabia’s arch-rival. “For years we’ve been told that Saudi oil policy is driven by commercial and economic considerations,” says Jason Bordoff of Columbia University’s Centre on Global Energy Policy. “Yet what happened in Doha seems to have had a big geopolitical dimension to apply pressure on Iran.”
Fortuitously for oil prices, the Doha debacle coincided with the start of a three-day strike in Kuwait that temporarily dented the emirate’s crude production. Yet that underscored how daft the effort to impose a freeze was in the first place: low oil prices are already dampening global supply. The strike in Kuwait was the result of public-sector pay cuts brought on by lean oil revenues. Schlumberger, an oil-services firm, says it is reducing activity in Venezuela because the cash-strapped state oil firm there has not paid its fees. Oil traders say they can no longer get letters of credit to trade with Venezuela. They also worry about the counterparty risk of dealing with oil-dependent countries like Nigeria.
The real freeze, says John Castellano of Alix Partners, a debt consultancy, is taking place in America. Shale producers that borrowed heavily to increase production in the boom years are likely to flock to bankruptcy court this year in even greater numbers than in 2015, he predicts. On April 14th and 15th respectively two such firms, Energy XXI and Goodrich Petroleum, filed for Chapter 11 protection. Even those that are still going concerns have no money to invest in maintaining production. As a result, shale production has fallen by 600,000 barrels a day since its peak last year, according to the Energy Information Administration, an official body. That, more than any OPEC posturing, is what is underpinning oil prices.
