Posted by /u/MrDannyOcean

So this is a commonly repeated viewpoint, both in this subreddit and in the broader reddit-verse and media. It goes something like Saudi Arabia is intentionally leaving the oil taps on as a strategy to kill North American shale! Flood the market with cheap oil, drive out those companies by bankrupting them, then go back to the glorious days of high oil prices! Sometimes you'll see this repeated with Iran as the primary target, because the Saudis and Iranians have very high tension right now. Unfortunately, this analysis is mostly false. It's not 100% wrong - I'm sure the Saudis will be happy if Iran gets hurt, or if North American shale companies go bankrupt. But it's simply not the primary reason why they are pumping. What is the reason Saudi Arabia is still pumping? Because they can't drive the price down by themselves - they're only 13% of world oil production. If they were to cut production, the price of oil would rise... but not that much. If the price increases by 10-15% but your volume plunges, you just lost a huge amount of money. It makes zero financial sense to cut production by yourself - you do nothing but lose money. But what about OPEC? If OPEC were to slash production as a group, would that make a difference? Potentially. OPEC controls about 40% of the world's production. This is less than their heyday (more than 50%) but it's still a huge chunk. The problem is that OPEC doesn't work - a cartel only functions if the members trust each other not to cheat. If a cartel has cheaters who continue to pump high volume after agreeing to a production cut, the cartel falls apart. And Saudi Arabia absolutely does not trust the rest of OPEC. To see why, you have to glance backwards a few decades. In the 1980s the price of oil had slipped heavily, and the Saudis held meetings to push it back up. The Saudis believed that they had OPEC's agreement to limit production, and started to slash their own production. The rest of OPEC didn't stick to it, and continued to pump. The Saudis went forward, undeterred. The cut their own production to a quarter of previous levels... and not much happened. The rest of OPEC didn't cut, and prices didn't rise by that much (certainly not enough to make up for a 75% fall in volume). Saudi Arabia lost a boatload of money, and got pissed. They turned the oil tap back on and flooded the market, and prices dropped like a brick. That moment essentially sealed the end of OPEC. Since then OPEC has barely functioned. Leading up to the 91 Gulf War, Saddam wanted a production cut to help himself and all members. But the Saudis didn't trust him (or anyone), Iran hated him, and nothing happened. In the mid-90s oil fell to fifteen dollars a barrel before the cartel got its head out of its butt and was able to agree to mild production cuts in 1998. Even these cuts were unlikely to work for long, or to drive the price of oil very high, but geopolitical factors saved OPEC for a while. In the early 2000's three things happened 9/11 Two middle eastern wars Demand from China and India skyrocketed Without having to have any production cuts at all, the price of oil went through the roof, shattering OPEC's own lofty late-90s goal for what the price should be. It was basically nirvana for oil producing countries. But the deep divisions and mistrust remained. In 2008 the price began to crash as the global recession hit. OPEC held meetings and tried to agree to production cuts to keep prices high. What happened? On 10 September 2008, one such production dispute occurred when the Saudis reportedly walked out of OPEC negotiating session where the organization voted to reduce production. Although Saudi Arabian OPEC delegates officially endorsed the new quotas, they stated anonymously that they would not observe them. The New York Times quoted one such anonymous OPEC delegate as saying "Saudi Arabia will meet the market’s demand. We will see what the market requires and we will not leave a customer without oil. The policy has not changed."[58] This is the new reality of OPEC - agreement to cut, followed by backstabbing. This quote is from 2008, before North American shale was really a huge concern in the market. But the Saudis see (out of pure, financial self interest) the best thing as 'pump baby pump'. They don't trust the rest of OPEC - particularly not the basket cases like Venezuela who are almost certain to cheat. There might be some trust among the Arab gulf states, but not among membership at large - too many poorly run governments and untrustworthy strongmen. Remember, this is before shale was on anybody's mind as a major problem. So we reach the current day - prices have dropped because of slowing demand in China, and increased shale production in North America (just to list a few primary reasons). There are a lot of countries desperate to cut production. But the Saudis have publicly proclaimed that "We don't care if prices crash to 20 dollars a barrel". That number isn't an accident - that matches history - the last time OPEC actually cut was in 1998 when prices hit 15 dollars a barrel. $15 in 1998 is roughly $21.80 in 2015. Things have to get incredibly, incredibly bad for OPEC to actually band together. And 20 dollars a barrel is where the Saudis probably stop making money - their production costs are estimated somewhere between 10-20 dollars a barrel (estimates vary). The simple truth is that Saudi Arabia can make plenty of money right now because their production costs are so low, and they don't want to lose volume or market share. They don't trust OPEC to keep with a cut because of their historical experience and the bad governance in many of their partners. So they keep pumping because there's nothing else to do. As I stated in the beginning, I'm sure they are happy about some of the side-effects of this strategy. The Saudis would love to hurt shale producers, even if it would only be a temporary hit to them. They're definitely happy Iran is feeling the hurt of low oil prices, because Saudi Arabia is basically in a proxy war (or two) with Iran. The Saudis are also more than happy to hurt Russia, who is financing Assad (whom they oppose). This is all true, but it's mostly secondary side-effects. The primary reason for low oil prices today is the 1980's era OPEC cheating - The Saudis have played this game before and gotten burned. Until things reach their breakeven point of about 15-20 dollars per barrel, Saudi Arabia isn't budging. As an aside, the entire 'drive shale out of business' model wouldn't really make a lot of sense anyways. Shale is a flexible (well, flexible for O&G) type of production that can start/stop fairly quickly. If the price goes back up, shale production revs back up and the price drops again after just a short interlude. The big American O&G companies are also advancing technology in this area incredibly fast, and the cost to produce is dropping. Even bankruptcy wouldn't really be a problem - even if all the shale companies went under, the US and Canada are financially advanced. Some company or financier would always be there to buy up the bankrupted assets and quickly revive the dead company in the event of high prices.