6 ms·
Oil extraction has wildly varying costs. Saudi Arabia is lucky in that they have large deposits that are quite shallow. As such Saudi Arabia can produce oil wit
by Phlarp 8y ago
Oil extraction has wildly varying costs. Saudi Arabia is lucky in that they have large deposits that are quite shallow. As such Saudi Arabia can produce oil with a very low marginal cost per barrel ($15 or $20). Compare that to tar sands, offshore rigs or shale gas with horizontal drilling, exotic injection techniques, high water usage, deeper oil deposits, saturation divers and royalties on the extraction techniques. North American oil producers have much tighter margins.
- yingw787 8y agoYeah, but many of those are fixed costs, given immutable characteristics of the fields themselves, which means given a certain profitability threshold, you have a very predictable income stream. That given of course varies on the highly variable price of petroleum commodities, but given the oligopolistic nature of the O&G industry, getting subsidies to tide over the bad times and prevent extensive capital depreciation is reasonably easy. Saudis make a lot of crude, and the crude they pump is good quality. Hence, they print money.
- Phlarp 8y agoThe fixed low marginal costs of Saudi infrastructure also allows them to keep the higher cost producers on a tight leash. If US domestic production gets too robust for their liking; they can simply enforce a price regime low enough to put other producers out of profitability, and hold it there long enough that even the most cash rich extractors will pack it in and attempt to shift that capital to other ventures.
- dahdum 8y agoOPEC used to have that power, but not really any longer. U.S. / Canada production has steadily lowered production costs, cheap oil will bankrupt OPEC countries before it kills off US production.
- Phlarp 8y agoThe glut of domestic oil all comes with higher extraction costs. While it's unlikely an OPEC embargo could affect the United States in the same way it did in the 70s, Saudi Arabia specifically can sell oil at a price that is mildly profitable for them but a loss for US producers. OPEC no longer operates as a perfect cartel; members cheat on the quotas that are set and not all OPEC members can hold the line as well as KSA can. With all that said, the 2015 oil price collapse did lead to significant reductions in domestic production, and it was partially driven by Saudi Arabia.
- martinald 8y agoUS/Canada is a net oil exporter now, so their power is pretty limited in an embargo style situation. Also, unlike the 1970s Saudi now has a much larger and ridiculously fast growing population - growing anywhere between 2 and 6% per annum since the 1980s. There is an enormous welfare state with very few taxes collected (on the basis the oil wealth pays for everything), but with a population growing so fast it is stretching the budget. This means KSAs power to hold prices low actually probably hurts them more than the US now - the social contract in KSA is that the government looks after you, and if you suddenly stop getting healthcare/housing etc because of a OPEC/US oil, it will start destabilising the country which obviously the royal family as terrified of.
- blattimwind 8y agoKSA also has access to very cheap labor (relatively slave like).
- Phlarp 8y agoThis is true, but the relatively slave like cheap labor does still require robust social services, which the kingdom pays for with oil revenue.