Is There a U.S.-Saudi Move to Lower Oil Prices?
Could the U.S. unleash a flood of oil from the strategic petroleum reserve that would drive down prices in order to punish Russia? While the idea has been kicked around over the last few weeks — most recently by George Soros – it has also been dismissed as not a serious option. Some say the impact of an oil sale, if it actually succeeded in lower prices, would be temporary. Saudi Arabia could cut back on production to keep oil prices at their current levels. Others decried the idea as contrary to the objective of the SPR, which has been setup to be used only in cases of emergency.
However, over at Quartz, Steve LeVine wrote an interesting article about the possibility of a coordinated response between the U.S. and Saudi Arabia that could have a much broader impact on oil markets. President Obama is, after all, meeting with Abdullah, king of Saudi Arabia, on March 28. Ukraine is certainly going to come up in their discussions; his time in Europe was dominated by coordinating a response to Russia, despite the original intention of the trip to discuss nuclear security.
LeVine argues that it is possible that the U.S. could sustain a sale of 500,000 to 750,000 barrels of oil per day from the SPR. If the U.S. coordinated with Saudi Arabia to ensure that they did not cut back production — indeed, they could even step up production from 9.7 million bpd — the greater supplies could slash prices almost immediately. Russia gets about 70 percent of its export revenue from oil and gas, so even a modest drop would be a significant blow. A former Ford and Carter administration official believes a U.S. SPR release could lower oil prices by $12 per barrel, potentially costing Russia $40 billion in lost revenue.
But by LeVine’s own account, there are few signs that such a move is in the works. Saudi officials, including Prince Turki bin al-Faisal, recently remarked about the global nature of today’s oil market and the inefficacy of a single nation’s move to impact supply. Moreover, Saudi incentives aren’t exact in-line with such a move. As one the world’s largest oil producers, Saudi Arabia would suffer from a drop in oil prices. The fiscal breakeven price for Saudi Arabia is rather high, considering its budget necessities. Bank of America (NYSE:BAC) Merrill Lynch estimates Saudi Arabia needs a global oil price of $85 per barrel for its budget to break even. That figure has crept higher in recent years, meaning the Saudis are probably not inclined to want oil prices to decline from the $105-$110 range where they have been for the last few months.
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