Since mid-June, oil prices have dropped 25 percent to a four-year low, with many analysts predicting that this trend will continue. However, Saudi Arabia—the largest oil exporting country in the world—has made no efforts to slow its oil production in order to keep prices high. It is unclear why Saudi Arabia is allowing prices to drop. Some experts say it is a political move targeting Russia due to their support of Syrian president Bashar al-Assad, while others believe Saudi Arabia is hoping to drive competing companies in Canada out of the oil market (the United States gets most of its oil imports from Canada, with Saudi Arabia in second place). Why do you think Saudi Arabia might be allowing oil prices to drop, and what are the implications for the U.S.?

Prof. Guive Mirfendereski (LGLS)

An oversupply of oil helps lower price, and lower price makes investment in and exploitation/production of oil with higher cost of production uneconomical. The Saudis hope this will allow them to keep their market share, and perhaps eventually help extinguish the US and Canadian new-technology production that is made economical by virtue of high oil prices.  Geopolitically, as long as the price is low, the Iranians, the Saudis’ archrivals in faith and in the Persian Gulf/Middle East, will suffer diminishing revenues from their oil exports which, the Saudis may hope, will pinch the Iranian economy and lower Iranian contribution to regimes and causes that the Saudis oppose. Lastly, the Organization of Petroleum Exporting Countries is unable presently to restrict production quotas due to internal political animosity among its members, notably between the blocs led separately by Saudi Arabia and by Iran—and so no one member of OPEC is expected to cut back production by itself.

Prof. Guive Mirfendereski (LGLS) is a lecturer in the Legal Studies department, and teaches “LGLS 127b: International Economic Law.” 

Prof. John Ballantine Jr. (IBS)

First, no one really knows why the Saudis are maintaining high production levels as oil prices drop to the low 80s.  There is speculation from commentators around the world: “Coordinated pressure on Russia in light of their moves in Ukraine; countervailing moves in response to Iran’s actions in Syria, or its nuclear negotiations; maybe it is a way for Saudi Arabia to reassert its swing producer position in OPEC; Perhaps it is a way to send a message to energy producers (fracking, shale oil, solar, gas) that that the marginal price of oil is significantly below expected value set during the summer (eg, over $100 barrel).”  The swing in oil and energy prices reminds us all that this is a boom / bust business requiring long term investments and large amounts of capital.  Prices have always been set within a complicated political and economic environment. Today’s events across in Russia, China, the Middle East, Europe, Latin America and the U.S. reminds all that Saudi Arabia is the most significant and the lowest cost producer of energy in the market. Again, no one knows the motivation or strategy behind these moves, but all are paying attention because there are large ramifications across world economies.

Prof. John Ballantine Jr. (IBS) teaches “FIN 235a: Investing in Energy: Fossil Fuels to Cleaner Energy.”
Cameron Fen '15
I really don’t have any idea why Saudi Arabia hasn’t cut back production on oil.  My guess is that with Canada and Russia and US producing so much oil it is reducing the market power of OPEC, so while Saudi Arabia could still influence the price it has gotten to the point where it costs more for them to pull back.  Keep in mind that oil accounts for over 90 percent of the Saudi Arabian budget.  As for the U.S., lower oil prices are a plus for the US economy.  Oil is a huge component of what we spend as Americans, so lower prices at the pump translates into more effective stimulus into the economy.  As an investor, fracking companies are getting killed.  Most are not economical at $80 or $90 dollars a barrel, but you can find a few high quality producers that have lower costs (like $50 a barrel) that are unjustifiably punished with everyone else.  
Cameron Fen ’15 is the President of the Brandeis University Investment Club. 
David Getz '15
Saudi Arabia appears to be using the price drop as an economic power play to regain pricing power in oil. The leading reason for this suspicion is the current U.S. standing as one of the global leaders in oil production. Rivalry and the threat of the U.S. shale oil production boom may explain Saudi Arabian action in lowering prices, which would ultimately limit the finances, investments and expansion in supply from the U.S. shale patch, among other places. However, despite the threat of dropping prices, only a small percentage of U.S. crude oil producers would be affected, given breakeven prices below $80 and for nearly 82% of US producers, breakeven prices of $60 or below.
David Getz ’15 is a member of the Brandeis Technical Traders Society.