Saudi Arabia Is OK With Lower Oil Prices. Here’s Why That Could Be a Bad Thing for Both Russia and the U.S.

Good news for consumers: Saudi Arabia, the self-proclaimed “world’s largest producer and exporter of oil” (though the U.S. is slated to pick up that title this year), says lower oil prices are OK.

But the Saudis aren’t just feeling magnanimous.

There’s a strategy behind their pricing acceptance, and it could bode badly for other oil-producing nations, including Russia and the U.S.

(Getty Images)
Getty Images

Reuters reported Monday that Saudi officials are quietly telling insiders that the kingdom will accept oil prices below $90 per barrel, possibly as low as $80 per barrel, for the next few years, even as other oil-producing nations beg for production cuts to achieve $100-per-barrel price points.

The Saudi relaxation on prices comes just one month after the kingdom cut oil production in an apparent bid to keep prices high.

Chart via NASDAQ
Oil prices have slumped dramatically since June as U.S. production ramps up and European and Asian demand lags. (Chart via NASDAQ)

Now, it seems the Saudis have a long-term strategy: allow lower prices to wreak havoc on competing nations and then leverage the kingdom’s enormous oil reserves to capture a larger share of the global oil market.

The Saudis are already aggressively pushing into the European and Asian oil markets, the Wall Street Journal reported Sunday.

How will the Saudi strategy impact the rest of the world’s oil producers?

In nations that rely heavily on oil sales, including Venezuela and Russia, the impact could be enormous.

As Business Insider noted, the Russian government needs oil prices to average $100 per barrel to cover its spending promises — meaning $80 barrels could prove ruinous.

In the U.S., lower oil prices could slow the expansion of shale field exploration, a welcome development for foreign powers as skyrocketing American oil production has been one of the primary forces cutting oil prices this year.

Saudi Arabia “will accept a price decline necessary to sweat whatever supply cuts are needed to balance the market out of the U.S. shale oil sector,” Robert McNally, a White House adviser to former President George W. Bush and president of the Rapidan Group energy consultancy, told Reuters.

Ali al-Omair, oil minister of Kuwait (a key Saudi ally), said Sunday that oil prices will likely fall as low as $76 per barrel.

Follow Zach Noble (@thezachnoble) on Twitter

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