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Saudi Arabia Is Driving Down Oil Prices, and That Might Be Good for the Environment

As the price of oil falls below $50 a barrel, the world's largest energy companies are scrapping ambitious new extraction projects and the number of new wells in the US has dropped by 10 percent since October.
Image via AP/Hasan Jamali

When it comes to oil, Saudi Arabia has long been king. The desert monarchy sits on the world's largest proven reserves. Though its position as the world's top producer was eclipsed by the United States in the past year, it remains the world's top exporter. That's made it the fulcrum on which the oil markets have pivoted for decades, cutting or increasing production as needed to balance supply and demand.


But this time, with a flood of oil being pumped into the market and softer demand, the Saudis are sitting on their hands as prices slump. Crude futures have plunged from more than $100 a barrel in mid-2014 to barely $45 this week.

That's led observers of the industry to scratch their heads. Some suggest it's a way to punish regional rival Iran, where the economy is already hamstrung by sanctions, or that it's a favor to longtime allies in Washington by putting the screws on an intransigent Russia and Venezuela, whose economies depend upon oil exports. Perhaps it's even a shot across the bow of American shale oil producers, the latest challenger to Riyadh's hold on supply.

It's a development of great importance to the world's environmentalists, who wonder if the return of cheap oil will help or hinder their efforts at reducing reliance on carbon-spewing fossil fuels.

Several of the world's biggest oil companies are scaling back or walking away from expensive drilling projects in the Arctic, the North Sea, and the Canadian Rockies that are no longer viable when oil is this cheap.

Here's why low gas prices might not be bad for the environment. Read more here.

Anthony Swift, a staff lawyer for the Natural Resources Defense Council (NRDC), told VICE News that high oil prices mean dirtier and more environmentally risky projects — like the production of oil from the Alberta tar sands — become profitable.


"It puts enormous pressure on some of our most important resources and enables some of the most carbon-intensive sources of oil to get on the market," Swift said. But with oil falling below $50 a barrel, "We're seeing a slowdown in tar sands expansion just in recent weeks," he said.

If Saudi Arabia performed it's traditional role as the dominant exporter by cutting production to shore up prices, they'd be inviting another country to step in and take their place, Jim Krane, a Middle Eastern energy expert at Rice University's Baker Institute, told VICE News. And with reserves of cash estimated at more than $750 billion, the ruling family can hold out for some time before their oil-dependent economy starts to grind its gears.

"The Saudis have decided that short-term pain of protecting prices is worthwhile to maintain their business over the longer term," Krane said. "They've got substantial markets around the world that they depend on and they don't want to hand those markets to someone else — to a competing upstart producer."

Meanwhile, China's economy has been slowing down, Japan is still struggling to escape its prolonged slump, and Western economies have been consuming less oil. The Saudis are looking to Asian markets in the future, so their top priority is giving those markets a shot in the arm by keeping prices low." And if Iran and Russia and Venezuela are hurting a bit, that's even better," Krane told VICE News.


Meanwhile, the slump has been a bonus for American drivers, since gas prices have fallen by more than a dollar a gallon in the past year. But it's made it harder for US oil producers, whose shale projects made America the world's top oil producer in 2014, to make a buck.

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Krane said the Saudis are still pumping oil out of the ground at a cost of about $5 a barrel, while estimates of the break-even point for shale oil run north of $50. While the Saudis have increased the number of wells being drilled — probably to meet an increasing domestic demand, according to Krane — the comparable "rig count" in the United States has gone down 10 percent since October, according to figures from oilfield services firm Baker Hughes.

Undercutting the US shale boom isn't the primary goal of the Saudis, "but obviously, it's one of the effects," energy and environmental policy analyst Jessica Lenard told VICE News.

However, most of the companies that sunk money into shale projects are in it for the long haul and aren't likely to pull back anytime soon. Even at today's prices, US shale drillerscould hold on for as long as four years, said Lenard, who works at the Washington DC-based public relations and governmental affairs firm Levick.

And if the slump starts to undercut the much-touted US oil boom, "We may see political movement in order to support those interests," she said.


"I think we'll see production stay where it is — at least for the short term," Lenard said. "In the meantime, low oil prices mean a lot of consumer spending. It puts extra money in people's pockets."

But Krane said the Saudis, with their deep pockets, can wait, too.

"The Saudis are probably gambling that a year, give or take a few months, is enough to scare some of this new investment in new production out of the market," he said.

But if the slump goes on, the Saudis and their allies among the Persian Gulf monarchies may have to cut some of the subsidies they provide their own populations — a move that may cause some unrest in those highly stratified societies. The monarchy has been spending heavily on schools, hospitals, housing, and roads in recent years, and some analysts project it needs oil to stay over $80 a barrel to balance its budget.

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"To the extent that reduced social benefits cause people to grumble and the regimes lose public support, that's a much bigger deal," Krane said.

Environmentalists in the US, regardless of the price of oil, remain focused on what they say is the real cost of fossil fuel burning.

"Prices go up and they go down, and we know that," NRDC's Swift told VICE News. "We also know that our addiction and dependence to crude oil is more than just an economic liability, it's also an existential environmental threat. So regardless of the price of oil, it's a necessary public policy goal to being to reduce our dependence on it."

Follow Matt Smith on Twitter: @mattsmithatl