Daniel Yergin, The New York Times, January 23, 2015


audi Arabia, with the support of the Persian Gulf emirates, used to be considered the swing producer of the global oil market. Due to its enormous oil production capacity, it could adjust its output to accommodate the market in times of shortages and surpluses. Then on November 27 at the Organization of Petroleum Exporting Countries (OPEC) meeting, Saudi Arabia gave up this role, allowing oil prices to be determined by the market. Consequently, the role fell to the United States. After an oil production slump in 2008, the U.S. has had a major comeback with the development of shale oil technology, which boosted it to second only to Saudi Arabia in oil output. Because of growing demand in China and declining supply in countries with political turmoil such as Libya and Sudan, this oil price collapse was postponed. Nevertheless, soon slowing growth in China and Europe led to decreasing growth in oil demand, while Libya quadrupled its output. Together these factors set in motion the plunge in prices. OPEC was expected to combat this price drop by cutting production.

In fact, trillions of dollars’ worth of investments were based on this presumption. However, Saudi Arabia and the Persian Gulf emirates refused to reduce production on the rationale that if they did, they would lose market share permanently. Their point of view was that, “They would be cutting back on their ‘low cost oil’ to make room for ‘high cost oil,’ and then would have to make more cuts to accommodate more high cost oil.” This refusal was motivated by competition not just from the U.S., Canada and Russia but also neighboring countries Iraq and Iran, which Saudi Arabia and the Persian Gulf emirates saw as growing threats. The price collapse has caused oil companies around the world to cut budgets as well as slow down and even cancel projects. Meanwhile, Saudi Arabia and the Persian Gulf emirates are anticipating that lower prices will trigger economic growth and increase oil demand. With enormous holdings in foreign reserves, they can bear the cost to wait. The countries that have been hit hardest by the drop in prices include Venezuela, Russia and Nigeria, while the U.S., Japan and China stand to benefit the most.

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Debate: Related Articles
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The shale technology breakthrough is likely to be a far more effective stabiliser of oil prices than the cartel of oil producing countries. Opec is now relinquishing its pricing power. It may never be regained.Alan Greenspan, Financial TImes, February 19, 2015
The tactic might hurt revenues in the short term, the reasoning went, but it was necessary to protect market share./su_animate]Anjli Raval, Financial Times, March 9, 2015
Justin Scheck, The Wall Street Journal, January 27, 2015
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