How We Got Here

For decades Saudi Arabia’s status in the world of oil was that of a swing producer. They are rich enough that they have been running below full capacity so that they can raise and lower production levels to keep global demand in line and prices high enough. That changed recently. When the US lifted sanction on Iran, they got pissed. If there is any one thing the Sauds hate, it is Iran. Far more than one country should. And not a cheeky hate like the Brits and French, but a deep sated one that has gone back millennia. This should not affect their day to day operations, but it does, because they are not a country. They are a kingdom. A ruling family in complete economic and military control of the country. And they act like a family more than a country. Enacting revenge on their rivals takes far greater precedence than sound economic policies. It is why they kept the taps opened and have spent the last year pumping as much oil as they could, when there was a global oversupply. They had the ability to reign in their production to keep the prices high, but no. Low prices hurt their competition more. And who was their competition. Iran of course And the upstart US, who was in the midst of a fracking boom and had sided with Iran. The Sauds had the ability to hurt both countries. Keep the prices low to drive the US frackers out of business, and keep foreign investment out of Iran. This plan is working, but took far longer than expected. US rig counts are their lowest since the eighties with production due to plummet. Only the advent of horizontal drilling has managed to keep US production levels this high for this long. And Iran, despite having the largest proven reserves of conventional oil, is handicapped by obsolete equipment and methods. They could easily double their current output in a few years, but there is still too much risk for anyone to get the financing required to overhaul their entire infrastructure. The Sauds had to burn through a staggering amount of capital to do it, but it looks like they are finally winning.

Well done.