Tuesday 1/10 - Janie Chermak - University of New Mexico - Energy Economics in New Mexico

Tuesday 1/10
Janie Chermak
University of New Mexico
Energy Economics in New Mexico

By the time the founding father of the modern state of Saudi Arabia died in 1953, Abdul-Aziz Ibn Saud was not just the literal King of his country, he was the figurative king of the worlds of petroleum and energy.

His sons, who have ruled the Kingdom, one after the other ever since, have reveled in the might and majesty of ruling the most important commodity market in the world.

Saudi power over energy markets was built on having the world’s largest supplies of oil and the lowest costs of production not to mention a stable network of well-established clients and bankers.

Even though Saudi Arabia today is still the #1 producer, with the lowest costs, the world has changed. Global exploration has brought to market dozens of national competitors, and new technologies, particularly in the United States, that are making inroads on the Saudi’s competitive advantages.

Which makes the latest twist in Saudi Arabia’s oil strategy a real gamble, and maybe a disastrous anachronism. From single-mindedly defending its share of the global market by pushing up production in the face of a global glut of oil and an 75% crash in prices, the new regime of King Salman has pushed OPEC and other oil states to cut production by an average of 2%.

Already prices that had gone from below $30 a barrel 10 months ago, climbed back to $45 by May, and leapt up to the mid 50s in reaction to the Saudi-mandated promises of cutbacks…and some analysts say by the end of 2017, $70 a barrel oil may be back.

To which, other analysts say to the Saudi King and his oil minister – “In your dreams.” The fact of $45 oil already triggered dreams in Texas of $50 oil…and a pile of futures contracts with oil somewhere under $55…and equally important, dozens of oil rigs going back into production every week in the Permian Basin of West Texas…and could it be…maybe soon, here in New Mexico, where the oil and gas-based state economy is gasping.

And if the US resumes big-time pumping, and can make a buck at $55, the projected price rise to $60 to $70 a barrel could be stopped dead in its tracks, and the Saudi economy, already worn thin by 2 years of low prices, may not be saved by only a middling rise.

 

READING ROOM

Janie Chermak is a Professor of Economics at the University of New Mexic. She specializes in Natural Resource & Environmental Economics with an emphasis on Energy, Water, and Invasiveecies.

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