American shale oil production has become such a global force that a debate at a major industry conference was not how much any potential price shock would damage the United States but how much it would hurt Saudi Arabia.
Just a few years after Saudi Arabia, Russia and the rest of OPEC joined forces in an effort to drive down oil prices and crush American independent producers, the marketplace has changed to the point where U.S. unconventional producers are viewed as the swing producers. Industry insiders at this year's CERAWeek by IHS Markit in Houston believed the Americans, having become more efficient in production and price controls, are now in a better position to handle a price downturn than the Saudi juggernaut.
"The emergence of shale has been such a big event … that the energy market is influencing geopolitics," said Christof Rühl, an economist at energy markets and policy research firm Crystol Energy. "We have a degree of flexibility in the industry that is new … The least flexible region appears to be the Middle East."
The Saudis have embarked on a potentially unpopular program of economic and social reforms under the direction of King Salman bin Abdulaziz Al Saud and Crown Prince Mohammad bin Salman, and the nation appears to need higher oil prices than the U.S. or Russia in order to fund social welfare programs. The price of WTI crude oil in Cushing, Okla., was $56.60 per barrel on March 4, according to the U.S. Energy Information Administration. The price of Brent crude in Europe was $64.44 per barrel on the same date.
The reforms by King Salman bin Abdulaziz Al Saud and Crown Prince Mohammad bin Salman may have helped put Saudi Arabia in a position where it cannot afford another oil price downturn.
"Saudi Arabia is now entangled in some financial reform," Ruhl said. "It's no longer a country that can run down prices. It seems to me that Russia and the U.S. are in better position to survive lower oil prices. The Middle East will be the one who struggles, because they need the money."
American shale has become such a preoccupation with OPEC and the Russians that they have tried to improve their traditionally cool relations and develop a loose alliance against U.S. producers. The partnership could expand as a result of American political activity — specifically, sanctions against one or both countries — but panelists were skeptical that the alliance would move much beyond a marriage of economic convenience.
"They may need each other and it may last, but if not, when the economic motivation goes away, there's little reason for it to last," said David Goldwyn, the chairman of the Energy Advisory Group of the Atlantic Council. The council has roots in the North Atlantic Treaty of 1949 and advises on international economic and security issues.
Goldwyn said the Russians should not be considered a reliable ally by the Saudis, and the Russians will be looking to increase production as soon as it is convenient. The kingdom may have other problems closer to home, as traditional rivals look to regrow their production at the Saudis' expense.
"The U.S. is a relatively low-cost, low-price producer … The Russians will go back to free riding, and that will put pressure on Saudi Arabia," Goldwyn said. "I think Iraq and Iran are also looking at Saudi Arabia as the country that took their market share … and they want it back."
The tone of the March 12 panel put the Saudi representative, an adviser to the Saudi Ministry of Energy, Industry and Mineral Resources, on the defensive. Ibrahim al-Muhanna said current prices are quite comfortable for the kingdom.
"There is a major change in Saudi Arabia … the government is making more money than it did in the past," he said. "They have the flexibility."
Citing production problems in Venezuela and sanctions on Iran as opportunities, al-Muhanna said there would be enough room in a growing marketplace for his country and its "rivals," the United States and Canada. "Demand is taking care of it naturally," al-Muhanna said of growing U.S. production. "For the next [several] years, it doesn't look like it's going to matter."
The Saudi representative also made the case for OPEC retaining its prominent role in the marketplace, saying that "the market needs some management." While he claimed the relationship between his nation and Russia was no mirage and cooperation between the two had improved, al-Muhanna said the kingdom would not be pleased if Russia backs out of its agreement to reduce production.
"We care about commitments," al-Muhanna said. "If they said they will cut [300,000 barrels per day], they should cut [300,000]."
Other panelists were skeptical of al-Muhanna's optimistic outlook for the kingdom.
"There is too much oil. Full stop," Ruhl said. "If pressure is on the system, the Middle East is not in a position to withstand it."