Oil rig (illustration)
Oil rig (illustration)Thinkstock

A gambit by Saudi Arabia to break the back of its oil competition – the North American shale oil business – has fallen flat on its face, a respected UK analyst said Wednesday. As a result, Saudi Arabia and OPEC face a bleak economic future, according to Ambrose Evans-Pritchard. “If the oil futures market is correct,” Pritchard wrote in the Daily Telegraph Wednesday. “Saudi Arabia will start running into trouble within two years. It will be in existential crisis by the end of the decade.”

That crisis will gravely affect not just Saudi Arabia, Israelis analysts said, but also the clients of what had until now been the Sunni Muslim “money machine” that funded projects the world over for the advancement of Arab and Muslim causes. Among the biggest victims is likely to be the Palestinian Authority, which has been a major recipient of aid from the Saudi government and Gulf oil moguls.

Oil prices started to slip late last year, after the Saudis continually pumped up production, despite a worldwide glut. Prices fell, but still Saudi – and eventually OPEC – production was not cut, or even increased, to the point where oil now regularly trades in the area of $50 a barrel, a third of its price just a few years ago.

Analysts at the believed that the Saudi strategy was to “starve” the American shale oil industry, which has emerged as a major competitor to OPEC oil. Thanks to shale production and new oil well discoveries, the U.S. this year became the world's leading oil producer.

However, shale oil, the Saudis believed, could not be produced profitably at rates below $60-$70 a barrel – and if oil were to be maintained at prices like that, they believed, the U.S. shale producers would shut down, leaving OPEC once again the “kings” of the international oil market, and its prices.

But Riyadh was wrong, said Pritchard. “If the aim was to choke the US shale industry, the Saudis have misjudged badly, just as they misjudged the growing shale threat at every stage for eight years,” he wrote. “The problem for the Saudis is that US shale frackers are not high-cost. They are mostly mid-cost. Advanced pad drilling techniques allow frackers to launch five or ten wells in different directions from the same site. Smart drill-bits with computer chips can seek out cracks in the rock. New dissolvable plugs promise to save $300,000 a well.”

Pritchard quoted a Saudi oil expert as admitting that the policy has failed. “The policy hasn't worked and it will never work,” the expert said – but according to Pritchard, it's too late to change things. “OPEC now faces a permanent headwind. Each rise in price will be capped by a surge in US output. Saudi Arabia is effectively beached. It relies on oil for 90pc of its budget revenues. There is no other industry to speak of, a full fifty years after the oil bonanza began.”

The implications of this situation will be profound, he wrote. “The government can slash investment spending for a while - as it did in the mid-1980s - but in the end it must face draconian austerity. It cannot afford to prop up Egypt and maintain an exorbitant political patronage machine across the Sunni world.

“Social spending is the glue that holds together a medieval Wahhabi regime at a time of fermenting unrest among the Shia minority of the Eastern Province, pin-prick terrorist attacks from ISIS, and blowback from the invasion of Yemen. Diplomatic spending is what underpins the Saudi sphere of influence caught in a Middle East version of Europe's Thirty Year War, and still reeling from the after-shocks of a crushed democratic revolt.”

The Saudis, he added “took a huge gamble last November when they stopped supporting prices and opted instead to flood the market and drive out rivals, boosting their own output to 10.6m barrels a day (b/d) into the teeth of the downturn. Bank of America says OPEC is now 'effectively dissolved.' The cartel might as well shut down its offices in Vienna to save money.”