American Oil and Gas Reporter - September 2015 - 96

FIGURE 1

Brent Crude Price versus Trade-Weighted U.S. Dollar Index

$160.00

100.0
95.0

$140.00

90.0
85.0

$100.00

80.0

$80.00

75.0
70.0

$60.00

65.0
60.0
55.0
03
1-

-0

50.0

-0

03
1-

-0

1-0

09
20

-0

07
20

-0

03
1-0
05
20

Trade-weighted U.S. $ index (major currencies, index 2001-03-01=100, daily,
not seasonally adjusted)

$20.00

Brent crude oil prices ($/bbl, daily, not seasonally adjusted)

$40.00

Dollar Index

U.S. $/bbl

$120.00

Source: Federal Reserve Bank of St. Louis

FIGURE 2
9,000

Saudi Arabia Crude Oil Exports

8,000

bbl/d (thousands)

7,000
6,000
5,000
4,000
3,000
2,000

May 2015 crude exports declined, but
total refined product exports were a
record 1.3 million bbl/d.

1,000

r-1
Ju 0
l-1
O 0
ct
-1
Ja 0
n1
Ap 1
r-1
Ju 1
l-1
O 1
ct
-1
Ja 1
n1
Ap 2
r-1
Ju 2
l-1
O 2
ct
-1
Ja 2
n1
Ap 3
r-1
3
Ju
l-1
O 3
ct
Ja 13
n1
Ap 4
r-1
4
Ju
l-1
O 4
ct
-1
Ja 4
n1
Ap 5
r-1
5

Source: Joint Organization Data Initiative Website

FIGURE 3
800

2015 Saudi Arabia Budget and Sovereign Wealth Fund

700
U.S $ (billions)

600
500
400
300
200

Total Budget
$230 billion
100
0

Source: U.S. EIA

733
39
191
2015 Budget

Deficit
Revenue

96 THE AMERICAN OIL & GAS REPORTER

Sovereign Wealth Fund

The collapse of oil prices since mid2014 have been driven by a strengthening
U.S. dollar (Figure 1) and Saudi Arabia's
efforts to force out higher-cost production
and regain market share it had lost to nonOPEC producers (Figure 2). There are two
primary components of the Saudi action.
First, the economic logic is that for any
commodity, the cheapest source should be
produced first. However, it is difficult to
apply pure economic theory to a situation
where oil production and revenue are primarily in the hands of the government.
Governments have revenues and provide
services.
In the United States, government revenue consists primarily of taxes. In Saudi Arabia, conversely, 90 percent of government revenue is from oil sales, according to the International Monetary Fund. In
this environment, the true cost of oil has
to be looked at in terms of what is required
to balance the budget. The IMF estimates that number at $106 a barrel in Saudi Arabia. Evidence of the fact that oil receipts are at a "below-cost" level is shown
in Figure 3. Since late 2014, the Saudis
have appeared to be willing to risk dramatically reduced government revenues from
oil receipts in order to return to Organization of Petroleum Export Countries the
management of global oil prices.
The second component of the Saudi's
view is that there is a limited amount of
time available to benefit from oil revenue
before global demand growth slows and
begins to decline. For a country whose primary source of revenue is oil sales, the ideal situation is to produce the last barrel at
the same time the last barrel is consumed. Research by Bank of America
Merrill Lynch commodities researchers
suggests that $60-$70 oil prolongs peak
demand by about five years. In any event,
it is apparent that Saudi Arabia is in this
for the long haul. This is evidenced by the
fact that the Saudi government is looking
at the debt market to fund some of its
budget shortfalls, and the IMF is forecasting Saudi economic growth slowing as
government spending adjusts to lower oil
prices.
This suggests that crude oil prices
will recover slowly over the next few years
and will not likely achieve pre-Saudi-influenced levels for a long time. U.S. producers would benefit from a weaker U.S.
dollar, but given the state of the global
economy, it does not look like operators
get any relief there, either.
Growth Opportunities
When compared to crude oil, natural
gas presents more opportunities for demand growth for U.S. producers. Inprocess and still-to-come demand growth

American Oil and Gas Reporter - September 2015

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