Reluctance by Saudi Arabia to cut production in defense of the crude price reflects important new realities of the oil market.
Saudi Oil Minister Ali al-Naimi was not being obstinate last year when he asked why his country and other members of the Organization of Petroleum Exporting Countries should be expected to moderate supply.
Speaking after the Nov. 27 meeting at which OPEC ministers refused to lower their group’s quota, al-Naimi asserted that a price increase resulting from production restraint by low-cost OPEC members would just coax out new supply from high-cost nonmembers, suppress the price anew, and trim market shares of the low-cost production-cutters.
The dynamics he described are not new. Until recently, though, high-cost, incremental supply had to be found and developed. Supply responded slowly to price signals.
In the new era of unconventional resources, exploration—in the traditional sense of finding subsurface traps containing hydrocarbons—is muted in the supply sequence. Unconventional reservoirs present problems aplenty, but finding the hydrocarbons isn’t among them.
From a hugely important unconventional category, tight oil, a price rise can generate new supply in the time required to drill and complete wells. With many US and Canadian wells now drilled into low-permeability formations but left uncompleted, the response time can be even shorter for operators with cash.
So the cycle described by al-Naimi now can happen fast.
This month, he told reporters in Riyadh his country is ready to seek a higher crude price if non-OPEC producers join the effort. While Saudi and other OPEC officials have appealed for cooperation before, incremental supply then took much longer to bring to market.
With or without cooperation, non-OPEC production eventually will fall, in tight-oil plays and elsewhere, as a broad and deep industry contraction grows however broader and deeper it must to balance the market.
Larger, longer-term questions relate to how producers—OPEC and otherwise—manage assets with so much hair-trigger supply at hand and unlikely soon to vanish.
Did someone mention cooperation?
(From the subscription area of www.ogj.com, posted Apr. 24, 2015; author’s e-mail: [email protected])