Arabs driving up their cost of production of oil
Image via WikipediaA sharp rise in domestic government spending by Saudi Arabia and other key Arab oil exporters threatens to upset the mutually beneficial relationship they’ve kept for decades with energy consumers worldwide.The higher costs should not effect supply and demand which are the real driving factors on pricing. It is possible that when the next down turn in prices occur they will be selling their product at a loss. That is what happened to the car companies who were stuck with unsustainable cost because of labor agreements and the paying of retirement benefits.
A wave of popular protests sweeping the Middle East and North Africa has toppled regimes in Tunisia and Egypt and led to civil war in Libya. It has also forced the region’s rulers to launch programs worth tens of billions of dollars in attempts to redress public grievances.
The spending spree is likely to be felt far beyond their borders. To cover the cost, energy producers have to squeeze more money from their oil fields. That means raising their “break-even” price — the amount of money they must make from each barrel of oil — to avoid fiscal deficits.
Failure to fund these new commitments could lead to domestic spending cuts, which could stoke social and political unrest, or jeopardize their fiscal soundness by requiring they take on more national debt or draw down sovereign wealth funds accumulated over the years.
Producers’ rising break-even points also have profound implications for consumers, and the interests of both groups depend on finding an oil price they can live with.
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Right now the Arabs are benefiting from the Obama/Salazar police of strangling the US production of oil and gas by keeping several areas off limit. If they would get out of the way, the price of oil would drop significantly and immediately as speculators anticipated future supplies.
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