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As Saudi Arabia Battles Its Oil Rivals, Prices Are Expected To Stay Low

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Cars drive past a banner of Saudi Arabia's King Salman that reads, "Salman, we hear and obey," near Mecca on Sept. 17. A drop in oil revenue is forcing Saudi Arabia to consider cuts to social programs. The Saudis have declined to cut production, a move that would likely drive up prices, but could also cost the country its current share of the world oil market.

As the world's oil producers gather in Vienna, they are all hurting from prices that crashed a year ago and are hovering at a little over $40 a barrel. One country, Saudi Arabia, could probably drive up prices if it wanted to cut its production.

But the Saudis appear willing to endure the pain rather than make a move that would help rivals like Iran and Russia.

One of the key reasons oil is cheap today is a decision made by the Saudi and other OPEC countries one year ago. There was a massive increase in supplies, thanks in large part to shale oil production in the U.S., says Jason Bordoff, director of Columbia University's Center on Global Energy policy.

"Production in the U.S. was growing over 1 million barrels per day per year, it was a huge growth, the largest multi-year growth of production of any country in history," he says.

In the past when there was too much supply leading to low prices, Saudi Arabia, the world's largest oil producer, would step in and slow the spigot which in turn would raise the world price for everyone.

But last year OPEC said forget it. Why should it help out the competition? The Saudis decided to keep production rates as they were even if it meant oil prices would stay low.

Jim Krane, an energy specialist at Rice University's Baker Institute, says that policy is unlikely to change when OPEC meets Friday in Vienna.

"I think that the Saudis and their Gulf allies are going to stick to their guns and basically keep production unchanged," he says.

Pain Throughout OPEC

But Krane says the policy is hurting some OPEC members who rely heavily on oil revenues to balance their budgets.

"OPEC's poorer members like Algeria, Nigeria, Venezuela, they've been making these increasingly desperate calls for production cuts to try to get the price back up," he says.

Columbia's Bordoff, who was an energy adviser to President Obama, says Saudi Arabia has vast cash reserves and can wait it out. But even the Saudis are feeling the pinch of low oil prices.

"The Saudis can weather this, but even for them it's been incredibly costly," he says. "I mean over 100 billion dollars in reserves that they've had to draw down, at a time when they're engaged in a costly conflict next door in Yemen and have a host of other support they need to provide to their people."

Greg Priddy, director of Global Energy and Natural Resources at the Eurasia Group, says Saudi Arabia is likely to stay the course because of long-term strategic interests.

One of those is beating back its non-OPEC competitors, such as Russia. American production has been hit hard as well. It's down about 500,000 barrels a day from its peak a year ago. Priddy says it's been particularly tough for those involved in the more costly shale industry.

"I think what some of the OPEC producers, including the Saudis, had hoped was that it would buckle pretty rapidly. And it hasn't," he says.

Greater Efficiency In The U.S.

Priddy says the OPEC policy forced many U.S. producers to improve technique, cut costs and increase efficiency.

"So under that pressure they've proven to be very resilient, improving their business practices very rapidly," he says.

Saudi Arabia's other major concern is geopolitical. Most sanctions on its regional rival Iran are expected to be lifted some time next year — which could release an additional 1/2 million to 1 million barrels of oil a day onto the global market.

Brenda Shaffer, an energy specialist at Georgetown University, says Saudi Arabia believes cutting production to raise prices would only help its rivals.

"Iran, who is little by little going to be re-entering the market, would benefit. Russia would benefit. North America would benefit. But Saudi Arabia wouldn't get any benefit out of it," Shaffer says.

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