Saudi Arabia’s Oil-Price War Is With Stupid Money

Saudi Arabia is not trying to crush U.S. shale plays. Its oil-price war is with the investment banks and the stupid money they directed to fund the plays. It is also with the zero-interest rate economic conditions that made this possible. 

Saudi Arabia intends to keep oil prices low for as long as possible. Its oil production increased to 10.3 million barrels per day in March 2015. That is 700,000 barrels per day more than in December 2014 and the highest level since the Joint Organizations Data Initiative began compiling production data in 2002 (Figure 1 below). And Saudi Arabia’s rig count has never been higher.

Chart_Saudi Prod & Brent Ap 2015

Figure 1. Saudi Arabian crude oil production and Brent crude oil price in 2015 U.S. dollars. Source: U.S. Bureau of Labor Statistics, EIA and Labyrinth Consulting Services, Inc.

Market share is an important part of the motive but Saudi Minister of Petroleum and Mineral Resources Ali al-Naimi recently emphasized that “The challenge is to restore the supply-demand balance and reach price stability.” Saudi Arabia’s need for market share and long-term demand is best met with a growing global economy and lower oil prices.

That means ending the over-production from tight oil and other expensive plays (oil sands and ultra-deep water) and reviving global demand by keeping oil prices low for some extended period of time. Demand has been weak since the run-up in debt and oil prices that culminated in the Financial Collapse of 2008 (Figure 2 below).

Chart_Cons PCT_Demand PCT of Supply WTI CPI 3 April 2015
Figure 2. World liquids demand (consumption) as a percent of supply (production) and WTI crude oil price adjusted using the consumer price index (CPI) to real February 2015 U.S. dollars, 2003-2015. Source: EIA, U.S. Bureau of Labor Statistics, and Labyrinth Consulting Services, Inc.
(click to enlarge image)

Since 2008, the U.S. Federal Reserve Board and the central banks of other countries have further increased debt, devalued their currencies and kept interest rates at the lowest sustained levels ever (Figure 3 below). These measures have not resulted in economic recovery and have helped produce the highest sustained oil prices in history. They also led to investments that are not particularly productive but promise higher yields that can be found otherwise in a zero-interest rate world.

Federal Funds Interest Rates & CPI Oil Price 1955-2015
Figure 3. U.S. Federal Funds rates and WTI oil prices in January 2015 U.S. dollars. Source: U.S. Bureau of Labor Statistics, EIA and Labyrinth Consulting Services, Inc.

(Click image to enlarge)

The quest for yield led investment banks to direct capital to U.S. E&P companies to fund tight oil plays. Capital flowed in unprecedented volumes with no performance expectation other than payment of the coupon attached to that investment.

This is stupid money. These capital providers are indifferent to the fundamentals of the companies they invest in or in the profitability of the plays. All that matters is yield.

The financial performance of most companies involved in tight oil plays has been characterized by chronic negative cash flow and ever-increasing debt. The following table summarizes year-end 2014 financial data for representative tight oil-weighted E&P companies.

Oil_Weighte E&Ps Summary Table 2014
Table 1. Summary of 2014-year end financial data for tight oil-weighted U.S. E&P companies. Money values in millions of U.S. dollars. FCF=free cash flow (cash from operations plus capital expenditures); CF=cash flow; CE=capital expenditures. Source: Google Finance and Labyrinth Consulting Services, Inc.
(Click image to enlarge)

Some rationalize the negative free cash flow as an expansion of capital base that will result in future profits. The following table shows that over the past 4 years, tight oil negative cash flow increased and has reached a cumulative of more than -$21 billion for the representative companies. Almost half of that negative cash flow took place in 2014.

4-YEAR OIL WEIGHTED Sampled E&Ps 2014 10 March 2015
Table 2. Summary table of cash from operations and capital expenditures for tight oil-weighted U.S. E&P companies. Values in millions of U.S. dollars.  Source: Google Finance and Labyrinth Consulting Services, Inc.
(Click image to enlarge)

The average U.S. oil price from January 2011 through year-end 2014 was $95 per barrel. First quarter 2015 performance at $48.50 WTI will be a disaster that makes the previous 4 years look good.

How long do the losses continue before the cheerleaders of shale plays admit that the enterprise is not profitable? Only the more diversified integrated companies like ConocoPhillips, Marathon, and OXY show meaningful long-term positive cash flow. If companies could not show positive cash flow at $95 per barrel, what price is necessary and what will that do to the world economy?

Some of my readers dispute the poor economics of these plays based on incorrect notions of break-even profitability–some believe that tight oil plays are profitable at $35 per barrel oil prices (see comments from my last post).

Following are two slides taken from Schlumberger CEO Paal Kibsgaard’s recent presentation at the Scotia Howard Weil 2015 Energy Conference held in New Orleans. These slides present a well-informed and objective view of how tight oil plays compare to other plays.

In my Figure 4, Mr. Kibsgaard shows that the average break-even price for tight oil plays is about $75 per barrel. By comparison, Middle East OPEC break-even prices are less than $10 per barrel. Other conventional oil plays break even at less than $20 per barrel.

Figure 4. Slide from Schlumberger CEO Paal Kibsgaard’s presentation at the Scotia Howard Weil 2015 Energy Conference.
(Click image to enlarge)

In my Figure 5, Mr. Kibsgaard shows Schlumberger’s assessment of drilling intensity or efficiency. For nearly equal oil-production volumes of about 11 million barrels per day, U.S. oil producers drilled more than 35,000 wells and 297 million feet of hole compared to 399 wells and 3 million feet of hole for Saudi Arabia. 

Figure 5. Slide from Schlumberger CEO Paal Kibsgaard’s presentation at the Scotia Howard Weil 2015 Energy Conference.
(Click image to enlarge)

U.S. companies drilled almost 100 times more wells to reach the same daily production as Saudi Aramco. Strident claims of increased efficiency by tight oil producers sound absurd in this context.

Prolonged low oil prices will prove that tight oil plays need at least $75 per barrel to break even. When oil prices recover to that level, only the best parts of the tight oil core areas will be competitive in the global market. As production declines from expensive tight oil, oil sand and ultra deep-water plays, inexpensive Saudi oil will gain market share. 

Saudi Arabia is not trying to crush tight oil plays, just the stupid money that funded the over-production of tight oil. Too much supply combined with weak demand created the present oil-price collapse. Saudi Arabia hopes to prolong low prices to benefit their long-term needs for market share and higher demand.



  • William E

    4th quarter rig count 2014,
    US 1912
    Saudi Arabia 143

    OPEC 605
    NON OPEC 3080

    Roughly there’s a mismatch.

  • William E

    Beside your correct view on energy independence (reserves) there is the dependence on heavy crudes (WCS,Arab Heavy) to blend with the light shale crude.
    Refiners need 30-32 API.

  • Sam Taylor

    Interesting to see that Schlumberger think drilling intensity will increase at the same time they’re laying off 11k staff. That’s integrated thinking for you.

    Also, another interesting tidbit from his talk was the stat that shale and deepwater account for around 10% of production and 40% of capex. These are also, along with tar sands, the only areas where any significant production growth has come from in the last few years.

    I’m in the seismic exploration business and things are just dead right now. Hard to see how we don’t have a serious supply crunch in a couple of years.

  • If it’s true that the Saudis’ war is with “stupid money”, then that war does not look to be over just yet:

    • Arthur Berman


      The stupid money views lower oil prices and lower company stock prices as greater opportunity for growth. Also, there is the absence of other good yielding investments. First quarter earnings and credit re-determinations are the next phase of the unfolding drama. Stay tuned!

      All the best,


  • As I read through investor presentations of shale E&P companies, I have to conclude that “stupid money” really is the only term that fits the people/institutions who are still handing these companies money (per the Bloomberg article I linked above).

    For example, right now I’m reading a presentation of Comstock Resources. One slide states, “New wells have 27% to 47% rates of return at natural gas prices of $3.00 to $3.50/Mcf at current well costs. Refracs have 40% to 69% rates of return at natural gas prices of $3.00 to $3.50/Mcf at current service costs.”

    If you read that, you think, wow, these guys must be rolling in the money. Those are great rates of return, and the average price of gas was well above those rates for 2013-2014. Plus, this company produces some oil, which enjoyed high prices from 2010-2014. Then, you go to the reported financial data and you see that this company has been fairly consistent at one thing since late 2008 – losing money. In fact, cumulative losses from the last quarter of 2008 through the most recent quarter is -$302 million. They lost $57 million in 2014 alone. All one has to do is look at the SEC filings to see that something is amiss.

  • Later in the same presentation, this gem appears under the heading “Low Cost Structure”:

    “Comstock total producing costs are 32% lower than the average E&P total producing costs”

    “16th lowest of 64 companies surveyed”

    I just don’t see how anybody can believe anything that comes out of this industry.

  • JL

    Have you looked at the yearly PV10 of the developed reserves for each of the companies in your cash flow table. Would be interesting to know what “value” they were booking for the capital being spent. I know one could argue how they came up with reserves and the value of same but it would be an interesting static data point of value vs investment.

    • Arthur Berman


      I have not. It’s a good idea but the problem with doing all of this work for free is that I have to draw a line somewhere.


  • Dave Snelgrove

    Dear Mr. Berman: I have often wondered just why it is that oil prices seem to change, from day to day, all year long. After listening and watching some of your podcasts now I know why. A few years ago I was fortunate enough to read Matthew Simmons fine book, “Twilight in the Desert”. This book should be mandatory reading for every high-school attendee in America. Look at the map of all the planes that are in the air at any one time over the Continental U.S. and truly the numbers are staggering!!
    Though I live in Canada, our oil is heavy and extraction is doing great damage to our country. Point is, one cannot help wondering just how long this insanity can continue?
    The economy cannot function very well when oil sells for over a 100$ a barrel.

    • Arthur Berman


      Matt Simmons was a mentor of mine. The economy doesn’t function well for very long at $90 per barrel based on the world’s experience over the last 35 years. Debt is a major component also. The two are interrelated.

      Energy is the economy and currency is a call on energy. Wealth can be accumulated and the economy can grow as long as there are enough energy resources to back the currency all of that depends on. The economy will stop growing when there is only enough energy to meet basic needs. That is where we have been since 2005.

      We have reached the limit of inexpensive and abundant energy from oil and gas. What is left will be increasingly expensive. It will have lower quality and higher risk. That is the problem. It is hard to get people’s attention about this whether oil is $100 per barrel or $50 per barrel. That’s because people prefer to believe there are no problems. That is what they are told by politicians, the press and companies.

      Clifford Krauss’ article “New Balance of Power” in today’s New York Times is a great case in point. The U.S. is the new OPEC according to him. Any reasonable comparison of reserves shows that is a joke but people love to read this kind of silliness. It is impossible to have a serious discussion when this is the kind of nonsense that fills people’s heads.

      All the best,


  • […] Posted by Ugo Bardi Saudi Arabia just increased oil production to a record level, never reached in previous history. They are doing that in a moment of record low oil prices. What do they have in mind? (Image from Arthur Berman) […]

    • Arthur Berman


      As I said in the post, I believe they are trying to get the global economy back to something resembling normal to ensure demand and market share for their oil.

      All the best,


  • […] en kwantitatieve verruiming, vormt nu juist het uitgangspunt van Art Bermans artikel ‘Saudi Arabia’s Oil-Price War Is With Stupid Money’. Berman stelt dat Saoedi-Arabië niet de strijd heeft aangebonden met de Amerikaanse […]

  • J Philippe DeCaen

    Your level headed and data based commentaries have kept me sane in a world of commentaries full of bombast and bs. Thank you so much for being a beacon of reason. I live in Alberta, Canada.

    • Arthur Berman

      J Philippe,

      Many thanks for your comments. I have spent a lot of time in Calgary and Toronto offering my opinions about the direction of natural gas and crude oil production.

      The Great American oil production decline has begun–look for my post later today.

      All the best,


  • […] what are the Saudis doing, exactly? Art Berman suggests that they are fighting against the banks that created the tight oil bubble possible. […]

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  • If the Saudis are thinking they can ‘go back’ to the good old days, they are whistling in the wind. The problems are structural not strategic and have little to do with Saudia.

    Stupid dollar credit money. Credit flows by way of the gas pump to Saudia … and then:

    More stupidest dollar credit money:

    Stupid money comes and it goes:

    Stupid money everywhere, Wall Street, Frankfurt, London, Tokyo are eager to lend to themselves, can’t get more stupid than that. Sadly, the individual customer has to be able to borrow enough to retire finance industry’s loans:

    The end users can’t get enough of the stupid money! Even now the firms and traders are getting more stupid money. They gain at the expense of their customers; the outcome is a ‘mini-rally’ in crude prices even as the firms are stranding themselves in the process.

    QE- and other easing programs have shifted purchasing power (claims) from customers to firms, firm owners and traders. Less customer purchasing power = no bid for crude or crude products.

    What caused oil price crash is credit problems on customer side. Borrowing capacity is relentlessly leaking out of customer side:

    What remains is borrowed stupidly:

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