Normally when a jump in production occurs, Saudi lowers their production volume to keep the price high. This time they have simply decided not to. If they did it it is only going to help the US, UK, and Iran as they re-enter the market. King Salman is the one that convinced now dead King Abdullah to start this,Mao no way Salman will let up easy.
Saudi can ride this for a long time. In the US, production costs averages $36 (per barrel) while Saudi it $10. It isn't that Saudi dramatically increased production, it's that in the US we've had the largest increase of production in history, adding 1 million barrels a day. U.K., Russia, and others are already loosing $ on every barrel they make at over $50 per production costs.
We see the effects here as desired by Salman, slowing our production to about half that increase is down. Other OPEC countries in sand land are dying right now from it and begging Salman to slow production, but can't do anything about it.
A bunch of "experts" say Saudi will loose too much $ if this went on until 2020. I disagree. If they stop production in 75% of countries whose cost is over $50 per b, the cost of restarting up will be to great for them to do it quickly.
If there are 25 companies making widgets, but only 5 make them for $10-$15 range, who can sell them for $25? Not US,Canada,Russia,U.K., etc.
Then 1 more thing to consider- if we get SO MAD we pressure politicians to make changes, they fear not getting re elected. How rough does it have to get for KING Salman, controller of Mecca? If he decides to impose a tax for foreigners to visit Mecca, could be generate more wealth for his nation? He's sweating nothing.
Actually, this whole scenario falls under Cartel Economics and Commodities Markets.
Cartel, association of independent firms or individuals for the purpose of exerting some form of restrictive or
monopolistic influence on the production or sale of a commodity. The most common arrangements are aimed at regulating prices or output or dividing up markets. Members of a cartel maintain their separate identities and financial independence while engaging in common policies. They have a common interest in exploiting the monopoly position that the combination helps to maintain.
Cartels result in a price to the consumer higher than the competitive price. Cartels may also sustain inefficient firms in an industry and prevent the adoption of cost-saving technological advances that would result in lower prices.
Though a cartel tends to establish price stability as long as it lasts, it does not typically last long. The reasons are twofold. First, whereas each member of the cartel would like the other members to keep the agreement, each member is also motivated to break the agreement, usually by cutting its price a little below the cartel’s price or by selling a much higher output. Second, even in the unlikely case that the cartel members hold to their agreement, price-cutting by new entrants or by existing firms that are not part of the cartel will undermine the cartel.
Here's the evidence that they've all been cheating on the output levels:
http://finance.yahoo.com/news/opec-...vbXVuBGNvbG8DZ3ExBHBvcwMxBHZ0aWQDBHNlYwNzcg--
So higher prices attracted competition, but at higher extraction prices. At the same time, OPEC members have been cheating on their agreed production levels in an amount roughly equal to the current daily production surplus estimated at 1.5 million barrels per day (bpd) versus the current daily demand. Yes the increases in U.S. production have also contributed to the surplus and that production is largely coming from Shale or "Tight" oil, which has significantly higher extraction cost than Saudi oil where they simply stick a straw in the ground.
Current daily oil production worldwide totals about 92 million bpd. OPEC accounts for about 30 million bpd, with the Saudis accounting for 10.5 bpd. The US hit a high production level of 9.7 million bpd in 2015. Current estimated daily oversupply ranges from 1 to 2 million bpd. Based on the drop in the US rig count, they're estimating that US production will fall 600K bpd in 2016 and a further 200K bpd in 2017. So the Saudi/Opec squeeze is having the desired effect on US oil production. However, they're estimating that Iran, now free of sanctions, will bring on board 7 million bpd of daily production. Meanwhile, there's an estimated 3K to 4K of drilled, but not finished, shale wells in the U.S. Those are ready and waiting to come on line when oil prices justify finishing the wells.
So the Saudis and OPEC are playing a fool's game themselves thinking they can protect market share. Do the math. OPEC produces 30 million bpd and they can sell it at $30 per, that's $900 million per day. If they produced 28.5 million bps and could sell it for $70 per, that's almost $2 billion per day for just decreasing production by 5%. How long you think they continue that fool's game. Furthermore, the Shale oil will serve to keep a cap on oil prices because once the price gets back to the $60 to $70 range, all those drilled but not finished Shale wells will start coming back on line.
In summary, this is just a short term thing. The lower the price goes, the greater the next oil price shock, but that won't last as long either because there's now a physical cap on how high prices can go. Bottom line, oil will range in the $20 to $80 range for at least the next 10 years.
http://www.reuters.com/article/us-oil-bp-idUSKCN0VX1GK