About twice a year, I go to the Middle East to tour the region, hold meetings and see first-hand what’s going on there. It helps us strategize at Breitling Energy to understand the dynamics that you don’t read in the headlines. This is the first trip back since the cartel refused to cut production in November, 2014, sending oil prices in a free-fall.
Saudi Arabia has never been in this position before. They have always had the United States standing with them. We started building their oil fields in 1941 and taught them how to produce and market crude to the world. Except for the embargo of 1973/74, we have mostly been friends and allies, on and off the stage. Then, when the attacks of 911 occurred, we learned the details of how the Saudi’s had been funneling our own oil money to bolster terrorist groups.
Then, enter the Obama administration. On multiple occasions, from the Arab Spring to King Abdullah’s funeral, this President has continued to distance the Kingdom like no predecessor before him. What you put out, you get back, and the Saudi’s have begun to pull away from America as well. Saudi Arabia requested the President’s help to oust King Assad of Syria. He refused. They asked for help to stamp out a tiny rogue terrorist cell in Syria, now known as ISIS. He refused. They also begged him to leave the Iranian nuclear sanctions in place…
Now we want them to cut production? It’s not going to happen. In fact, they’ve been on a drilling spree. Since March, 2014, rig counts there are up some 30%, while here they are down over 50%.
There’s more to that number than meets the eye.
The Saudi’s are burning cash faster than expected. In two months alone, they lost an estimated $36 billion from their central bank’s net foreign assets. Defense spending also spiked, particularly due to the administration’s determination to lift the Iranian sanctions and the war in Yemen. This burn-rate is not sustainable for the Saudi’s, much less the rest of OPEC. Libya, Venezuela, Nigeria and the other smaller producers are in far worse economic condition. How long are they willing to keep burning cash at this pace to try to prove a point? It appears they’re cranking up production to compensate.
Saudi Arabia thought they could lever the United States to its knees by holding to their 30.3 million barrel quota when global demand was in decline. Problem is that Saudi has rarely in the past, and certainly not now, held to any stated number. They push extra oil onto the market when the want, change prices on a whim, and yank supply off the market equally fast. And they never show their hand.
There are no changes expected when OPEC reconvenes in Vienna next month, but what they weren’t anticipating was such resilience from the United States. They’re betting an outdated strategy will beat our shale revolution, and that hasn’t happened.
There is a small but growing swell of support for something I advocated last year: A North American Energy Federation. “NOPEC,” if you will. Not a cartel, obviously, but a coalition of resources, trade, technology and cooperation between Canada, Mexico and the United States. Combined and working together, North America could generate upwards of 20 million barrels of oil per day, and that should be enough to permanently dethrone OPEC as the sole regulator of world oil prices.
While some on Capitol Hill like the idea, the reality is it will take a change of administration for such a scenario to have any hope of reality. But it’s worth exploring now, and has the potential to return America to a place of dominance and power on the world’s energy stage.
It’s going to be an interesting week in the Middle East indeed.
Written by: Chris Faulkner, CEO of Breitling Energy Corporation and author of the recent book, “The Fracking Truth.” He is also the producer of the documentary, “Breaking Free: The Shale Rock Revolution.”