In economics, they refer to the "income effect" vs. the "substitution effect". The Saudis don't have a substitute for the oil revenue. The only way they may have to replace the lost profit from the falling oil price is to pump even more oil. This increase in production would, of course, just drive prices down even further.
I don't really know much about the current state of the world oil market, so I can't really make an intelligent prediction, but I will predict anyway. Oil prices will continue to fall, a lot.
Absolutely true, we have a history to observe, they've been impotent for some time now for the reasons you provide.
For American shale plays, natural gas is the ace in the hole, natural gas prices are up significantly, while the price of crude has been declining.
Whatever the negative impact on American crude extraction, the positive effect of cheaper gasoline to consumers more than compensates.
“The article mentions the possibility of OPEC cutting production. I really doubt that will happen. They might agree to production cuts, but they will all cheat. Most of these countries are completely addicted to the oil revenue.
In economics, they refer to the “income effect” vs. the “substitution effect”. The Saudis don’t have a substitute for the oil revenue. The only way they may have to replace the lost profit from the falling oil price is to pump even more oil. This increase in production would, of course, just drive prices down even further.
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Being, among other things, an economist, I have seen the many different types of commercial terms countries impose.
Most of the third-world countries that are overly-dependent upon oil sales are finding a difficult time right now.
This is chiefly due to their history of possessing a greater and greater amount of the production “take”. There is little money which exchanges hands when an international company explores, develops and produces oil: most of the return a company gets is in the form of oil it is allowed to export to cover capital costs and a modest profit.
The company does not take the big hit when oil prices fall. It is the country due to their big production share.
To exacerbate things further, many countries like Saudi Arabia have kicked out internationals companies and allowed only their own company to operate. These countries take even a bigger hit.
The moral of the story is: When prices are high, places like the US are where you want to be as you get an improved margin. When prices weaken like now, you want to be in the OPEC countries as your return on investment falls less.
Watch the big internationals go after new developments and new contracts in the big third-world oil producers.