Opinion: OPEC is wrong to think it can outlast U.S. on oil prices [View all]

[FBaggins]

But there are at least three big problems with this strategy. One, North American crude isn’t as expensive to produce as it used to be. Two, there’s more than you think in the pipeline to make it even cheaper. And third, OPEC nations, including Saudi Arabia, have squandered their edge in cheap oil supplies on welfare states rulers can’t easily cut back.

In 2012, when U.S. shale burst into public consciousness, common wisdom was that it would cost at least $70 to $75 a barrel to produce. As recently as last week, saying U.S. producers could tolerate $60 oil seemed aggressive. But data from the state of North Dakota says the average cost per barrel in America’s top oil-producing state is only $42 — to make a 10% return for rig owners. In McKenzie County, which boasts 72 of the state’s 188 oil rigs, the average production cost is just $30, the state says. Another 27 rigs are around $29. That’s part of why oil companies aren’t cutting capital spending much — and they say they can keep production rising without spending more, by getting more out of wells they have already drilled.

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Yes, it costs Saudi Arabia only about $2 a barrel to get crude CLF5, -2.46% out of the ground. But analysts insist the Saudis’ real pain point is more than $100 a barrel — more than $30 higher than its price now — because of what they do with the money once they have it. In 2010, for example, the Saudis spent $130 billion to combat the Arab Spring, the Persian Gulf Fund reports. Some of that money went for better education and health care, and a little for infrastructure. Then there was a 15% raise for government employees, higher unemployment benefits, a government-subsidized minimum wage hike and 500,000 new homes in a nation of 28 million people. It cost 30% of Saudi gross domestic product.

Exxon Mobil and Devon have no such burdens. Naimi’s strategy to squeeze North Dakota and Texas is a bet that in the long run, low prices will force a cut in production and a return to Saudi leverage. But it will be much easier to further trim North American production costs than to convince whole nations to eat less.

http://www.marketwatch.com/story/opec-is-wrong-to-think-it-can-outlast-us-on-oil-prices-2014-12-02

IMO - It isn't so much the Saudi's that are the fair comparison (they have tons of cash piled up for just such a challenge). But much of the rest of OPEC is in a much tougher bind - as are non-OPEC exporters that fund their government expenditures through those profits.