As the oil crisis continues, more and more major oil companies are really feeling the pain. Recently, low oil prices claimed another 9,000+ victims as the Royal Dutch oil giant, Shell, announced big budget cuts. So, how big are the budget cuts? How are they going to be scaled? Who are the victims? And, what’s going on with this whole oil crisis anyway? We’ll discuss all of those topics today!
Shell’s Budget Cuts Are Huge!
Because the price of oil is trading so low, Shell is having a problem producing the commodity for a profit. As a result, they’ve announced that they’ll be scaling back investments by $15 billion! While the cut in spending was pretty drastic, according to the company’s statement, they have “options to further reduce spending, but (they) are not over-reacting to current low oil prices”.
Knowing that Shell is doing their best not to over react to the low oil price is definitely a bit calming, but $15 billion is still a major cut back. There is a bit more calming news however. Shell won’t be completely slowing spending by $15 billion immediately; that would be devastating to the company. Instead, they’ve outlined a plan to allow for these budget cuts over the next 3 years.
Who Are The Real Victims Here?
Of course, investors aren’t going to be happy to see losses, and the overall idea of cutting a major portion of spending out is hard to swallow for the company as a whole. However, I think the real victims are the workers that are soon to lose their jobs. In the announcement made by Shell, the company stated that they plan to lay off 9,000 workers throughout the course of the budget cuts; hence the mention of 9,000 victims above.
Why Is There An Oil Crisis In The First Place?
As recently announced by the Federal Reserve’s Richard Fisher, Saudi Arabia is responsible for engineering the global oil crisis. Here’s what Mr. Fisher had to say…
“I’m sure King Abdullah thought to himself, ‘I’ve alson done a favor vis-a-vis Iran… From a budget stand point, [the saudis] have reserves that can handle this.”
Why Would Saudi Arabia Do This?
One theory that just so happens to be the one I like the most is the idea that Saudi Arabia is attempting to maximize earnings over the long haul. The way they see the whole ordeal is this…I have a ton of oil laying around in reserves, I can sell it now, or I can sell it later, but at some point, I’m going to sell it. So, how do I go about getting the most money per barrel over the long term?
So, how can Saudi Arabia get the most money for their oil? One way is to knock out competition. Think of it this way, with oil prices at incredibly low figures, you have to imagine that several big money oil projects are not going to come to fruition. The United States will surely continue to produce oil, but will they be drilling more; probably not! Not to mention the fact that the Brazilian deep ocean drilling project, the Canadian tar sands, and big money arctic oil projects are all at jeopardy. So, in a nutshell, if Saudi Arabia is looking to kick some of the competition out of the way, they’re doing a very good job so far.
There’s no question that knocking out competition is part of the agenda either thanks to a January tweet by Prince Alwaleed bin Talal that read as follows…
“Although Saudi Arabia and OPEC countries did not engineer the reduction in the price of oil, there’s a positive side effect, whereby at a certain price, we will see how many shale oil production companies run out of business”
Another side of the equation here is political gain. There’s no shock in the fact that Saudi Arabia has political ground to gain when it comes to falling oil prices. It’s no secret that Saudi Arabia and Iran have a score to settle. While Saudi Arabia has the cash reserve to handle low oil prices, the same can’t be said for Iran. While I believe that the move is both political and to push competition out of the market, some experts believe that the pressure this puts on Iran is enough for Saudi Arabia to be happy with the price drop.
What Do You Think?
Who are the real victims in Shell budget cuts? Do you believe Saudi Arabia engineered the oil crisis? Let me know in the comments below!