This is a financial cold war - nothing more, nothing less.
While there are billions of reasons to cut output, and every major producing country is reeling from the loss of revenues, some are weathering the current bust better than others, but the devil is in the details, and the details contain tons of variables.
Production cost and breakeven figures that analysts enjoy bandying can trap you in bubble of black-and-white mathematics that is a few brush-strokes shy of a full picture.
Breakeven prices are hard to pin down, and harder yet because they fluctuate. OPEC governments downsize their budgets, cut social spending and put big projects on hold to lower the breakeven price. Independent producers likewise cut spending and delay development to get closer to a feasible breakeven. So the breakeven is elusive.
Saudi Arabia and Kuwait enjoy some of the lowest production costs in the world, at about $10 and $8.50, respectively, according to Rystad Energy data. Production in the UAE costs just over $12 per barrel, which is pretty much the same as in Iran, though Iranian officials say they will eventually be able to produce for as low as $1 per barrel from their central fields.
But these are just the costs of lifting oil out of the ground. State-owned oil companies often have many more responsibilities than just producing oil. They underpin generous spending levels by their governments, and thus any estimate of a “breakeven” price should include the cost of those obligations.
It’s hard to come up with a real breakeven point for Saudi oil, for example, because it is responsible for funding the royal palace and indirectly, a large number of social programs that include everything from education to housing and energy subsidies. It’s hard to measure costs when this oil has to pay for all the luxuries of the Saudi royal family.
According to Quartz, if you add in all these costs that U.S. shale producers don’t have, we’re looking at a breakeven point of around $86 per barrel for Saudi oil. That’s just one opinion, but it’s a poignant one. So is the royal family ready to give up its luxuries? Or will they sacrifice things such as healthcare and education first? The fact that the government is considering taking parts of Saudi Aramco public does not bode well.
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