At Forbes Robert Rapier presents the evidence that Saudi Arabia’s breakeven price for oil production is closer to $40 per barrel than it is to the $10 per barrel that has been assumed for decades:
Saudi Aramco, the national oil company of Saudi Arabia, is by far the largest oil company in the world. The company produces around 13% of the world’s oil, but its business operations have been notoriously opaque for decades. It has often been stated that the company has plenty of low-cost legacy wells that drop its overall production costs to $10 per barrel, or even lower.
Because there was no way to audit this information, the world was left to guess at the actual breakeven costs for the world’s largest oil company. Today, Saudi Aramco lifted the veil on its financial condition in a bond offering for the company. (PDF link here).
That’s an enormous difference with huge geopolitical implications. The breakeven price of some shale oil production in the United States is $51 with its proponents claiming it will go even lower. A lot of Saudi influence depends on its being the low cost producer of oil with a lot of disposable revenue.
Wow.
It makes you wonder about the estimate. There have been plenty of US citizens over there over the years. People who understand what efficient, and inefficient, operations look like and approximately what the cost structure should be. You would think both industry and CIA types would have figured it out. To miss by 4x is a head scratcher.
Are the “industry and CIA types” motivated to overestimate Saudi’s breakeven price or go along with the Saudi government and underestimate them? Keep in mind that this is the CIA that systematically overestimated Soviet capabilities over a period of 40 years.
Precisely what I was thinking. You can’t have too many bogeymen. On the other hand (and I don’t know what the bond offering stated use of funds is) the investment banker has motivation to show a need, like old, inefficient equipment. Still, 4x?
Separately, you may be interested in Goldmans commentary and charts at ZH on stock buybacks.