Oil price war may benefit both US shale and Saudi

EVEN as financial commentators on CNBC are starting to come around to the idea of a bottom in oil prices, the key question for US oil producers remains one of timing. How long will the oil price slump last? Is this a relatively short-term event like 2008, or a longer-term slump like the one in the mid-1980s? After the oil price crash in 1985, it took almost 20 years for prices to revert to previous levels. If oil does not return to US$100 a barrel until 2035, there will be a lot less shale companies around. Some market commentators have cited hedging as a potential source of safety for oil producers, but the truth is that given most firm's individual levels of hedging and the price of oil today, the hedges are more of a Band-Aid over a gunshot wound than anything else.

The US shale oil industry faces an implacable foe in the current crisis: Saudi Arabia. The long-time king of the oil markets is probably the party most responsible for the current price decline, and probably the party that is happiest about it. Saudi Arabia is uniquely positioned to withstand low oil prices given that, according to inside sources, the country has nearly US$800 billion in reserves to weather the storm. Early on in the fight, shale oil companies were loudly proclaiming their ability to withstand low prices, but those statements have dimmed in intensity and frequency in recent months. At this point, Saudi Arabia's currency reserves are roughly equal to the combined market capitalisation of the entire US shale oil industry.

The fundamental equation that drives any country or company's ability to survive in the oil industry is: