How Will Long-term Drop in Crude Oil Demand Impact the U.S., Saudi Arabia, and Russia
Saudi Arabia wants to boost oil supply and punish Russia for lower oil prices. But the Saudis also need to appease the U.S. by managing to keep prices around $70.
(Photo: Oil rig, courtesy Wikimedia Commons.)
January 11, 2025
By Ignatius Chithelen*
The crude oil output of the United States, the world’s largest producer, is around 13 million barrels per day (bpd), more than double the 2010 level. The incoming Donald Trump administration, as has been widely reported, plans to quickly implement policies that will make it easier for oil - as well as natural gas - companies in the U.S. to continue to boost production.
American companies, being privately owned, seek to maximize profits and avoid losses. In early 2020, for instance, after crude prices - benchmark Brent except where noted - crashed to $19 a barrel, down from $64 in 2019, companies began quickly shutting wells in the U.S. to reduce losses. As a result, in May and June 2020, U.S. output dropped by about a third to ten million bpd.
Currently, to drill profitably, large U.S. producers require a price of $58 and small operators $67, according to a Federal Reserve Bank of Dallas survey. So, prices, currently $77, will have to stay near roughly $70 for drillers in the U.S. to want to pump more oil.
But, if U.S. output were to rise substantially, as Trump wants, there will have to be offsetting cuts by other producing countries for the price to stay around $70. This is because global supply is abundant and will remain so. Demand, over the next decade, is forecast to plateau or even start declining.
On the supply side, global recoverable oil reserves are more than 1,500 billion barrels, according to RystadEnergy. Data from the energy research firm shows that an additional 700 billion barrels could be added to reserves if oil prices move up to around $100. Companies will then start exploring for reserves in higher cost fields around the world.
Meanwhile, demand is expected to peak due to rising use of electric vehicles (EV). This is especially the case in China, which is the world’s second largest crude oil consumer after the U.S. In 2023, China consumed 16.6 million bpd, importing two thirds of it. U.S. investment bank Goldman Sachs forecasts that global oil demand will peak in 2034 around 110 million bpd, up from 104 million bpd today - maybe even later in 2040, at around 113 million bpd, if EV adoption slows down.
The plateau - possibly decline - in demand is a decade away. While there could be short-term spikes, the long-term supply demand imbalance is already reflected in futures prices. For instance, December 2034 West Texas Intermediate crude futures trade at $61 per barrel, about a fifth lower than the current price.
The question for U.S. producers is whether, over the coming decade, oil prices fall and stay well below $70, causing them to cut, not raise, their output. Part of the answer depends on Saudi Arabia.
In 2024, the kingdom exported 90% of the roughly ten million bpd it produced, including as refined products. It is the world’s lowest-cost oil producer, with three million bpd of spare capacity and a fifth of the global reserves. The Saudis have used this clout to try and impose supply discipline among major producers, especially OPEC+, Organization of Petroleum Exporting Countries (OPEC) and allied countries including Russia. The OPEC+ together accounts for about 40% of the global output.
In early 2020, for instance, the Saudis flooded the market to punish Russia for sharply raising production and exports. In March that year, with Saudi output rising by a fifth, and that too amidst a steep slump in demand at the start of the COVID-19 pandemic, oil prices collapsed by two thirds to $19. Russia and Saudi Arabia quickly agreed on a nine million bpd Russian production quota, likely under pressure from the U.S. where producers were also losing money. So, four months later, as the Saudis and Russians started cutting supplies, the price recovered to $45.
In March 2022, the oil price spiked to around $123, the highest level in a decade, over fears that Western sanctions against Russia, for invading Ukraine, will sharply restrict Russian exports. The rise contributed to higher inflation in the U.S. American voters were constantly reminded of high inflation each time they bought gasoline for their cars. Inflation was one of the factors that led to the incumbent Democratic Party losing the 2024 Presidential election.
(Image: OPEC countries.)
Currently, at $77, oil trades near the level in late 2021, prior to Russia’s invasion of Ukraine. The decline in price, since 2022, is due to rising Russian and U.S. output.
Russia is producing as much oil as it can and exporting at a discount to market prices. It exports three quarters of its ten million bpd output, including as refined products, according to Russia’s Interfax. In 2024, Russia earned $190 billion, around a tenth of its GDP, from oil and refined product exports, which helped fund its war with Ukraine, according to estimates of the Kiev School of Economics, Ukraine.
Unlike American companies, Saudi oil giant Aramco is a government-run entity driven less by profits than the national goal of earning foreign exchange revenues and helping reduce the kingdom’s budget deficit. The Saudis seek $100 oil to maximize revenues from its massive reserves, before the expected drop in global demand.
The Saudis are annoyed that prices have fallen due to Russia ignoring a production agreement – Russia also evades lax Western sanctions. Recently, Saudi officials have been warning Russia, including through the Western media, that the kingdom will flood the oil market again to severely damage the Russian economy. But, if the Saudis boost output, the resulting collapse in prices will also crush oil producers in the U.S.
The Saudis have ignored the sharp rise in U.S. oil supplies, which they could easily halt with a price war. Saudi Arabia appears to manage supplies to provide a price umbrella for U.S. drillers. Apparently, this is because the Saudi Royal family fears retaliation by the U.S. government, whose military support essentially keeps them in power.
So long as prices stay around $70 or higher, the Saudis will hold off on punishing Russia to appease the U.S. Russia must know this which is why it is ignoring Saudi quotas and threats to cripple its economy.
However, if oil prices drop and stay below $60, the Saudis will likely flood the market. At such prices, American producers will suffer losses and start cutting production. So, the U.S. administration could tacitly back the Saudis raising supplies, expecting losses for U.S. producers to be short-term. Saudi Arabia will want to sink prices below the $15 cost of Russian production. If Russia is then forced to cut output, prices could rebound to $70 or more – pleasing producers and the administration in the U.S.
But an expected sharp rise in output by U.S. producters could push prices below $60. They can profitably pump more oil only if supply from some other country is cut. Will the supply cuts come from further Western sanctions on Iran, which exports around half ot its four million bpd production? Will the U.S. administration pressure the European Union and other Western countries to stop importing refined products from Russia? Long-term, as oil demand plateaus, will it ask the Saudis to cut output?
*Ignatius Chithelen is manager of Banyan Tree Capital Management.