$100 … $80 … $70? $60? $50? How low will oil prices go?

Crude oil prices have fallen to a four-year low, leaving producers and consumers wondering: Where's the price floor? The answer lies with Saudi Arabia, according to many analysts.

Gregory Bull/AP/File
An oil field worker hangs from an oil derrick outside of Williston, N.D. US oil output is surging so fast that the United States rivals Saudi Arabia as the world's biggest producer, filling the market with a glut of oil that's driving down prices worldwide.

Want to know where the floor on plummeting global oil prices is? Ask Saudi Arabia.

Crude oil prices have spiraled to four-year lows over the last three months, leaving consumers and producers wondering how far prices will fall. We may be approaching the price floor, according to many analysts, but where prices stabilize depends heavily on Saudi Arabia – an oil mega-producer that controls a huge share of the market.  

Saudi Arabia produces about 9.65 million barrels a day, according to Bloomberg. That’s a third of all Organization of Petroleum Exporting Countries (OPEC) output, and around a sixth of global supply. With that kind of oil, Saudi Arabia’s production and pricing decisions heavily influence global markets. Many are calling on the Saudis to cut their supply and prop up prices, but their next move is anyone’s guess.

“Anyone who thinks they know what the price is going to be … must have some listening devices in the royal family’s home,” says Tom Kloza, chief oil analyst at GasBuddy.com, a group that tracks gasoline prices. In short, Kloza says of the price floor, “you can’t know it.”

Burgeoning supplies of US oil are a key reason Saudis have already moved their prices lower, hoping to stave off competition from American shale. Innovations in hydraulic fracturing and horizontal drilling have helped US production surge 70 percent since 2008, according to the New York Times, which has slashed the amount of OPEC oil the US imports in half. That US shale oil is more expensive to produce, which means falling oil prices will generally hurt US producers before they hurt the Saudis.

But if Saudi Arabia lets the price of oil drop further to hold their market share, it could imperil the oil revenues that behemoths like Venezuela and Iran rely on to fund their budgets. Those countries have grown accustomed to earning $100 or more for every barrel they produce.

Saudi Arabia, meanwhile, likely has the financial reserves to weather low prices for several years.

“If the Saudis want to send a message to the US oil shale producers or to Vladimir Putin, they have the wherewithal to do that,” Mr. Kloza says. “If they want to bring other producers to their knees, they have the power.”

If prices continue to fall, it would be a windfall for major oil importers like Japan and Europe as they emerge from recession.

 

“Consumers win, producers lose,” says Edward Chow, a senior fellow at the Center for Strategic and International Studies, a Washington-based think tank, in an interview with Bloomberg Thursday.

Prices on US crude fell to $82 per barrel this week, while the global benchmark, Brent, slid to $85 a barrel. That’s a major drop from $100 a barrel, where crude had been hovering since 2011. And it looks like prices could stay this low, or go even lower.

“Prices in the $70 or $80 [a barrel] range are Goldilocks numbers,” says Kloza – that is, not too high, not too low. “These are reasonable numbers,” Kloza says, even for producers in the Bakken, where the cost of extraction is significantly higher than Saudi Arabia. “If we go into $50 or $60, they’re not.”

But is Saudi Arabia – and the rest of OPEC – willing to sell oil at lower prices to compete with growing US production? It’s unclear, and predictions of future prices hinge on what Saudi Arabia and other OPEC producers decide at their meeting in late November.

In the meantime, Saudi Arabia has followed market trends – accepting lower crude prices to hold its share of the market.

“They may be just teaching the crowd in the U.S., the shale boys, a lesson,” said T. Boone Pickens, founder and chairman of BP Capital LLC, on Bloomberg TV in early October.

The US shale boom has thrust North American extraction into the upper echelons of oil production, rivaling mega-producers like Saudi Arabia and Russia. But, like Pickens, many worry that if prices continue to fall US production could be hurt; after all, it costs more to extract oil from US shale, given the higher cost of hydraulic fracturing and horizontal drilling – the technologies that unleashed the US boom in the first place.

Meanwhile, ebbing oil prices spell good news for motorists at the pump. And with consumers paying less for gas, retailers benefit from consumers who have more to spend.

And assuming OPEC nations don’t take any major actions to alter oil flows or prices, prices could stay where they are for some time.

“Under most circumstances, we’re close to a reasonable floor,” Kloza says, noting that changes in production out of Libya and Nigeria could drive up prices and make for a higher floor.

Production has been relatively stable throughout Africa and in Iraq, and the glut of US oil has helped push down prices even more. But if any of that changes, so does the price calculus.

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