In 280-279 B.C., the Epirote King Pyrrhus defeated the Romans in two consecutive battles at Heraclea and Asculum. But he suffered such a large number of casualties that his army could no longer carry on the fight.
Ever since then, the term "Pyrrhic victory" has become synonymous with winning at too high a cost.
These days some are beginning to wonder if the Saudis are marching down the same road.
By cutting oil prices rather than export volume, Saudi Arabia has signaled it is now ready for a potentially costly price war…
Targeting American Shale Oil
On Oct. 1, Saudi Aramco, the state-run oil producer of the world's biggest exporter, cut prices for all its exports, reducing prices for Asia to the lowest level since 2008.
The so-called "Asian premium" I have talked about on several occasions – the higher price Asian importers need to pay over other end users for the same consignment of Saudi crude – is still there, but it has been reduced significantly.
What appears to be quickly forming is a situation that parallels an earlier Saudi move back in the mid-1980s. Under much lower pricing constructions, Saudi Aramco dramatically increased its exports, thereby slashing the cost of oil.
At the time, Saudi authorities were attempting to straighten out several recalcitrant OPEC members who were selling volume in excess of their monthly quotas. Saudi Arabia has traditionally served as "the balancer" in the cartel, offsetting actions by other members in order to maintain OPEC policy.
Today, the Saudis are cutting prices for a different reason.
There appears to be a direct battle underway among OPEC members for market share in a pricing environment increasingly defined by unconventional (shale and tight) reserves.
The move suggests that the biggest member of OPEC is prepared to let prices fall rather than cede market share by paring output to clear a supply surplus, according to a comment from Commerzbank, the Frankfurt-based global banking giant.
Usually, the Saudis act in the other direction.
About the Author
Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.