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In the Oil news, as the price drops to under $3 a gallon of gas, the production from Saudi Arabia is said to remain the same to keep market share of the demand. This has been predicted by many analysts since the belief in the market is that the Saudi Arabian producers can win any price war, as seen in past price wars like in the 1980’s. See the inserted chart from Bloomberg indicating the production levels of Oil.
As technology and new methods of extracting oil reduces the cost per barrel, this is putting pressure on the Saudi Arabian producers to lower their operating costs. It only costs the producers a few dollars to extract oil, but the overall cost to support the country’s infrastructure is very high. The estimates are anywhere from $78 to $89 per barrel in 2013. With old technology, $90 per barrel was required for shale to be profitable. This is now changing to $75 or even $60 per barrel. The cost curve is not in the favor of the Saudi Arabian producers. Thus, the threat of a permanent change in the cost structure and supply movement is new.
To counteract this threat, a new approach is needed to retain market dominance. A proper strategy is though process improvement and problem solving methodology. To bring Lean (effective and efficient) continuous improvement practices to reduce waste along with Six Sigma (optimization) to reduce variance into their procedures, the cost curve for their current productions will decrease dramatically allowing for them to continue their dominance of market share.
Gary Kapanowski – Lean Six Sigma Master Black Belt – Excelsior
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