88 THE BiG DROP
and what does Saudi Arabia want to do about it?
If they can’t make fracking go away, they at least want to bank-
rupt a lot of the fracking companies and make them slam on the
brakes. To do that, Saudi Arabia wants to get the price low enough
to hurt the frackers. That’s because frackers have higher costs.
The power of Saudi Arabia comes from the fact that they
have the lowest marginal cost of producing oil. It only costs
them a couple of bucks to lift the oil out of the ground. That oil
was discovered, explored, drilled when their entire infrastruc-
ture was put in place decades ago.
Because their marginal cost of production is just a few
dollars, they can still make money — even at $40 and $30
per barrel. The question is, what is the number that hurts the
frackers but doesn’t hurt Saudi Arabia? Because obviously,
the lower the oil price, the more money that’s taken out of of
Saudi Arabia’s profit.
In theory, there’s a number that’s low enough to hurt the
frackers, but high enough so that Saudi Arabia still maximizes
their revenues.
It’s what’s called an optimization or a linear programming
problem. That number, again from very good sourcing, is about
$60 a barrel. It’s not a number I made up or pulled out of a hat.
Think of $60 per barrel as the sweet spot where we have
all the bad stuff in terms of fracking — corporate bonds and
junk bond defaults — but not so low that the Arabs hurt them-
selves more than necessary.
Oil below $60 is more than low enough to do an enormous
amount of damage in financial markets. Losses are all over the
place. We don’t know necessarily where they are right now.
But I guarantee there are major losers out there and they’re
going to start to merge and crop up in unexpected places.
The first place losses will appear are in junk bonds. There
are about $5.4 trillion — that’s trillion — of costs incurred in
the last five years for exploration drilling and infrastructure in