Here's proof that Saudi Arabia doesn't care about killing oil prices - only the competition

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Prince Mohammed bin Salman

Reuters

Saudi Arabia's Deputy Crown Prince Mohammed bin Salman.

There is proof that Saudi Arabia is more interested in trying to kill competition in the oil industry at the expense of cratering oil prices - its oil production just hit a record high.

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The country said output increased by 123,000 barrels per day, which pushed overall production for July to 10.67 million barrels per day. This surpasses the previous record of 10.56 million per day from June last year.

While Saudi does pump out more oil usually in the summer months to sate domestic demand, the record production level is likely to be scrutinised because oil prices are still around 55% lower than they were since June 2014.

Currently, oil prices are just above $40 per barrel.

At the moment, there is too much oil on the market. Supply is high and demand is low, meaning oil prices are dampened from triple digit levels of the summer of 2014.

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The market, at one point, was so flooded with oil, prices threatened to fall as low as $20 per barrel at the beginning of this year.

crudeoil 2014 2016

Investing.com

Oil prices from 2014 to date.

The situation is so bad that the Saudi government said petrol prices, which are usually very cheap in Saudi Arabia because of the glut of oil the country produces, may increase by 50%; and diesel, electricity, and water prices will also increase to help offset the drop in foreign revenues.

Meanwhile, Saudi Arabia reported that its budget deficit - the amount in which expenditures exceed revenue - for 2015 hit $98 billion (£65.7 billion).

Yet Saudi Arabia's economic situation is logically a product of its own doing. This is because it produces so much oil that it has the power move prices - Saudi Arabia is the largest country in the 13-member OPEC cartel of oil producers.

The record levels of production just shows how it does not care about oil prices falling, or at least being dampened for a prolonged period of time, so long as oil producing rivals like the US and Russia are being subdued.

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There are no other benefits to prices going as low as they are for oil-rich nations other than killing off their direct competition in the long run. The media outlet OilPrice.com and various others, including Business Insider, have pointed out that the lower the price goes, the less oil those rival countries can produce.

cba us crude production v imports

Business Insider Australia/CBA

On August 4 this year, my colleague David Scutt pointed out that for the first time since January 2014, the US imported more crude oil last week than it produced, thanks largely to a surge in OPEC supply. And this is what Saudi Arabia wants - the US is producing less but buying more oil from the UAE country.

Earlier this month, state oil company Saudi Aramco revealed that it would cut export prices for customers in Asia.

This is a big deal because it is an incentive for Asian customers to buy oil from Saudi Arabia, rather than its competitor Russia.

So all in all, it looks like Saudi Arabia does not really care that oil prices are still comparatively low to that of 2 years ago and therefore hurting the country's finances, just so long as it kills off competition in the long run.

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