Oil price falloff serves US and Saudi strategic interests

Is it just my imagination or is there a global oil war under way pitting the United States and Saudi Arabia on one side against Russia and Iran on the other?

One can't say for sure whether the American-Saudi oil alliance is deliberate or a coincidence of interests, but, if it is explicit, then clearly we're trying to do to Russian president Vladimir Putin and Iran's supreme leader, Ayatollah Ali Khamenei, exactly what the Americans and Saudis did to the last leaders of the Soviet Union: pump them to death – bankrupt them by bringing down the price of oil to levels below what both Moscow and Tehran need to finance their budgets.

Think about this: four oil producers – Libya, Iraq, Nigeria and Syria – are in turmoil today, and Iran is hobbled by sanctions. Ten years ago, such news would have sent oil prices soaring. But today, the opposite is happening. Global crude oil prices have been falling for weeks, now resting at about $88 – after a long stretch at $105 to $110 a barrel.

The price drop is the result of economic slowdowns in Europe and China, combined with the US becoming one of the world's biggest oil producers – thanks to new technologies enabling the extraction of large amounts of "tight oil" from shale – combined with America starting to make exceptions and allowing some of its newfound oil products to be exported, combined with Saudi refusing to cut back its production to keep prices higher, but choosing instead to maintain its market share against other Opec producers. The net result has been to make life difficult for Russia and Iran at a time when Saudi and America are confronting both of them in a proxy war in Syria. This is business, but it also has the feel of war by other means: oil.

The Russians have noticed. How could they not? They've seen this play before. The Russian newspaper Pravda published an article last April 3rd with the headline, "Obama Wants Saudi Arabia to Destroy Russian Economy".

Collapse

It said: “There is a precedent [for] such joint action that caused the collapse of the USSR. In 1985, the kingdom dramatically increased oil production from two million to 10 million barrels per day, dropping the price from $32 to $10 per barrel. [The] USSR began selling some batches at an even lower price, about $6 per barrel. Saudi Arabia [did not lose] anything, because, when prices fell by 3.5 times, [Saudi] production increased fivefold. The planned economy of the Soviet Union was not able to cope with falling export revenues, and this was one of the reasons for the collapse of the USSR.”

Indeed, the late Yegor Gaidar, who between 1991 and 1994 was Russia's acting prime minister, observed in a November 13th, 2006, speech that: "The timeline of the collapse of the Soviet Union can be traced to September 13th, 1985. On this date, Sheikh Ahmed Zaki Yamani, the minister of oil of Saudi Arabia, declared that the monarchy had decided to alter its oil policy radically. The Saudis stopped protecting oil prices ... During the next six months, oil production in Saudi Arabia increased fourfold, while oil prices collapsed ... The Soviet Union lost about $20 billion per year, money without which the country simply could not survive."

Neither Moscow nor Tehran will collapse tomorrow. And if oil prices fall below $70, you will see a drop in US production, as some exploration won’t be cost effective, and prices could firm up. But have no doubt, this price falloff serves US and Saudi strategic interests and it harms Russia and Iran. Oil export revenues account for about 60 per cent of Iran’s government revenues and more than half of Russia’s.

The price decline is no accident. In an article in the New York Times earlier this month, Stanley Reed noted that the sharp drop in oil prices "was seen as a response to Saudi Arabia's signaling ... to the markets that it was more interested in maintaining market share than in defending prices. Saudi Aramco, the national oil company, stunned markets by announcing that it was cutting prices by about $1 a barrel to Asia, the crucial growth market for the Persian Gulf producers, as well as by 40 US cents a barrel to the US".

The Times also noted that, with the US now producing so much more oil and gas, net oil imports to the US have fallen since 2007 by 8.7 million barrels a day, roughly equivalent to total Saudi and Nigerian exports, according to a recent Citigroup report. This resource abundance comes at a time when we've also hit a "gusher" of energy technology in Silicon Valley, which is supplying us with unprecedented gains in energy efficiency and productivity, savings that may become as impactful as shale in determining our energy security and global strength. Google, through Nest, and Apple through coding in the iPhone software, are making it easier for average Americans to manage and save energy.

Bottom line: the trend line for petro-dictators is not so good. The US today has a growing advantage in what the former assistant energy secretary, Andy Karsner, calls "the three big Cs: code, crude and capital". If only we could do tax reform, and replace payroll and corporate taxes with a carbon tax, we would have a formula for resiliency and success far better than any of our adversaries. – (Copyright New York Times 2014)