By Sal Bommarito
Bloomberg Quick stated, “Oil is so much more than a fuel. It’s a force even bigger than its $3.4 trillion market. It’s a weapon, a strategic asset, a curse. It’s a maker and spoiler of fortunes, a leading indicator and an echo chamber . . . ”
The price of oil was specially volatile in 2014 on the downside. The price per barrel decreased from $107.73/ barrel in June to $53.27 by year end, a 48% decline, even as Americans and Europeans drove less in more efficient cars. Today the price of oil is approximately $48. The volatility of oil prices prior to the current precipitous drop was always affected by world affairs, economics, supply and demand and OPEC, which is dominated by Saudi Arabia.
Saudi Arabia has a new leader, King Salman. Will he adopt new policies towards the U.S. and other Arab countries, or will he follow in the path of his predecessor? The answer to this question could have a dramatic impact on events in the Middle East and regions surrounding it.
The world is closely monitoring the actions and comments of the Saudis relative to oil prices. The price of this commodity and the commodity itself represents the power of this Sunni state. For years, Saudi Arabia impacted the price of oil to its benefit. Vast accumulation of wealth has enabled the kingdom to maintain domestic tranquility in the face of increasing religious fanaticism and influence. The Saudis bribe other nations to do their bidding. They unleashed insurgents to Shiite controlled nations to create instability. And now, they have a unique opportunity to dramatically impact three very important countries involved in the ISIS conflict.
There are some very interesting oil conspiracy theories floating around the marketplace. It should be noted that Saudi Arabia is the largest producer of oil in the Middle East, and it has experienced a huge drop off of revenues because of declining prices. Yet, the Saudis have resisted the urge to cut back production and create an artificial shortage, which would drive prices up. While prices and revenues are low, the country can draw upon very significant monetary resources.
The Saudis have stated that if they cut back production, other producers will step in, fill the vacuum and prices will not increase. Additionally, they say that oil prices should be established by supply and demand, not on the whim of one producer or another.
Back to conspiracies. One is that the Saudis are not increasing prices because they want to deter the production of oil in the U.S. Production in the U.S. has increased from 5 million barrels in 2008 to 8.5 million barrels in 2014 spurred principally by hydraulic fracking in shale deposits. This has enabled the U.S. to dramatically decrease its dependence on foreign oil and made it a producer equal in size to Saudi Arabia. Some say that the Saudis are keeping prices low to discourage new production in the U.S. High cost producers in this country are currently shutting down operations rather than producing oil and selling it a loss.
Another theory is that Saudi Arabia is reveling in the problems facing both Russia and Iran. Both are large producers who are highly dependent on oil revenues. Russia and Iran are also dealing with economic sanctions imposed by the U.S.
Russia is being punished because it annexed Crimea and continues to support rebels who are destabilizing Ukraine. Iran is being sanctioned because it has continued its nuclear program.
Saudi Arabia is in a position that is very familiar to it. By manipulating oil prices, it can significantly impact other nations. In the case of Russia, the Saudis want it to encourage Bashar al-Assad of Syria to abdicate. Russia has been supportive of Assad and has given him military assistance as he fights with ISIS and moderate rebels. Most believe Vladimir Putin will not cave to these demands.
Iran is Saudi Arabia’s principal antagonist in the region. It is the leader of the Shiite world; Saudi Arabia leads the Sunni world. They regularly are at loggerheads when one supports a regime and the other works to destabilize it. Iran is having serious financial problems because of oil prices and sanctions. Its ability to create unrest in Sunni nations will be diminished if revenues are squeezed. Exacerbating its relationship with Iran is Saudi Arabia’s concern about the ability of Iran to develop a nuclear weapon. Like Israel, the Saudis believe that this contingency is an existential threat. It is highly probable that the Saudis are conferring with the U.S. to maintain sanctions and not permit the Iranians to move forward in their nuclear program, while the Saudis keep oil prices low.
Saudi Arabia is in the driver’s seat relating to several important situations. We can be sure that they will use their influence and money to take advantage of these situations.