Oil in a good cause (Jerusalem Post, December 6)
For most people in most countries of the world, the sharp fall in the price of crude oil — and hence of all oil-derived products and services, such as petrol and airline seats — seems an unalloyed blessing. Whether that is indeed the case, or whether this proves to be an example of the adage ‘if something seems too good to be true, it probably is’, will only become clear over a period stretching into months and years.
To explain why this is so, let’s refer to historical precedent and let’s also examine current developments. The historical reference is not that old — less than thirty years, in fact. The point is that we have been here before: the oil price has dropped sharply – ‘collapsed’– even during a period of economic stability, as opposed to a background of economic crisis as was the case in 2008.
I’m referring to 1986, when the US and global economies were doing fine. Nevertheless, oil prices plunged that year (this was when $40 a barrel was the all-time high) and the reason was simple: there was excess supply in the world market (because of over-investment during the boom years of 1973-1980). Saudi Arabia, the biggest exporter, decided not to fulfill its usual role of swing producer, by which it would have cut its output to balance supply and demand. The Saudi non-move, prompted by intra-OPEC politics, caused a price crash from which the market took several years to recover.
Oil producers who were reliant on high prices to balance their budgets were severely discomfited. How severely? Well, let’s just say that many analysts and historians have concluded that it was the mid-80s oil bust that pushed the crumbling Soviet economy over the edge and led to the fall of the Berlin Wall and the collapse of the USSR.
Fast forward to 2014. In late June, the price of Brent crude was $113. Analysts — faced with continuing disruptions in Libya, ISIS rampaging through Iraq and, above all, the re-incarnation of the Cold War as Russia and the West went head-to-head over Ukraine — were discussing the likelihood of prices going much higher. The 2008 record high of c-$150 a barrel was considered definitely vulnerable.
Yet, despite continued geo-political tensions all round the world, the price has gone from $113 to below $70 — a decline of roughly 40%.Because this development seems counter-intuitive — the price “ought to have gone up”, according to the forecasts — there has been a rash of conspiracy theories to explain what happened.
The simplest theory is that the Saudis conspired with themselves, meaning that a secret cabal of sheiks gathered in Riyadh, or wherever, and decided to push the price down. Why? To do in their enemies, obviously. Who are the Saudis’ enemies? The list is rather long, but at the top are Iran, ISIS (which generates income from selling oil from captured fields) and Russia — which is supporting Assad, another Saudi enemy.
An alternative theory is that the conspiracy is between Riyadh and Washington, and is aimed at Russia, which is very dependent on oil revenues for its effort to regain Great Power status. Another theory goes in the opposite direction: the Saudis, perhaps in cahoots with other Gulf producers — maybe even Qatar — are driving the price of oil down to destroy not (or not only) the Russian oil sector, which is uneconomic below $90 or so, but America’s ‘new’ oil sector. New drilling technologies have massively boosted American production, and the optimists believe this trend will continue so that by 2020, the US will be largely ‘energy independent’.
This is what allows them to disengage from the Middle East, leaving Saudi at the mercy of a nuclear Iran. By taking the price of oil to $60-70 dollars and holding it there for a couple of years, Saudi Arabia will put Iran, Russia and all the new American fields out of business.
This is great stuff and if it were a thriller or spy novel, the author would sell a lotta books and make a killing on the movie rights. Sadly, the truth is probably much more prosaic. The price of oil is falling because, despite all the reasons it “ought” not to, supply and demand are out of balance. The world economy — especially China — is slowing down and demand projections are being revised downwards, whilst supply is rising, mainly thanks to the US, although there is also the natural gas revolution underway, as well as expanding use of alternative fuels.
It is very possible, even likely, that Saudi oil minister Ali al-Naimi has persuaded his colleagues to use this circumstance to their best advantage — with a view to achieving some long-standing Saudi aims within OPEC and outside. But they didn’t cause the fall.
It is also the case that Iran, Russia, Venezuela and other producing nations are being fiscally throttled by the fall in price. It is therefore likely — if prices stay low — that the world will see massive geo-political upheavals, in the form of revolutions and wars, two, three or four years down the road. Stay tuned.