Saturday, October 25, 2014

Oil Price as a Weapon: The Game is Afoot

The current drop in oil prices is due to increased production from Saudi Arabia. What does this mean? It means that Saudi Arabia has not peaked in oil production, but that is all that it means. It does not mean that we are not facing depletion, nor does it mean that the oil market can handle low prices over the long term and remain stable. Remember that the North American shale oil boom, as well as other unconventional projects worldwide, need a specific level of price support to remain economically worthwhile.
Additionally, producing nations that depend on oil exports for national wealth and well-being (much of the Middle East, and Russia) have their own specific price support needs. These levels vary depending on the economic makeup of the country in question. It is fairly settled that below a specific price point, and oil-export dependent nation will begin to face significant socioeconomic and even political challenges.
So in the face of the higher prices required by new unconventional sources and the higher prices required by such nations, why is Saudi Arabia allowing oil to sink to $75/barrel? More to the point, Saudi Arabia's production is intentionally driving down the price of oil. It is a form of suicide.
I agree with others that this is a political favor to the US. Yes, the US economy benefits from lower oil prices. However, the bigger and more important benefit (at least to the current administration) to place economic pressure on Russia and Putin. The US has supported Saudi Arabia for a long time and this is just returning the favor. This is a cunning geopolitical move designed to destabilize Russia. AND - our administration is willing to put domestic oil shale production under the gun to do it!
The last thing we need is for our economy to get used to lower oil prices just to have them snap back up once the US has completed its dirty deed, allowing our economy to grow then shoving it back into recession. Also, lower oil prices will have a destabilizing effect on nations OTHER than Russia. We are playing with fire, here.

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