A Chess Match for the Control of Oil

Undoubtedly, the plummeting of oil price is one of the most observed and debated topics of this year's end, both for its economic and political implications. These kind of events are hardly ever random, or driven by market forces alone. In this article I will examine the reasons behind this issue, as well as the behavior of the countries involved. I will discuss why widespread theories about this subject miss on some important points, and I will go over those overlooked details at length.

The Ruthless Law of Demand and Supply

For starters, the current oil market situation is rooted into the excess of offer, which inevitably led the price to decline and eventually drop dramatically, since the onset of the crisis around June 2014.

One key aspect is that producing countries, and notably OPEC's highly influential member Saudi Arabia, refrained to cut their output, which has inevitably aggravated the situation.

There are currently two theories trying to make sense of the position of Saudi Arabia, that I will analyze in a moment. Both of them are reasonable, and non mutually exclusive, although as it stands the truth most likely lies somewhere in the middle. Though, it is my opinion that the greater picture may also reveal more about the behind the scene, and that a dangerous game is being played.

The X-Ray Attack

The most rumored theory claims that Saudi Arabia, a traditional ally of the United States in the Middle East, is deliberately refusing to cut its oil supply as part of a geopolitical maneuver to damage Russia, whose economy is markedly dependent on oil and gas exports. One problem is that Russia's breakeven price for oil sales is allegedly close to Saudi Arabia's, hence the objection that trying to infer that this could be a coordinated move against Moscow's economy might be a far-fetched supposition. Of course, the world's general diplomatic unrest, and the current outright hostile stance of Western countries towards the Russian Federation, might still suggest that there could be some truth to this view.

The Pin Attack

The other theory states that Saudi Arabia is moving not against Russia, but against American shale oil and gas, which the Arab country would see as an undesirable market competitor, especially once the shale fuels will be ready to be exported consistently from the United States, if ever. Indeed, there are some elements that support this conclusion. Since the shale extractions began on vast scale, the oil and gas prices dropped inside the U.S.A., and while this fact alone did not directly endanger the market position of traditional oil producing countries, they could not certainly welcome a similar result to be replicated worldwide.

The problem with this conjecture is that after the initial optimism the shale gas “revolution” has been progressively becoming less “revolutionary”, as experience and time are putting some major obstacle on its path. In simple terms, even if shale drilling was economically sustainable in the long-run, its social and environmental costs simply aren't. On the same token, and perhaps even more importantly, the assessment of technically recoverable shale oil in North America has been greatly reduced since the beginning of large scale drilling, and currently it is thought that the extracted material will never achieve sufficient volumes to achieve any significant export.

Therefore, Saudi Arabia might have considered the “shale revolution” as a threat to its market position back when it was still at its outset, but not certainly now that is clear that most of the hype has vanished surrendering to some hard facts.

Convergence of Interests

More prosaically, in the oil oligopoly this whole matter is turning out to look more and more as a move, and certainly an astute one, born for economic reasons which thrived on geopolitical ground, with the aim to knock out of the market not the shale industry, but rather the other traditional producers. And if we factor in that this effectively translates into a hard impact on the economies of countries like Russia and Venezuela, which are not currently enjoying a healthy diplomatic relationship with the United States, then sinking the oil price down would be a way to kill two birds with one stone, configuring a win-win scenario for the Saudi-American partnership. Of course, only if the plan could succeed eventually.

Evidence corroborating this conclusion is more solid, especially after the Saudi Oil Minister Ali al-Naimi has recently released some enlightening statements. Talking to the Middle East Economic Survey in late December, he clearly asserted:

“It is not in the interest of Opec producers to cut their production, whatever the price is. Whether it goes down to $20, $40, $50, $60, it is irrelevant.”

“ [If Saudi Arabia cut its production] the price will go up and the Russians, the Brazilians, US shale oil producers will take my share.”

Moreover, making remarks about other producing countries, and putting forward the alleged higher efficiency of Saudi extraction plants, Mr. Naimi added:

“So sooner or later, however much they hold out, in the end, their financial affairs will limit their production.”

“We want to tell the world that high efficiency producing countries are the ones that deserve market share.”

“If the price falls, it falls . . . Others will be harmed greatly before we feel any pain.”

From a purely economic standpoint, refusing to cut the production on the ground that it would cost a portion of the market share would be a decision that does not carry any sense whatsoever, if prices could be boosted at or above breakeven level anyway. Strategically though, it is a whole different story and it does make a lot of sense, as Mr. Naimi, who knows better, reveals not even too timidly in his message.

Discovered Attack: the Fork

In my view, though, his words still conceal the identity of the intended targets of this operation. Breaking another economy through a oil price war alone might prove a risky endeavor when the attacker is highly dependent on oil themselves, but chances of success could be improved if pressure is applied by other means, namely if economic sanctions are added to the equation.

So, talking about the real targets, Russia is the only one really mentioned by the Minister, and given the tones of West's foreign policy, there was no need to dissimulate this occurrence, because doing so would have simply confirmed the suspicions. The shale industry, on the other hand, is collateral damage, for reasons discussed above. However the shale boom was likely the original trigger that urged Saudi Arabia to put in place countermeasures to survive a prolonged shale-induced price drop. Those countermeasures took the form of the amassing of sufficient financial resources, likely the same that are now allowing Saudi Arabia to carry on with unaltered output levels, while being shielded from the effects of selling oil at a loss.

It could be objected that the shale industry is indeed suffering from current prices, but since it is clear now that shale is no more the be-all and end-all, there was really no use to beat on a dead horse, especially if it can be sacrificed, or downsized, in order to gain better advantages.

If there is a combined effort going on to weaken some countries, then the probable conclusion is that the other primary target is Venezuela, which has been another objective of U.S. sanctions, imposed for alleged human rights violations. Meanwhile two Saudi women have been arrested in their country for defying the ban on female drivers and may face trial on terrorism charges, but the United States have not revealed yet whether they will enforce economic sanctions for human rights violations in this case.

Digressions aside, it is no mystery that current Venezuelan President has been very vocal about his criticism regarding United States' policies, not differently from his predecessor Hugo Chávez. It is also interesting that Venezuela's oil reserves are larger than Saudi Arabia's. It should be noticed as well that the current price crisis is definitely putting the Venezuelan economy to a tough test, with the risk of default looming large. If the sanctions were to escalate, a script which has already been played more than once in the past, that might deliver the final blow. A hypothetical default would also have direct repercussion on China and Russia, which are owed important debts from Venezuela, and earlier in November consolidated a bilateral partnership concerning natural gas. 

Check?

So, although the truth remains hidden from the public, and we are left with making sense of the evidence, while avoiding conjectures, the main point to retain is that Saudi Arabia made clear that it is confident in keeping oil prices at abnormally low levels for an undefined time span. The consequence on other producing countries are clear, as it is clear that while the prices have not yet stopped their descent, coincidentally economic sanctions targeting some of those very same countries may rise again in the near future. But if those economies will ever be crippled, it is delusional to think that the effects will be delimited locally, quite the contrary, the consequence will be felt globally. Wars always take their share of victims, even when they are is fought by weaponizing the economy.