The oil price drop that has dominated the headlines in recent weeks has been framed almost exclusively in terms of oil market economics, with most media outlets blaming Saudi Arabia, through its OPEC Trojan horse, for driving down the price, thus causing serious damage to the world's major oil exporters – most notably Russia.
While the market explanation is partially true, it is simplistic, and fails to address key geopolitical pressure points in the Middle East.
Oilprice.com looked beyond the headlines for the reason behind the oil price drop, and found that the explanation, while difficult to prove, may revolve around control of oil and gas in the Middle East and the weakening of Russia, Iran and Syria by flooding the market with cheap oil.
The oil weapon
We don't have to look too far back in history to see Saudi Arabia, the world's largest oil exporter and producer, using the oil price to achieve its foreign policy objectives. In 1973, Egyptian President Anwar Sadat convinced Saudi King Faisal to cut production and raise prices, then to go as far as embargoing oil exports, all with the goal of punishing the United States for supporting Israel against the Arab states. It worked. The “oil price shock” quadrupled prices.
It happened again in 1986, when Saudi Arabia-led OPEC allowed prices to drop precipitously, and then in 1990, when the Saudis sent prices plummeting as a way of taking out Russia, which was seen as a threat to their oil supremacy. In 1998, they succeeded. When the oil price was halved from $25 to $12, Russia defaulted on its debt.
The Saudis and other OPEC members have, of course, used the oil price for the obverse effect, that is, suppressing production to keep prices artificially high and member states swimming in “petrodollars”. In 2008, oil peaked at $147 a barrel.
Related: OPEC Ministers Decry Price War Conspiracy Theories
Turning to the current price drop, the Saudis and OPEC have a vested interest in taking out higher-cost competitors, such as US shale oil producers, who will certainly be hurt by the lower price. Even before the price drop, the Saudis were selling their oil to China at a discount. OPEC's refusal on Nov. 27 to cut production seemed like the baldest evidence yet that the oil price drop was really an oil price war between Saudi Arabia and the US.
However, analysis shows the reasoning is complex, and may go beyond simply taking down the price to gain back lost marketshare.
“What is the reason for the United States and some U.S. allies wanting to drive down the price of oil?” Venezuelan President Nicolas Maduro asked rhetorically in October. “To harm Russia.”
Many believe the oil price plunge is the result of deliberate and well-planned collusion on the part of the United States and Saudi Arabia to punish Russia and Iran for supporting the murderous Assad regime in Syria.
Punishing Assad and friends
Proponents of this theory point to a Sept. 11 meeting between US Secretary of State John Kerry and Saudi King Abdullah at his palace on the Red Sea. According to an article in the Wall Street Journal, it was during that meeting that a deal was hammered out between Kerry and Abdullah. In it, the Saudis would support Syrian airstrikes against Islamic State (ISIS), in exchange for Washington backing the Saudis in toppling Assad.
If in fact a deal was struck, it would make sense, considering the long-simmering rivalry between Saudi Arabia and its chief rival in the region: Iran. By opposing Syria, Abdullah grabs the opportunity to strike a blow against Iran, which he sees as a powerful regional rival due to its nuclear ambitions, its support for militant groups Hamas and Hezbollah, and its alliance with Syria, which it provides with weapons and funding. The two nations are also divided by religion, with the majority of Saudis following the Sunni version of Islam, and most Iranians considering themselves Shi’ites.
“The conflict is now a full-blown proxy war between Iran and Saudi Arabia, which is playing out across the region,” Reuters reported on Dec. 15. “Both sides increasingly see their rivalry as a winner-take-all conflict: if the Shi’ite Hezbollah gains an upper hand in Lebanon, then the Sunnis of Lebanon—and by extension, their Saudi patrons—lose a round to Iran. If a Shi’ite-led government solidifies its control of Iraq, then Iran will have won another round.”
The Saudis know the Iranians are vulnerable on the oil price. Experts say the country needs $140 a barrel oil to balance its budget; at sub-$60 prices, the Saudis succeed in pressuring Iran's supreme leader, Ayatollah Ali Khamanei, possibly containing its nuclear ambitions and making the country more pliable to the West, which has the power to reduce or lift sanctions if Iran cooperates.
Adding credence to this theory, Iranian President Hassan Rouhani told a Cabinet meeting earlier this month that the fall in oil prices was “politically motivated” and a “conspiracy against the interests of the region, the Muslim people and the Muslim world.”
Pipeline conspiracy
Some commentators have offered a more conspiratorial theory for the Saudis wanting to get rid of Assad. They point to a 2011 agreement between Syria, Iran and Iraq that would see a pipeline running from the Iranian Port Assalouyeh to Damascus via Iraq. The $10-billion project would take three years to complete and would be fed gas from the South Pars gas field, which Iran shares with Qatar. Iranian officials have said they plan to extend the pipeline to the Mediterranean to supply gas to Europe – in competition with Qatar, the world's largest LNG exporter.
“The Iran-Iraq-Syria pipeline – if it’s ever built – would solidify a predominantly Shi’ite axis through an economic, steel umbilical cord,” wrote Asia Times correspondent Pepe Escobar.
Global Research, a Canada-based think tank, goes further to suggest that Assad's refusal in 2009 to allow Qatar to construct a gas pipeline from its North Field through Syria and on to Turkey and the EU, combined with the 2011 pipeline deal, “ignited the full-scale Saudi and Qatari assault on Assad’s power.”
“Today the US-backed wars in Ukraine and in Syria are but two fronts in the same strategic war to cripple Russia and China and to rupture any Eurasian counter-pole to a US-controlled New World Order. In each, control of energy pipelines, this time primarily of natural gas pipelines—from Russia to the EU via Ukraine and from Iran and Syria to the EU via Syria—is the strategic goal,” Global Research wrote in an Oct. 26 post.
Poking the Russian bear
How does Russia play into the oil price drop? As a key ally of Syria, supplying Assad with billions in weaponry, President Vladimir Putin has, along with Iran, found himself targeted by the House of Saud. Putin's territorial ambitions in the Ukraine have also put him at odds with US President Barack Obama and leaders of the EU, which in May of this year imposed a set of sanctions on Russia.
As has been noted, Saudi Arabia's manipulation of the oil price has twice targeted Russia. This time, the effects of a low price have hit Moscow especially hard due to sanctions already in place combined with the low ruble. Last week, in an effort to defend its currency, the Bank of Russia raised interest rates to 17 percent. The measure failed, with the ruble dropping another 20 percent, leading to speculation the country could impose capital controls. Meanwhile, Putin took the opportunity in his annual televised address to announce that while the economy is likely to suffer for the next two years and that Russians should brace for a recession, “Our economy will get diversified and oil prices will go back up.”
He may be right, but what will the effect be on Russia of a sustained period of low oil prices? Eric Reguly, writing in The Globe and Mail last Saturday, points out that with foreign exchange reserves at around $400 billion, the Russian state is “in no danger of collapse” even in the event of a deep recession. Reguly predicts the greater threat is to the Russian private sector, which has a debt overhang of some $700 billion.
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“This month alone, $30-billion of that amount must be repaid, with another $100-billion coming due next year. The problem is made worse by the economic sanctions, which have made it all but impossible for Russian companies to finance themselves in Western markets,” he writes.
Will it work?
Whether one is a conspiracy theorist or a market theorist, in explaining the oil price drop, it really matters little, for the effect is surely more important than the cause. Putin has already shown himself to be a master player in the chess game of energy politics, so the suggestion that sub-$60 oil will crush the Russian leader has to be met with a healthy degree of skepticism.
Related: OPEC Calls For Widespread Production Cuts
Moscow's decision on Dec. 1 to drop the $45-billion South Stream natural gas pipeline project in favor of a new pipeline deal with Turkey shows Putin's willingness to circumvent European partners to continue deliveries of natural gas to European countries that depend heavily on Russia for its energy requirements. The deal also puts Turkey squarely in the Russian energy camp at a time when Russia has been alienated by the West.
Of course, the Russian dalliance with China is a key part of Putin's great Eastern pivot that will keep stoking demand for Russian gas even as the Saudis and OPEC, perhaps with US collusion, keep pumping to hold down the price. The November agreement, that would see Gazprom supply Chinese state oil company CNPC with 30 billion cubic meters of gas per year, builds on an earlier deal to sell China 38 bcm annually in an agreement valued at $400 billion.
As Oilprice.com commented on Sunday, “ongoing projects are soldiering on and Russian oil output is projected to remain unchanged into 2015.”
“Russia will go down with the ship before ceding market share – especially in Asia, where Putin reaffirmed the pivot is real. Saudi Arabia and North America will have to keep pumping as Putin plans to uphold his end in this game of brinksmanship.”
By Andrew Topf of Oilprice.com
More Top Reads From Oilprice.com:
- Sanctions, Oil Prices Push Russia Into Currency Crisis
- LNG Export Hopes Fading Fast For US
- Don’t Expect Low Oil Prices To Last For Long
and the EU.
Plan was to take over Ukraine via proxies, kick Russia out of Crimea, use to port to bring in LNG and use the Ukrainian pipelines to sell it to Europe. U.S. companies bought 49% of the U.S. energy transit lines in Ukraine and Joe Biden's son was made the director of a Ukrainian energy company. Does Biden's kid even speak Ukrainian?
The U.S. is the aggressor in Ukraine.
a setup. If they would just tell us where oil is made we
wouldn't have this problem.
We sent in our military to stop Hussein in return the Saudis promised us the price drop. Now that the war is over, payment is being made.
Think big picture.
Or not. Just a thought.
But the point I wonder most is, that there is no single reference to the fact, that since shale-boom, US-oil-imports from Saudi Arabia shrank every year. And this fact is the most likely reason for Saudi Arabia trying to push down prices, so the "inefficient" producers leave the marketplace, as the Saudi Oil Minister says. They want market share BACK. Another fact is OPEC's actions pushed prices lower since Nov. 27, but we should not ignore the fact that prices have already fallen since July '14.
So what could be the reason for people to believe in such theories while ignoring the obvious facts? The reason must be hope, that prices, once the "bad guys" lose, will rise again. But that would be again ignoring facts like oversupply plus supply rising in a higher rate than demand.
1. The least complex, most logical explanation is almost always correct. The theory above is a grossly complex conspiracy that has the risk of severely imploding in the faces of the players. Further, the goal of the current US administration is HIGHER energy prices, not lower.
2. The price drop is a direct result of American private sector activities that run contrary to public policy. If the administration could find a way to shut down shale production, it would do so in a heartbeat.
Beyond these ideas, the simple fact is that the current administration is essentially incapable of formulating or carrying out any foreign policy beyond photo op hand shakes.
What people do not realize is that most of the private job growth in this country has been in energy. If the oil price stays suppressed we are going to lose many of those companies and the jobs they have created. You make think it is great to have $2 a gallon gas for now, but the rebound effect and going back into recession are going to hurt the seriously impact the country for a long time.
This is NOT good.
I guess we are not hearing any more about Russian threts to freeze out Europe this winter? Vlad needs the cash.
Both the Russians and Saudi's have stated multiple times that the biggest threat to them is fracking. Watch protests against fracking ramp up and if the producers start going bankrupt watch for the Saudi's to swoop in and buy the assets.
Nose dive. Obama working with the Saudis on THIS conspiracy ??? ha ha ha
This admin. Doesn't have a foreign policy. They detest oil and hate cheap gas as
It creates individual mobility and kills green initiatives.
It's supply and demand and yes, U.S. Fracking was the trigger for the oversupply.
It will end at 40 per barrel.
http://www.opednews.com/articles/Low-Energy-Nuclear-Reactio-by-Christopher-Calder-Andrea-Rossi_Energy-Policy_Industrial-Heat-Llc_Lenr-141013-530.html
"There are many companies now racing to bring Low Energy Nuclear Reaction products to the marketplace. One notable company is Solar Hydrogen Trends, which claims to have accidentally discovered a way to use LENR to produce hydrogen gas from water at the energy equivalent of producing pollution free oil for about $5.00 a barrel. Their hydrogen gas producing reactor has been independently tested by two well known companies, AirKinetics, Inc. and TRC Solutions. Both companies found that the reactor works as promised, and the TRC Solutions PDF report is quite shocking."
Second, Obama has make it very clear he wants 5 dollar gas, NOT 2.70. Cheap oil makes his green vision much to expensive to stomach.
Also, as a result of this, it's prudent to remember that our oil glut, is despite our Government, NOT BECAUSE OF IT!
Remember when a bunch of Russians, Norwegians, and Iranians hijacked airliners and flew them into buildings?
Yea, me neither.
Add to the above the realities the fact that in much of the Marcellus & Niobara Shale Fields production costs are well under $40 a barrel. An additional bonus for the US is that the EOR technology has created a reality that long exhausted fields such as Spindle Top, Kern & Ventura Counties, numerous "dry" fields in Pennsylvania and dozens of others throughout the US, Mexico & Canada can be brought back to life because previously used technologies recovered only 1/3 of those fields' oil.
Heap on top of the three aforementioned technologies
the exploding natural gas output in North America and for the next 40-50 years the world will be awash with non Opec non-Russian energy sources. Best of all the EOR technology can & will be used to rehabilitate coal as a clean dirt cheap source of electricity (if voters send liberal democrats, Shrillary, and Fauxcohontas to the depths of political Hades.
EOR technology needs billions of ton of co2 that can be captured from the smokestacks of coal burning thermal power plants.
Cry for yourselves and your Luddite Marxist follies eco freaks, gorebull warmenists, and red inside greenies. Petroleum engineers, oil entrepreneurs and non-government non-grant seeking scientists have reburied your beloved delusions of Gaia deep in the bowels of the earth below the fracking zones.
The wicked witch OPEC 5oo has in fact been slain (a Saudis know it by Texas birthed oil technologies created and daily being enhanced by the liberals much reviled oilmen.
far more entertaining than SNL. Keep em coming.
Not one word about Fracking gutting the price of oil.
You ever see an oil well being drilled, or a cat cracker turnaround? Gas is cheaper than CocaCola and takes a shitload more investment to make.
The Saudis could not care less about Venezuela either way.
The reasons that the Saudis are pumping and dumping oil like there is no tomorrow are:
a) to put US shale fracking out of business
b) to hurt ISIS next door, which finances itself largely by selling oil plundered from Syrian and Kurdish oil fileds. (Of course they financed ISIS previously, but now the Caliphate is getting a bit too powerful for the House of Saud)
It really not necessary to invent complex conspiracy theories beyond that.
So, the US wants to take out some big, domestic banks, too?
I'd venture about $15 or of the decline was due to margined out long positions getting liquidated. That was part of the bigger plan, I'm sure. But you don't see the price of a commodity of such importance as oil, the thing every civilized country lives on, decline like it has in the face of population growth without major manipulation. I've seen it planned and put to action first hand years ago.
T. Boone Pickens said it best the other day when he said that the Saudi's are making enemies by the hour and that in fact the price will be back around $100 again within a year or so. You see, guys like him know the Saudis have limits. They also are the most paranoid family on the planet. All those Arab springs leading to the ouster of all those entrenched leaders is what they fear more than anything. Obama is playing checkers here in probably one of the most advanced chess games ever seen with the prayer that these tricks they're playing using the markets to solve an end result.
The people getting hurt the most by this don't like the play checkers. They are ruthless and have big weapons, too. Obama is known to be a coward and can't step up militarily because of the base he belongs to will hang him. I have a feeling the story of the 2015 will be the checkmate Putin ends up delivering.
Gonna be a fun ride the next year.
In hindsight the invasion only prolonged the time it took to develop fracking because oil producers kept thinking the world was going to get flooded with cheap Iraq oil.
This is what competitors have to do to sell but first you need real competition.
For more than 40 years the large multinationals in bed with government and regulatory bureaucracy and since the 90s the environmental movement have been conspiring if you will to keep the prices of oil and natural gas higher than they would by at least 40-50% by waging regulatory environmental war on smaller domestic producers.
Technological advancement is turning things around in favor of the consumer but multinational producers aren't the only ones seething over this.
The activists and enviro freaks are angry too because they not only hate hte idea of cheap energy, they have been waging regulatory and legislative war on it for decades.
But wanting to drive the ascendant US oil energy business onto the rocks to kill cheap oil and make everyone move to $$$ green alternatives that will profit Gore and his buddies? I absolutely can see them going along with this.
Between Republicans and the US oil industry, I'm not sure which group Oblama hates more.
As the largest producer in OPEC, the Saudis were always being asked to take one on the chin by constantly reducing their production numbers and revenues so that other countries could up their numbers and revenues while keeping oil prices high. And to add insult to injury, these same countries were always over producing above their quotas.
I think the Saudis finally reached a point where they were tired of being the only member of OPEC to really feel any pain, and decided enough was enough. Rather than continue loosing revenues to protect other members who were constantly cheating them, the Saudis changed their game to look out for their own needs first and if other member states can't compete, then they have no one to blame but themselves.
Obama has issued almost no permits for drilling oil in the US over the past six years. All of the oil production has been fracking (which he opposes) shale on private, not federal, lands.
As such, the drop in oil prices was happening no matter what Obama wanted.
As for the Saudis, whether or not they're taking advantage of US shale production to hurt their enemies or if they're just simply desperately trying to hold onto their market share, that is up for debate.
The sole reason to drop oil prices was to harm Russia, because Russia has now taken control of the middle east by simply bombing ISIS all to hell despite the U.S funding them. Yes, ISIS is funded by the U.S and they are attempting to have ISIS overthrow Syria so the Saudi's can then build their stupid pipeline straight through to Europe.
U.S spent 6 trillion of your tax dollars to destabilize Iraq to the point they can build them back up and get them on the U.S's side. The U.S then told Iraq quite bluntly, do NOT allow Russia into your territory to attack ISIS, Iraq said "fine"..
But now Iraq is letting Russia have their way with ISIS in the area, and they are being decimated. Oil tankers are being destroyed, weapons and ammunition are being destroyed. Now ISIS commanders are threatening to leave the area unless they get more ammunition, so, the U.S sends 50 tons of ammunition to "rebel" groups which happen to be ISIS in the area as commanders have found.
The U.S is spending your tax dollars to fund ISIS which in turn is causing many civilians and your own military personnel to be killed. Russia thankfully has put a halt to it, there is nothing the U.S can do. Russia, Iran, Iraq, Jordan, and China are all conspiring to share information to destroy ISIS.
Now the Saudi's will be bankrupt in 5 years because of their foolish attempt to lower oil prices. There will be no pipeline, Israel will lose their power in their region, U.S will be driven out, then the U.S will go bankrupt because they've spent so much on the war that can no longer be paid back because of the oil prices and all those junk bonds.
The U.S shot themselves in the foot.