Saudis Dump Oil To Increase Leverage Over U.S. Middle East Policies

Source: informationclearinghouse

October 13, 2014 "ICH" - "MOA" - During the last years U.S. president Obama talked a lot about energy independence:

In his fifth State of the Union address on Tuesday, President Barack Obama celebrated the efforts his administration has made to cut greenhouse gas emissions, while also praising recent increases in domestic oil and gas production.

Obama said early in his address that there is now more "oil produced at home than we buy from the rest of the world," for the first time in two decades.

Obama did not say that the increase in U.S. fossil fuel production was only possible because international oil and gas prices had increased above the magic $100 per barrel equivalent. Below that price shale gas and oil extraction as well as oil production from tar sands are only marginally profitable or not profitable at all.

But the "energy independence" talk allowed various experts to claim that the U.S. could now ignore the Middle East:

Clearly, the booming American oil and gas businesses are not problem-free, but the benefits -- economic, geopolitical and environmental -- of this impending energy independence far outweigh the drawbacks.

The days when Mideast oil-producing dictatorships and their friends at OPEC could so easily wave their power over a trembling, oil-thirsty West are on their way to becoming a relic of the past.

As a new world-wide recession is creeping in, consumption of fossil fuels has declined. Typically, such a decline would be followed by a decline in production by major producers to keep the prices and their income somewhat stable. But that is not happening.

The Saudis and other Gulf state rulers disliked U.S. energy independence talk very much. They need to keep some leverage over U.S. policy. They now decided to end the U.S. "energy independence" talk and to push the U.S. to again do their bidding. The simple method they apply is to keep oil production high enough during a period of declining consumption to take prices lower and to thereby make new U.S. domestic production a money losing business:

[T]he [Saudi] kingdom, OPEC's largest producer, is ready to accept oil prices below $90 per barrel, and perhaps down to $80, for as long as a year or two, according to people who have been briefed on the recent conversations.

The discussions, some of which took place in New York over the past week, offer the clearest sign yet that the kingdom is setting aside its longstanding de facto strategy of holding prices at around $100 a barrel for Brent crude in favor of retaining market share in years to come.

The aim is clear. Kick producers with higher production costs than OPEC out of the market and thereby retain the global market share as well as the leverage needed to pursue the Gulf countries' political aims:

Kuwait's oil minister Ali al-Omair was quoted as saying by state news agency KUNA on Sunday that OPEC is unlikely to cut oil production in an effort to prop up prices because such a move would not necessarily be effective.

Omair said $76-$77 a barrel might be the level that would end the oil price slide, since that was the cost of oil production in the United States and Russia.

The Saudis and the other Gulf producers all have positive current account balances (pdf, Fig 3). They can easily afford lower oil prices.

U.S. shale and tar sand production costs are higher than Saudi or Russian production cost. They are the first to die when prices are kept low:

Allowing Brent to fall below $85 could slow the U.S. shale boom because some producers would lose money pumping at that price, Francisco Blanch, head of commodities research at Bank of America, said in a report Sept. 9.
...
Curtailing the shale boom would ensure continued U.S. reliance on Middle Eastern energy, Bank of America’s Blanch said.
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“For Saudi Arabia, I can’t see why they’d come in and manage prices unless it falls below $90,” Torbjoern Kjus, an analyst at DNB in Oslo, said by phone Sept. 10. “It benefits the Saudis to test where the limit is for U.S. shale.”

OPEC’s de facto leader has the “fiscal firepower” to tolerate prices as low as $70 for two years without experiencing economic difficulties, according to Energy Aspects Ltd., a consultant in London. The kingdom held reserve assets valued at $741.6 billion in July, almost double the level five years earlier, according to the Saudi Arabia Monetary Agency.

This strategy will not only allow the Gulf dictators to retain their market share, but the Saudis and others will use this strategy to slow down, if not stop, U.S. overtures to Iran as well as to press for U.S. enabled regime change in Syria.
See also

China, Russia Sign CNY150 Billion Local-Currency Swap As Plunging Oil Prices Sting Putin: The Kremlin itself is starting to hurt, if not so much as a result of the European trade embargo but mostly due to crashing oil prices, which have been driven lower almost exclusively by Saudi Arabia as part of its most recent secret bargain with the US, a bargain which as we read today is likely to tear OPEC apart.