The last months have witnessed oil prices at global markets dropping by more than 50%, from more than 100 dollars a barrel to less than 50 dollars. The reasons are numerous, but the primary one should be due to Saudi Arabia’s positions regarding the oil prices. While many interpret Saudi reluctance to reduce production as out of protecting its market share, Saudi Arabia actually intends to express its discontent and frustration.
It is true that the global oil market is initially decided by supply-demand economics. A global economic slowdown would appear to be the reason behind the price slump on the demand side. However Saudi Arabia still has the biggest say in the price mechanism of the supply side. Saudi Arabia not only commands the largest production capacity of about 10 million barrels a day, one-third of OPEC’s total, but also has the largest surplus capacity of 3.5 million barrels a day, which is regarded as the critical leverage in managing the oil prices.
Saudi also enjoys advantages over other oil producers. Saudi’s crude production cost is less than 30 dollars a barrel while the OPEC average is more than 40. Russia’s oil production is also more than 40 dollars a barrel compared to the cost of U.S. shale, which is more than $70. Though the price slump will cause a significant loss of wealth, Saudi Arabia can survive the lowest prices.
It is widely and also rightly argued that by refusing to reduce production to save prices, Saudi Arabia, together with other gulf oil producers, intends to kill U.S. shale oil before it is able to take up a significant proportion of the market. Thus, the gulf oil producers can maintain its long term dominant position in global oil markets. Just as Ali Naimi, the veteran oil minister of Saudi Arabia, made clear a couple of weeks ago: Saudi Arabia is trying to prove to the world that survival is for the fittest.
This explanation might be true, but political intentions behind Saudi Arabia’s conduct are certainly underestimated. Saudi Arabia’s reluctance to reduce production also reflects Saudi anger as a result of frustrations in regional politics in the last years. Or to put it another way, it is out of political considerations that Saudi intentionally maintains a high level of oil production.
It is interesting enough that those target countries that Saudi Arabia is not satisfied with almost all happen to be oil producers. On the top of Saudi’s target list should be Iran. No other country can more likely arouse Saudi’s anger than Iran. Iran not only has a large population of 80 million, two and a half that much of Saudi Arabia, but also rallied Iraq, Lebanon and Syria under its mantle in the last decade. As a result, Saudi Arabia not only feels the power balance tilted in favor of Iran, thus weakened its own position in the region, but also senses the security threat.
The past years saw intensified competition between the two in Iraq, Lebanon and Syria for both geopolitical and sectarian reasons. In addition, Saudi Arabia also thinks that Iran is conducting very aggressive regional policy by meddling in the domestic affairs of Bahrain, Yemen and even Saudi Arabia itself by taking advantage of the dissatisfaction of the Shiite communities of these countries. These moves have been felt to greatly encroach upon the Saudi sphere of influence.
Currently, Iran is seeking a breakthrough in nuclear negotiation and détente with the West. Saudi believes that Iran without economic sanctions and diplomatic isolation will further increase its power and will finally become a hegemonic power in the region.
Therefore, it is reasonably to believe that Saudi Arabia is resolute to fight a price war to destroy Iran’s crippled economy. Due to sanctions in oil trade and financial fields, Iran’s economy has already been seriously affected as inflation rates have reached more than 50% in the last a couple of years. And as a result of the loss in oil profits, Iran will have to decrease its assistance for Bashar Assad.
Though Saudi Arabia itself can feel the pain of sliding oil prices, it believes that it is a worthy cost, and is even confident that it can win the war because of the low cost of production and huge reserve of foreign currencies.
Saudi’s anger is also toward the United States. Saudi has long regarded it as natural that the U.S. should serve its geopolitical interests since it has guaranteed stable flow of oil to U.S. market at reasonable prices for a long time, and has made sure that the international oil trade is paid in U.S. dollars, which is a pillar of U.S. financial dominance in the world.
But unfortunately, the U.S. in the past few years has failed to live up to its commitments as an ally. Not only is the U.S. is not willing to address the Iran nuclear issue with military means, but it is even negotiating a solution with Iran. A potential breakthrough in negotiations will finally lead to the collapse of the West’s containment against Iran.
The U.S. also failed to invest more efforts in toppling down Bashar Assad’s regime as required by Saudi Arabia. Both regard Bashar Assad’s regime as a staunch ally of Iran.
Saudi Arabia’s anger also extends to Russia, another major oil producer. Russia has been an ally of Bashar Assad since the Cold War. Saudi Arabia believes that only through Russia’s support has the Bashar Assad regime has been able to stand till now, and is even furious that Russia obstructed the West’s military intervention by vetoing UN Security resolutions.
All in all, Saudi reluctance to reduce production might be out of its long-term interests of maintaining its market share in the face of the shale gas. But Saudi Arabia has reasons to be angry with realities, and even has reasons to express anger with the only weapon it has: oil. Only the sense of frustration can really explain its willingness to use the weapon at high cost on itself.
Though Saudi Arabia might finally win the price war in the short term, the conduct will hurt itself in the long run. The price crisis will certainly undermine the consuming capacity of oil producers from the Middle East to other parts of the world, which is not good news for the global economy. And learning these lessons, many oil producers like Iran will later invest more effort in diversifying their economy so as to reduce their reliance on oil. They can. But can Saudi Arabia?
China and the U.S., albeit different in status in the global oil market, should be aware that the two share the common interests in maintaining reasonable oil prices. China may benefit from the lower prices in the short term, but as a major long-term consumer, it has no reason to expect the oil prices to be deliberately kept low. It would be naïve to believe that the current level of oil prices would be sustainable.
For the US, the price slump will benefit the lives of average American citizens, especially those of lower class. But it will also undermine the newly booming U.S. shale gas production, and even the whole U.S. oil industry. And the U.S. is also a major consumer. A rational consumer should not expect the prices to be low forever.