If I were a steadily employed person who regularly commuted to a workplace and had to fill his tank frequently, I’d probably be harping about low gas prices all the time. “Have you seen how low gas has gotten?” I’d say. “Man, gas was twice this expensive just a few months ago,” I would remark, as though I were saying something meaningful. But instead I’m a freelance writer, so I harp about other stuff and hope that some kind stranger will offer me some free gasoline so that I might go someplace someday. But it’s true, gas prices are really freaking low. U.S. light crude closed today at a little over $57/barrel, while Brent crude was around $62/barrel, and that was up for both of them. Overall oil has lost almost half its per barrel value since this summer. There are a lot of reasons for this, but it boils down to Econ 101: the global oil supply is higher than expected, thanks in part to the explosion of fracking in the U.S., and demand is lower than expected, owing to economic slowdowns, increased conservation efforts, etc.
OPEC met about a month ago, and it was assumed that the oil cartel would decide to reduce production in order to drive prices back up. However, the Gulf members of the cartel, led (or, ah, “encouraged,” probably) by the Saudis, blocked such a move, which was favored by poorer OPEC members like Venezuela and Iran. On Sunday, the cartel reiterated that it has no intention of cutting supply and no plans to call any kind of emergency meeting to discuss remedies for the sharp decline in oil prices. Everybody’s been trying to figure out why OPEC has responded this way. One theory reasons that the Saudis learned from the 1980s, when they responded to a similar drop in oil prices by cutting production, that you should never cut production because then you lose market share when the price rebounds. Another theory says that the Saudis are trying to lower the price of oil to the point where extraction by fracking becomes unprofitable, and thereby bury the U.S. fracking industry — this theory has been advanced by, well, the Saudis themselves, actually. But there’s more going on here than a historical cautionary tale and a desire to hurt U.S. suppliers.
There’s a particularly good piece in Foreign Policy today by Michael Moran that makes the argument that, in fact, the Saudis have little to worry about from U.S. fracking (the U.S. just doesn’t have the oil reserves to be a long-term competitor for the Saudis, and it’s not clear how these low prices will actually affect the fracking industry), and that it’s really Russia and Iran who are being targeted by the Saudi decision to keep prices low. After all, the Saudis are opposing both countries by proxy in Syria, and they’ve got a whole host of grievances with Iran, most acutely right now with respect to Yemen and, of course, the nuclear situation. And both countries are particularly vulnerable to a drop in oil prices; Russia is already in deep trouble because of the price drop, and Iran’s economy was just beginning to turn around, and with these oil prices will likely slide back into negative growth and higher inflation. So the Saudis are taking the starch out of a couple of vulnerable rivals (and maybe even trying to up Tehran’s desperation to reach a nuclear accord on terms that the Saudis would find acceptable, but that’s my own speculation).
Moran isn’t breaking new ground with this idea, but he also offers another explanation for Saudi actions that’s so compelling that it winds up being one of those “I can’t believe I didn’t think of that myself” ideas:
The Saudi decision not to try to arrest the slide in oil prices, meanwhile, avoided a bigger strategic disaster for Riyadh. Had they made the attempt, they risked providing evidence that such an act is now beyond even the Saudis, undermining their claim of being the most important player in global energy markets. By deciding not to act, Saudi Arabia has not only inflicted severe economic pain on its rivals, but it has also deftly reinforced Riyadh’s centrality as the only oil producer truly able to influence global oil markets on its own.
The Saudis likely consider this a particularly important message to deliver now, given their fears that a successful conclusion to the nuclear talks with Iran will cause Washington to cozy up to Tehran. But the idea that the conclusion of a verifiable nuclear proliferation treaty will mean the end of 40 years of pragmatic power politics between Washington and Riyadh is fanciful: Remember, even when the Shah was in power, the Saudis managed to purchase AWACS airborne radar planes and eventually F-16s, M1A1 Abrams tanks, and a lot else besides. Being the world’s main source of spare oil production capacity has its perks.
If the situation were reversed, if global oil prices were too high and the world was scrambling to boost oil supply, there’s a pretty strong possibility that the Saudis wouldn’t be able to do anything about it. There’s reason to believe that KSA’s stated oil reserves are overestimated and that it simply wouldn’t have the excess capacity to ramp up production if that’s what the market demanded. So they’re lucky, in a sense, that the current problem is a glut of oil, rather than a shortage, because that means the Saudis get to demonstrate that they’re still the heavyweight champ in the oil market without having to do anything (literally). It’s not just a good time for the Saudis to send this message with respect to Iran — it’s a good time to send the message with respect to KSA’s own impending peak oil problem.
Related to this story is a bit by Chris Mooney on Wonkblog today that I’m still having trouble processing. In it, he casts Russian President Vladimir Putin as a whackaloon conspiracy theorist over the oil price drop:
But now, right on cue, out come the conspiracy theorists — including Vladimir Putin — to tell us what’s really going on.
Recently, Putin floated the idea that the oil price drop is the result of a U.S.-Saudi plot to hurt his country. “We all see the lowering of the oil price. There’s lots of talk about what’s causing it,” Putin said recently. “Could it be the agreement between the U.S. and Saudi Arabia to punish Iran and affect the economies of Russia and Venezuela? It could.”
With these remarks, Putin joined a long tradition of conspiracy theorists who have surmised that the world’s great oil powers — whether countries or mega-corporations — are secretly pulling strings to shape world events. Prior oil-related conspiracies abound: 9-11 Truthers and JFK assassination conspiracists alike have sometimes given oil interests or companies an integral role in their theories.
I guess I’m not seeing where what Putin said was all that kooky, particularly when put alongside something as outrageous as 9/11 Trutherism. I mean, yes, the notion of an “agreement” between the U.S. and the Saudis to drive down oil prices is a little out there, particularly when there are plenty of simpler explanations for the price drop, but the Saudis have clearly made a conscious choice to give up revenue by not cutting production. They must have a reason for making that choice, no? A simple fear of losing market share could explain the whole thing, but it’s really not a stretch to suggest that they’re also taking this opportunity to hurt a rival or two. Maybe the real target is Iran and Russia is collateral damage, but does that undermine Putin’s point? Is Mooney objecting to the idea that the Saudis engineered the price drop from the beginning? OK, I could see that, but they are refusing to do anything to arrest it, and it seems to me that an argument over whether the Saudis caused the price drop or are merely deliberately exacerbating it is arguing semantics. I’m all for pointing and laughing at Vlad, but pegging him as a 9/11 Truther-level nutjob because he sees the Saudis deliberately keeping oil prices low and deduces that there’s a Saudi plot to keep oil prices low seems like a stretch.