Right now Oil prices are dropping faster than we’ve seen them drop in years.
Oil prices sank again on Monday, giving consumers more of a break and causing a split among OPEC leaders about what action should be taken, if any, to halt the slide.
The price drop has led to a near free fall in gasoline prices in the United States. On Monday, the national average price for regular gasoline was $3.20, 9 cents lower than it was a week ago and 14 cents below the price a year ago, according to the AAA motor club.
This would seem counter intuitive. Winter is coming for Europe & North America. ISIS is running amok in the middle east, Iran is still developing their bomb (large explosions not withstanding) and Eastern Europe is still wondering what Putin’s next move is going to be given that situation one would expect the prices of oil to go through the roof.
Except there is a wild card and that card is Saudi Arabia.
Saudi Arabia cut its flagship Arab light selling price by $1 a barrel, versus October’s discount of $1.05 a barrel to the Oman/Dubai average price. Traders expected a cut of about 70 cents, according to Reuters. The Saudis also cut prices to the U.S. and Europe by 40 cents a barrel.
McGillian said Saudi now lowered its selling price below the Oman and Qatar prices.
Why on earth would the Saudis be cutting prices rather than production? Why aren’t they fighting to get oil prices back up again?
Because they have no choice.
The reality of Saudi Arabia is pretty simple, all their power all their influence comes not only from their oil wealth but from the power to affect oil supplies internationally as soon as that lever disappears their ability to protect what is basically a family kleptocracy disappears.
But the shale oil and oil sands business have thrown things for a loop.
Thanks to increased oil prices oil sources that were once cost prohibitive, suddenly weren’t. Now it was cost-effective to build the infrastructure necessary to harvest the oil sands of Canada and oil via fracking and as the infrastructure. Meanwhile the experience as these projects got rolling, combined with the same western ingenuity that allowed the Saudi’s to develop the fortune underneath their feet caused technological improvements further bringing down the cost of producing that barrel of oil hitherto left untouched.
As Al Akhbar.com put it:
Though the Saudi move may seem puzzling in market terms, it becomes less complicated when analyzed within the world of geopolitics which is plagued by competition over strategic markets and where oil is used as political leverage.
Saudi Arabia is threatened physically from Iran to the east, moreover they are threatened economically from a US exports to their customers.
For Saudi Arabia, this may be the right time to increase its market share by lowering oil prices, which would also put pressure on both Iran and the United States.
If prices drop Iran is put on the defensive as they have to satisfy an unhappy population while still supporting their client state in Syria and holding off ISIS gains which could create a rival in the world of Islamic fundamentalism.
Meanwhile on the other end if the price of oil drops far enough the US production from non-traditional sources suddenly is no longer cost-effective:
Even the more expensive drilling operations are still profitable when oil sells for $85 a barrel, and oil closed just below $86 on Monday. In general, oil companies would have to expect oil prices to stay below $80 a barrel for many months to scale back their drilling plans.
What’s even more critical for the Saudi’s is to keep new sources offline. In areas where fracking etc is already established the primary cost creating the infrastructure to produce and supply the oil is in place so they can handle a price drop better but in spots where development hasn’t begun their only hope to keep them in check is a price that stops those folk in their tracks!
It’s a catch 22. High oil prices enable all those who are a physical threat to them and create new financial threats while low oil prices while dropping their bottom line preserves their ability to be the boss on the world’s energy stage, a state to be feared, respected and protected.
Thus the Saudi’s are forced to take steps that Hurt Iran, put Putin in check, wreak havoc with Venezuela and cause China to rethink their investment and development of oil allies around the world, while at the same time providing relief to American consumers and drivers.
Check and mate, we’ll see.