Has Saudi Arabia finally been Checkmated?

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Has Saudi Arabia finally been Checkmated?

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.

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.