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| Geo-Political Poker Game Or Saudi Blackmail? |
"After two years of stable prices at around $105 to $110 a barrel,
Brent blend, the international benchmark fell from $112 a barrel in
June to around $65 on Friday, December 12 . “What is the reason for the United States
and some U.S. allies wanting to drive down the price of oil?” Venezuelan
President Nicolas Maduro asked rhetorically in October. His answer? “To
harm Russia.” - says Mohamad Bazzi in a report he wrote for Reuters
That is partially true, but Saudi Arabia’s gambit is more complex.
The kingdom has two targets in its latest oil war: it is trying to
squeeze U.S. shale oil—which requires higher prices to remain
competitive with conventional production—out of the market. More
broadly, the Saudis are also punishing two rivals, Russia and Iran, for
their support of Bashar al-Assad’s regime in the Syrian civil war. Since
the Syrian uprising began in 2011, regional and world powers have
played out a series of proxy battles there.
While Saudi Arabia and Qatar have been arming many of the Syrian
rebels, the Iranian regime—and to a lesser extent, Russia—have provided
the weapons and funding to keep Assad in power.
Russia and Iran are highly dependent on stable oil prices. By many
estimates, Russia needs prices at around $100 a barrel to meet its
budget commitments. Iran, facing Western sanctions and economic
isolation, needs even higher prices. Already, Iran has taken an economic
hit from Saudi actions.
On Nov. 30, as a result of OPEC’s decision not
to increase production, the Iranian rial dropped nearly six percent
against the dollar.
The Saudis believe it can protect itself from the impact of the
price drops. It can always increase oil production to make up for
falling prices, or soften the blow of lower profits by accessing some of
its $750 billion stashed in foreign reserves.
Still, Saudi Arabia is playing a dangerous game—there is little
evidence that authoritarian regimes like Russia and Iran would change
their behavior under economic pressure. Worse, the Saudi policy could
backfire, making Russia and especially Iran more intransigent in
countering Saudi influence in the Middle East.
In the meantime OPEC Gulf members and crisis-hit
producer
Russia held the line on resisting oil output cuts, a
message that helped send oil to a fresh five-year low on
Tuesday December 16.
A near-$20 drop in prices since OPEC declined to cut output
at a Nov. 27 meeting has yet to prompt the Gulf members - who
overruled calls for output cuts by poorer members such as
Venezuela - to reverse course.
Russia has said it would not cut production even if oil
prices fell below $60 per barrel - far below some $100 a barrel
it needs to balance its budget - a message reinforced on Tuesday
by energy minister Alexander Novak arriving at a gas producers
summit in Qatar.
"If we cut, the importer countries will increase their
production and this will mean a loss of our niche market," he
told reporters, speaking through an interpreter.
"We plan to preserve the plan for 2014 production without
any increase or decrease," he said.
His comments came as the rouble fell to a new all-time low
despite the central bank's steep rate hike on Monday.
Oil prices dropped to below $59 per barrel on Tuesday for
the first time since 2009 and are now down almost by a half
since June due to weak demand and growing supply from the United
States.
The collapse of the rouble and plunging oil revenue present
one of the biggest challenges for President Vladimir Putin
during his 15-year rule at a time when the Russian economy is
already struggling under Western sanctions over Ukraine.
Novak said Russia, the world's second largest oil exporter
after Saudi Arabia, will maintain its output levels even if
there was no guarantee prices would not go much lower.
"No one will tell you this," Novak said when asked what was
the floor for oil prices.
He also said Russia agreed with the view of Saudi Arabia
that the oil market would eventually stabilize itself.
What is certain however is that the oil market and the world economy faces an uncertain outlook in 2015 as tumbling oil prices
resulting from global oversupply stoke geopolitical tensions in key
producers of crude, analysts say.
In fact, if no one
eventually blinks in this rapidly deteriorating volatile energy based
geo-political dispute, it potentially has the ability to escalate on a
global scale and turn into a military conflict involving all super
powers which, without any doubt, would mean the end of civilization as
we know it.
EU-Digest
