Oil Wars

Steven LeBlanc

12222014

The rumor is–America and Saudi Arabia are actually working together to bring down the price of oil–the reason– to hurt Vladimir Putin. The Saudis gain more market share when the price of oil goes lower (which is true), and America benefits as Russia’s economy takes a heavy hit due to reduced oil revenue (a case of geopolitical weakness on the part of Russia).

But the above is actually a distorted view, the truth is– America and the Saudis are not collaborating on the price of oil—they are actually competing against each other, a three-way oil war is going on between Saudi Arabia, the United States and Russia. All these nations are competing against one another. Russia leads the world in oil production, followed closely by Saudi Arabia and just ahead of the United States.

Energy pundits say there is little doubt that OPEC is looking to drive new producers with higher costs — in particular North American shale companies — out of the market. Technological breakthroughs have unlocked shale resources in the United States and raised daily US oil output by more than 40 percent since 2006, but at a production cost which can be three times that of extracting Saudi oil.

What changed?

The American shale revolution created an America that went from being a big consumer of Saudi oil to becoming a major exporter of Natural gas liquids and condensates, and we are importing far less oil from Saudi Arabia, and other OPEC nations. Our newfound ability to export oil and natural gas liquids hurts Russia, Saudi Arabia and OPEC. This has created tension between the Saudis and America.

Both Saudi Arabia and Russia need revenue from the sale of oil and natural gas. It seems they have no intention of curbing production. This means there is plenty of oil available on the world oil markets—this oversupply is driving down the price of oil, and the price of gasoline at the gas station. How low will the price of oil go—hard to tell.

And now this just in…Saudi Arabia said on Sunday it would not cut output to prop up oil markets even if non-OPEC nations did so, in one of the toughest signals yet that the world’s top petroleum exporter plans to ride out the market’s biggest slump in years—Reuters.

Where does Russia stand in this oil fight?

Russia’s currency, the ruble, has fallen by over 30% in 2014. As bad as that is, it makes Russian oil and natural gas even more attractive to European and Chinese buyers. Russia will not cut production and will continue to increase its market share in Asia. Just take a look at the monster energy deal between Russia and China that was reported during the November APEC [Asia Pacific Economic Conference]. Like Saudi Arabia, Russia needs the money. We may see lower oil prices for some months.

Wars and rumors of wars [see Matthew 24:6], but in a way you may not initially appreciate, make no mistake about it—this is a war, but not a war using tanks and troops but an energy war. Russia and Saudi Arabia are in an energy war with each other over market share, and both are competing with US shale. Throw in rising political tensions—the US wishing to do economic damage to Russia, Russia determined to stand its ground on Ukraine, the Saudis angry over US foreign policy in the Middle East, mostly because America’s newfound softness toward Iran—and you have a mass of shocking cross-currents.

Another factor impacting markets… Weak demand in China — where the economy is slowing after decades of spectacular growth — is likely to continue, said Bassam Fattouh, director of the independent Oxford Institute for Energy Studies. Competition for Asian markets has meanwhile grown, he said, after the production increase in the United States allowed it to reduce or stop crude imports from the Middle East, West Africa and Latin America. “That has created a shift in oil trade flows,” he said.

Oversupply, lower demand and the stronger US dollar have all contributed to pushing down oil prices, which have dropped 50 percent since June to around $60 a barrel. The world economy promises more surprises in 2015!

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