Thursday, December 17, 2015

The US–Saudi Oil Price Manipulation: Winners and Losers

On September 11, 2014, US Secretary of State, John Kerry, met in Riad with King Abdullah of Saudi Arabia and persuaded him that Saudi Arabia, the swing producer of the OPEC oil cartel, should do the opposite of what a cartel leader is supposed to do, that being to constrain supply and hold the price high. Instead, Abdullah agreed to Kerry's proposal, and Saudi Arabia raised production, thus driving the price of oil from $100 plus per barrel to, currently, $35.

Why did Kerry want this? Why did King Abdullah agree?

Kerry's objectives are clear. The Obama administration is pursuing the New World Order plan for the destruction of the nation state. Russia and China are the prime obstacles. As a result of Kerry's oil price manipulation, Russia, the world's largest energy exporter, has suffered substantial economic damage — a loss of revenue in the order of several hundred billion dollars a year. This, together with the US-directed EU trade sanctions on Russia, have created a combination of recession and high inflation, the latter resulting from the near 50% fall in the value of the ruble consequent upon the collapse in the price of oil. So far, these effects have failed to achieve America's prime objectives, these being to undermine Putin's popularity and thereby the stability of the Russian state, making way for regime change by fifth columnists and exiled oligarchs such as Khodorkovsky without the need of Western military intervention.

For Russia, thus far, the outcome has not been as intended. The devaluation of the ruble has provided Russian producers of both food and industrial goods massive home market protection and increased export opportunity, thereby stimulating the diversification of Russia's economy, while greatly promoting Russia's trade relations with the BRICs. Meantime, Putin's popularity at home has reached all time highs.

But what about the US and Saudi Arabia? The collapse in oil price has killed America's booming tight-oil (aka shale oil) industry and forced the Saudi government to run huge budget deficits, covered by running down foreign reserves, mainly US-denominated securities, a mode of operation that is unsustainable in the long-term.

How do these consequences help either the US or the Saudis?

For the US, death of the fracked oil industry means a 50% cut in US oil production. Wow. Was that a dumb move, or what?  Not necessarily. The three top producers of fracked oil are, or were, Texas, North Dakota and Oklahoma: all red (Republican) states. None of them voted for Obama, and none will vote for Hillary, so what's Obama gonna care if their economies go into recession. Meantime, consumers in states where they are more inclined to vote for the Democrats get cheap gas. Moreover, the energy-cost savings run right across the economy. Food, airline travel, cement, and just about anything that embodies energy, which is to say everything, is gonna be cheaper than it would otherwise have been: an important factor in the run up to the Presidential election. A further benefit, now that the technology of fracking has been proved and the tight oil resource mapped, is that the locked-in tight oil constitutes a well-defined national petroleum reserve, readily accessibly should offshore supplies be interrupted.

In addition, even if less fracking means more US oil imports, the unit cost of those imports has been so drastically cut that America's overall oil import bill has actually fallen. And as oil is America's biggest import by far, the net result is a soaring US$, which makes almost everything cheaper, particularly all those imported sneakers, tee shirts, jeans, car parts, BMW's, and stinky VW's, plus high-tech electronic stuff from China, Japan and Korea.

But if the deal was so great for the US, it must have been a bummer for the Saudis, right?

Not necessarily. Since the Kerry: Abdullah meeting, Saudi Arabia's foreign-held reserves have fallen from US$740 to $660 billion US dollars, a decline of about ten percent. So the Saudis can continue living off capital for many years to come. Meantime, the Saudi Riyal has appreciated along with the US dollar against most currencies, meaning that in purchasing power, Saudi reserves have declined considerably less than 10%. Moreover, Saudi oil output is growing and is now about 20% up since 2010, whereas it would have had to have been cut to maintain a $100 dollar price in the face of rising US and Canadian production. So although Saudi Arabia's income per barrel is down by more than 50% since last year, gross income is down by less. Moreover, the decline in revenue has been partly compensated by the rise in the value of the Riyal. And finally, the rise in Saudi production is likely to continue for years to come as global demand expands, with the result that even at a reduced price, Saudi oil revenue will eventually reach new heights.

For the Saudis, a transition from 10 million barrels a day at $100 to, say, 20 million barrels a day at $50 will have little effect on net revenue because Saudi oil costs so little to produce. Further, a lower oil price diminishes the drive for alternative energy sources that will replace oil long before Saudi Arabia manages to fully capitalize its oil resource.

The outlook, then, is for relatively cheap oil for some time to come. For the American economy, the combination of a high dollar and rising interest rates suggests continuation of the ongoing depression and mass unemployment concealed only by economic data manipulation and media lies. For the Saudis, the economic future looks secure. For Russia, the outlook is for massive economic diversification and reorientation from the West to the East and the South.

Overall, the US-instigated oil price manipulation may turn out to be a US own goal.


ZeroHedge: "I Know Of No One Who Predicted This": Russian Oil Production Hits Record As Saudi Gambit Fails

No comments:

Post a Comment