Oil prices declined sharply in the past few weeks, with Brent crude dropping to a two-year low as Saudi Arabia continued to slash its oil prices, raising many questions about Saudi Arabia’s policy towards its depletable wealth.
Selling crude oil for the same price during the Global Financial Crisis in 2008 and 2009 is an economic blunder, with some people even saying it is better to burn the oil instead of selling it for less than $35 a barrel.
However, Saudi Arabia did just that, and will apparently continue to do so within certain limits. The country has been selling fossil fuel to its clients in many regions for this supposed “nominal price.”
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.
Analysts involved in the current market’s dynamics who were interviewed by the Financial Times, along with recent statements by Saudi Aramaco, suggest that it is very unlikely for Saudi Arabia to reduce its oil output, even if this leads to a large surplus in supply and brings oil prices down to unusual levels. What is its motive? Saudi Arabia seeks to increase its shares in essential export markets, especially in Asia.
Saudi Arabia’s measures brought Brent crude prices down to $92 this week, its lowest level in the past 28 months, while US crude oil prices dipped below the $90 mark.
The Saudi move is also expected to have numerous implications, mainly in the Organization of the Petroleum Exporting Countries (OPEC), after Riyadh dealt a severe blow to the organization's strategy of keeping oil prices at a fair level.
In fact, a conflict of interest is raging within OPEC, particularly between Saudi Arabia and Iran.
Saudi Arabia has the largest oil reserve in the region and enjoys a wider margin to cut prices by flooding the market in order to please its allies or to draw political gains. Iran, meanwhile, is one of the hawks always advocating for increasing prices to above the $100 mark.
Saudi Arabia has the largest oil reserve in the region and enjoys a wider margin to cut prices by flooding the market in order to please its allies or to draw political gains. Iran, meanwhile, is one of the hawks always advocating for increasing prices to above the $100 mark.
Aside from analysis of new markets, it seems that Saudi Arabia is flooding the oil market with low-price oil in order to exercise political pressure on Iran because its nemesis is more likely to be affected by lower oil prices.
Studies by US Citibank analysts suggest that both Saudi Arabia and the UAE can establish a balance in their public budgets if oil falls to $89 and $74 a barrel respectively, and of course, any increase would bring a surplus to the two countries’ treasuries. However, according to the US bank, Iran can only achieve a balanced budget if oil prices increase to $130 a barrel.
Though this analysis may imply some sort of conspiracy, it was the Iranians themselves who stressed during a recent OPEC meeting on the need to contain the decline of oil prices.
Today, multiple actors are influencing the oil market, from Venezuela and the United States, to Angola and Iran, along with the Gulf countries, and the Islamic State in Iraq and Syria (ISIS) – now controlling oil fields in Iraq and Syria – which may lead to conflicting analyses seeking to explain Saudi actions.
However, the bigger picture, which is far from the direct interests stemming from the conflict of axes in the Middle East, calls for an inclusive approach.
Some believe that this is an anticipation stage with investors awaiting a new wave of price increases at the beginning of winter. However, the oil market’s structure consistently keeps changing in a confusing manner.
The oil market is ruled by the principle of supply and demand. Demand on the one hand is rarely influenced by politics, since it emanates from actual needs. For example, gas tanks in cars and planes need to be filled; factories need to be operated, while heating and cooling cannot be overlooked.
Supply, however, is a far more complicated issue. Producers and owners have to take numerous matters into consideration, which may be impacted by politics and other non-economic interests. However, if we are to consider all other factors constant, production would still depend on the technological abilities and the available capacity to procure the largest amount of oil and natural resources at a given moment, and to later put it on the market.
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.
But is this new policy destined to succeed? Past experiences involving Saudi oil and oil revenues have not been encouraging. Oil was not used for development purposes and its revenues have not been invested in promoting non-oil related economies or creating job opportunities.
This article is an edited translation from the Arabic Edition.
RELATED
The views expressed in this article are the sole responsibility of the author and do not necessarily reflect those of the Blog!
No comments:
Post a Comment