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Page added on October 21, 2014
Saudi’s Policy Of Downplaying Oil Prices Will Backfire On Them
Saudi Arabia wants to use lower oil prices to pressure Russia to change its stance on Syria, to antagonize Iran, and to force US shale gas out of the market, Pepe Escobar explains the possible blowback…
RT: Russia’s economy is surely being hit by the falling oil prices. But what about other oil producers like the OPEC states?
Pepe Escobar: A lot of people are being hurt. There are more or less 20 nations that need oil at least for 50 percent of their budget. Among these nations we’ll find especially a mix of African countries and Persian Gulf countries, that includes Saudi Arabia and Iraq as well, Venezuela and Ecuador. So it’s very complicated, it’s not only to hurt Russia…
RT: Saudi Arabia is one of the OPEC members and it is supposed to collaborate its oil price policy with other members. Why it is acting like this?
PE: OPEC is not a moralistic organization. There has been a lot of speculation about what Saudi Arabia has been doing. In fact, their strategy is still faulty – they want lower oil prices to pressure Russia vis-à-vis Syria, change their stance vis-à-vis Damascus and they want to more or less price shale gas from the US out of the market, and also pressure Iran vis-à-vis what’s going on in the Middle East, the famous Saudi-Iranian antagonism. This is not going to work in the long run because even Saudi Arabia will be in trouble if we have a barrel of oil like it was projected for the first quarter of 2015 between $70 and $80, now it’s a round $86-87. So they will be in trouble as well, their strategy in the long run is going to backfire.
RT: So, how long are these major oil exporting countries going to follow this strategy? When will they think of their own economic interests?
PE: When we look at the breakeven for most of these countries in terms of their state budget – how much they need a barrel of oil to cost if they can more or less even their expenses? When we look at the latest table – which is a composite of indexes from the Economist, Wall Street Journal, Bloomberg, Reuters – Venezuela and Ecuador need oil at $120 a barrel, they are going to be in a deep trouble. Iraq, for instance, needs around $106-116 – they are in trouble. The problem with Iran is that we don’t have very exact figures.
According to these indicators, Iran will need a barrel of oil between $130 and $140. That’s too much because oil is less than 20 percent of Iran’s revenues, so it’s not essential for them. Gas is much more important. In terms of Russia, we know how Russia may [be] hurt because for the State Budget of Russia for 2015 it’s around $100 a barrel. So if we have next year, according to the best projecting so far, between $70 and $80 and maybe even going down to $65-70 in the next few years, all of these countries are going to suffer. But the market is very volatile. In one year from now we could be talking about a completely different situation if we have more demands, especially from China, from the US, from Europe, supposing there is some sort of economic realignment in Europe. So this could change not just in a matter of not only days and weeks or years but very fast.
RT: Why aren’t the OPEC-states reducing the production volumes, like they normally do when prices drop?
PE: There are a lot of back-door consultations among OPEC members at the moment. Sooner or later we can expect less oil in the market, so the prices will go up. Especially, I would say from Venezuela, Ecuador… Iran – they need the revenue, so at the moment they are just starting the market flows. Obviously they have very good customers in Asia, even if they are buying less like China, they still buy Iranian oil. We have to see the US point of view, in fact, because the US doesn’t want very low oil prices to price their shale gas exploration out of the market. So there are going to be counter-moves by many OPEC and non-OPEC players as well.
13 Comments on "Saudi’s Policy Of Downplaying Oil Prices Will Backfire On Them"
meld on Wed, 22nd Oct 2014 2:58 am
one last pump and then the fun begins
rockman on Wed, 22nd Oct 2014 6:51 am
“Why aren’t the OPEC-states reducing the production volumes?”
The KSA has been lowering production for at least the last 6 months. They are at the lowest level since 2010. Had they not been reducing production it’s easy to speculate prices would have fallen further. It might have only helped marginally but the KSA production cut back has helped Russian oil exports as well as the profits of US shale players. If the KSA wants to damage the revenue stream of other oil producers all they need do is put their excess capacity into the market place. I don’t know what global production rate would be the tipping point but such a KSA move could kick it there and we might see $50/bbl oil IMHO. It would appear the KSA has no interest in testing those waters. Waters that could severely damage Russia et al.
Once again the foolishness that the KSA dictates oil prices. The refiners decide what they can pay for oil. If the price is too high to allow them an acceptable margin they don’t buy the oil. And if they project consumers will be less of their products at higher prices than they won’t buy the oil. The feedback loop takes a while to work thru but eventually the consumers of products made from oil ultimately control the price of oil.
Gasoline prices have fallen significantly. Refiners charge the max they can for their products. They are not going to pass on the benefits of lower oil prices if they don’t have to. It isn’t personal…just business. If the refiners could sell the gasoline for $1/gallon more than they are today that would be the price. And they would be in a position to pay more for the oil they needed to crack. But they aren’t in that position: they can’t force consumers to buy what they can’t afford.
Simply supply and demand dynamics IMHO.
JuanP on Wed, 22nd Oct 2014 8:31 am
Rock, I am disappointed that you still believe in KSA’s mythological spare production capacity. I believe depletion won over spare production a few years back. I doubt the Saudis could pump a million barrels more than they are pumping now, or that they ever will.
shortonoil on Wed, 22nd Oct 2014 8:32 am
It is interesting to note that everyone is assuming that oil prices are going down because the market is being manipulated. Nothing could be further from the truth. The decline in its price is merely the inevitable result of petroleum’s ongoing depletion. Producers are merely reacting to that reality in a way that they feel will best secure their profits, and cash flow. The extract same way that producers have reacted for the last 150 years.
Petroleum has reached the maximum price that the economy can sustain. At the same time production costs are continuing to increase along the same curve they have been following for the last century. This will result in an ongoing shake out of the highest cost producers.
Depletion is the unavoidable consequence of resource extraction. It is as sure to occur as the sun will rise tomorrow. Although it is a simple, and inescapable concept it is avoided by journalist at all cost. The reality that there is no way out; that we are approaching the end of the oil age is not acceptable!
“If we accept absurdities, we will commit atrocities.” – Voltaire
http://www.thehillsgroup.org/
JuanP on Wed, 22nd Oct 2014 8:43 am
I like Pepe Escobar a lot. I consider him one of the few remaining honest journalists in the world today. He is not, however, an energy expect. He is better with economic, social, and political analyses than he is with energy analyses. He is my go to guy on the Hong Kong crisis.
I find this oil price dip to be the most interesting one I have ever experienced. I am very curious to find out if, how and when it ends.
Davy on Wed, 22nd Oct 2014 9:22 am
Short, there is the economic component that is as important to the oil equation as the depletion of quantity and quality. Diminishing returns to the effective application of capital with energy in a system reaching its complexity maximum in combination with net energy contribution loss. You are correct by me in discounting market manipulation. Manipulation has always worked around the edges and at different historical periods was highly effective i.e demise of USSR. The compression of the goldilocks range and the brittleness of the global system will not allow such manipulation on that scale. The interconnected nature of things makes hostile market manipulation a zero sum game.
Speculawyer on Wed, 22nd Oct 2014 12:25 pm
“Via RT” . . . translation: From Russia Today, purveyor of Putin approved propaganda.
JuanP on Wed, 22nd Oct 2014 12:38 pm
Specu, As far as I am concerned, Russian propaganda is more believable these days than Western propaganda. I don’t know if this is because the Russians are better at propaganda or because their propaganda is closer to the truth. To each their own propaganda! We are all delusional fools. LOL
baptised on Wed, 22nd Oct 2014 1:34 pm
So where does USA economy fit. We pay out for oil and then print more money, while the debt is 18 trillion and climbing?
nemteck on Wed, 22nd Oct 2014 2:03 pm
Rockman:”…. but such a KSA move could kick it there and we might see $50/bbl oil IMHO.”. On one hand you say that KSA can influence the oil price but on the other hand you say:
“…foolishness that the KSA dictates oil prices”. Dictating is not necessary if one can influence the oil price with the same result.
Even recent uttering by KSA saying that they are comfortable with $80/b downed the oil price $3 in one day.
nemteck on Wed, 22nd Oct 2014 2:07 pm
“The decline in its price is merely the inevitable result of petroleum’s ongoing depletion. ” That is strange. I thought that, if a vital resource is depleting, than it becomes rarer and the price is going up.
Makati1 on Wed, 22nd Oct 2014 7:43 pm
nemteck, I thought so too. If the KSA group is cutting prices to force out the alternate sources and retain ‘market share’, it may succeed, for a while.
If it was done, as some articles state, to bankrupt Russia, it is not going to work. $80 oil is not going to force out anyone who can produce it cheaper. Yes, Russia uses oil profits for it’s budget, but they also have ~$400B in reserves to burn first and then there is China and it’s banks that would be happy to back the Kremlin for a few hundred billion in trade for oil.
I see the hand of the DC Mafia in this, for some reason not yet decernable. The West is on the ropes economically and this could put the last nail in the coffin. If the Saudi’s hold the price below $80, many of the frackers will go belly-up, killing investment income for a very long time. Or so it seems to me.
Glad I don’t heat my home with oil or need gas for a car. My trip to the States next Spring might just be cheaper … Or I may not go because there will be a deep depression there. We shall see.
Nony on Wed, 22nd Oct 2014 7:44 pm
KSA has a long history of constraining supply to drive price up (or at least attempting to do so). And a long history of “we can’t pump enough to stop prices from going up”. A cynic might say they want to manipulate prices higher.