Saudi-wielded oil price is double-edged sword

By Robert A. Manning Source:Global Times Published: 2014-12-23 23:13:01

The Saudi-driven drop in world oil prices, from more than $100 a barrel in June to around $60 a barrel now, is already having a huge impact on the global economy. But it is also filled with geopolitical consequences. And recent statements by Saudi and other Gulf Cooperation Council (GCC) officials suggest that lower oil prices may be a trend, with oil at $60-$95 range or lower - well into 2015 and perhaps longer.

Why? The short answer is global oversupply - the result of a combination of the global economic slowdown and a surge in US production from the "shale revolution."

But reinforcing this trend is the reality that the Organization of the Petroleum Exporting Countries (OPEC) largest producer, Saudi Arabia, which pumps 9.7 million barrels a day and its GCC allies, have made it clear that they can live with lower prices.

The International Energy Agency (IEA) recently lowered its estimate of world oil demand for 2015 by 230,000 barrels per day. Lower demand means that if the Saudis and other Gulf oil producers want to maintain or increase their market share, they will have to sustain current production levels.

The Saudis appear to be trying to avoid the result that occurred on previous occasions when oil prices plummeted. In the 1980s and around 2000, oil prices plummeted and Riyadh and other OPEC nations cut production. The result was that they lost a significant portion of their share of the market.

Another Saudi aim that may succeed is to slow down the US shale boom. Shale extraction has helped boost US oil production to over 9 million barrels a day. The US is projected to surpass Saudi Arabia as the primary global producer by 2016. But producing tight oil from shale is expensive. Most US shale producers need prices of $65-$70 a barrel to turn a profit. Fears of prolonged lower prices have already reduced US oil and gas investment for 2014 by 37 percent.

The Saudis have ignored the protests of other OPEC members like Venezuela and Iran. Both Russia and Iran compete with Saudi Arabia in the international oil market, and both countries need oil prices to be at roughly $110 a barrel in order to balance their budgets. If oil prices remain at $60 a barrel, the big losers would be Iran, Russia and Venezuela.

For the Saudis, this has an added benefit. Both Russia and Iran have backed Syrian President Bashar al-Assad's regime in the Shia-Sunni proxy war across the Middle East, while Saudi Arabia is backing the rebels.

For US as well as Chinese consumers, the drop in oil prices is like a tax cut. For China generally, the price plunge is a mixed blessing, as China is the world's fourth largest oil producer, at 4.5 million barrels a day. While low oil prices may be a net gain for the global economy, some analysts worry that banks with exposure to oil firms and/or oil exporting nations may lead to instability in global financial markets.

Perhaps the biggest loser is Russia. The effect of $60 oil and international sanctions is a collapsing economy. The Bank of Russia forecasts the economy may shrink by as much as 4 percent or 5 percent in 2015 and 2016. Facing inflation, large-scale capital flight, and with some $650 billion in corporate debt due in 2015, Russia is reeling.

Much of Russian President Vladimir Putin's popularity has been based not just on nationalism but the prosperity and high energy prices have brought to Russians and what has been a growing middle class. Economic instability could lead to political instability.

One way out of the mess for Putin is to make a deal on Ukraine and end Western sanctions. Putin appears committed to his assertive policy toward the former Soviet republics. 

Venezuela's economy may be in worse shape than Russia's. Will Caracas continue to provide subsidized oil to Central America and Cuba? And what will Cuba do if the 115,000 barrels per day of oil from Venezuela stop flowing? That fear may have been a factor in Cuban President Raul Castro's deal with the US to normalize relations.

The biggest winners are oil importing developing nations like Indonesia and India for whom the down cycle of oil prices is a big plus likely to spur economic growth. In a curious twist of fate, it appears that unlike the oil crisis of the 1970s, the winner this time is not an increasingly irrelevant OPEC, but global consumers.

The author is a former State Department official and a senior fellow at the Brent Scowcroft Center for International Security at the Atlantic Council.

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