Riyadh using oil as a weapon

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The 32nd meeting of the Oil Ministers of Gulf Cooperation Council for the Gulf states in Riyadh on September 24, 2013. (Photo: AFP)

By: Hassan Chakrani

Published Saturday, October 18, 2014

With oil prices hovering around $85 a barrel, all eyes are fixed on the leading states capable of determining market trends. In fact, Brent Crude, used as the pricing benchmark for oil derivatives, dropped by 23 percent compared to its highest price registered last June.

Although this decline could partially be due to the global economic recession, the surplus in supply levels registered since last spring has also played a leading role in the decline of oil prices.

Statistics show that during this period, the international oil supply soared by one to two million barrels a day, reaching its peak last September when the supply of oil increased by 2.8 million barrels as Saudi Arabia slashed its prices to less than $40 a barrel and sold large quantities to its buyers around the world.

After analyzing the market situation, it is fair to say that leading oil producers, especially the United States and Saudi Arabia, are seeking to impose their agenda on other producers including Russian and Iran. And since Riyadh and Texas can afford to bear a relative decline in oil prices, their scheme is devised to undermine Moscow and Tehran in any current negotiations or wars.

But how can Saudi Arabia bear the burden of declining prices? The country can simply rely on its large production capacity and its foreign currency reserve, estimated at about $750 billion.

Saudi Arabia is also not under any sanctions. Instead it maintains strong, even if at times tense, relations with the same country responsible for imposing these sanctions: the United States.
Most importantly, Saudi Arabia’s oil decisions are linked to the political situation on the ground in the Middle East. The kingdom can afford to sacrifice a few billion dollars in order to win a checker or two on the region’s map.

Over the last decade, the United States successfully developed new technologies to extract shale oil which led to a surplus in supply, further promoting President Barack Obama’s [energy] policy which played an important role in curbing US reliance on oil producers, especially in the Middle East.

And contrary to all peak oil theories, “the United States’ shale oil production started to increase in 2009 and escalated in the past five years to reach 8.3 million barrels a day in the first half of [2014]” according to the Wall Street Journal.

The surplus made Washington more comfortable with its energy situation which was no now longer subjected to traditional Texas price indexes. Gradually, new technology has brought the cost of oil extraction down with production now at an estimated cost of $70 a barrel, which means that as long as the prices remain above the $70 mark, production will continue without incurring any losses.

However, oil data is not that encouraging. Starting with Russia, although the country is considered one of the largest energy exporters in the world, it is now facing many challenges which are tightening the grip on its financial and monetary situation.

Most observers agree that economic sanctions imposed on Russia after its so-called “invasion” of Ukraine last summer have affected the foreign currency reserves it had accumulated during the past decade. Today, its foreign currency reserves are estimated at $450 billion, a respectful amount that reflects Russia’s position as a leading energy hub, but does not deny the fact that the Russian ruble had its poorest global performance in the last three months.

The Russian authorities have so far allocated $13 billion to stimulate the economy, and the central bank seems ready to pump more hard currency into the market. Only two days ago, the central bank announced it will offer up to $3.5 billion in currency repurchase agreements within an auction to be held later this month.

Declining oil prices further exasperated the financial situation in Russia which is set to pay hefty sums to cover its public debt this season, like it normally does in the last quarter of every year. However, the country made its economic projections and drafted its budget based on oil prices standing at a minimum of $90 a barrel. It is worth mentioning that Russia relies on raw material to secure half of its annual budget.

Meanwhile, Iran seems relatively less impacted by the price decline since it benefited from the détente sparked by the recent negotiations with the United States and the release of billions of dollars of Iran’s money. The latter rebounded also after having received critical technological tools to rehabilitate some essential sectors, which were suffering due to its estrangement from the West, most prominently the aviation sector.

Recently, growth prospects in Iran have improved to the extent that the International Monetary Fund indicated that the country will get out of its recession this year and that its economy will be more diversified, even if not to the required level.

However, oil prices not only impacted the Russian ruble and Iranian riyal or the economies in both countries, but the price decline also caused major shifts within the US market itself: when oil prices drop, the budgets of small companies are affected, prompting giant institutions to seek acquisitions in order to reinforce their place in the market.

According to Bloomberg data, the recent free fall of oil prices wiped out over $20 billion of the market value of oil-producing companies considered “possible targets” for oil giants.

These oil giants include Chevron, Exxonmobil, and Conocophillips, the same companies that were circulated during and after the invasion of Iraq in 2003, when huge oil contracts were being signed. In fact, Chevron is the most influential of these companies with a direct liquidity of $14 billion, nearly double of Exxonmobil’s for example.

Interestingly, the dramatic scenario in the US market further suggests that the targeted companies are the same ones that developed shale oil drilling technologies – a resource that gave the United States leverage in the energy market and reinforced its position in its negotiations with oil producers, including even Saudi Arabia.

US newspapers suggest that these large companies were awaiting such an opportunity, because they could not just buy the technology developed by small companies, but they also had to understand it, which cannot be done without acquisitions.

Any decline in oil prices will have a significant impact on countries and markets from the east to the west. This time, it seems that Washington and Riyadh have coordinated to flood the market and hurt their enemies. Though the coordination may not have been direct or straight forward, but it certainly serves both parties.

The views expressed by the author do not necessarily reflect Al-Akhbar English's editorial policy. If you would like to submit a thoughtful response to one of our opinion pieces, send your contribution to our submissions editor.

This article is an edited translation from the Arabic Edition.

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