Why is Saudi Arabia flooding the oil market?

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An Iraqi oil worker works at Al-Doura oil refinery. (Photo: Getty Images-Oleg Nikishin)

By: Hassan Chakrani

Published Wednesday, October 8, 2014

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.

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.

Comments

As soon as the OIL is gone you will have no bread to eat.
What's more you will have no seed to put into the depleted & radioactive ground that is the Middle East to grow the wheat, for the flour, to make yourselves a loaf of bread.
Who will stand beside you & share their bounty with you (?)
If you don't have the means to pay (?)
NO ONE -
You spent it all on arms to fight each other & be martyrs,
with the help of WHITE MAN ... who laughed at you all the way to his bank.
I wonder if you could grind up the arms & eat them (?)

THE ECONOMIC BLUNDER :-
ALAS ; ...
Some of 'us' on this planet ...
Have not yet noticed the reality that.....
The economies of the nations of the world have not yet gotten over / recovered from the onslaught that was the 2008-2009 Global Financial Crisis
Who is living in fantasy land to think that - not only Saudi OIL but all things can be sold for ....
MORE dollars than any nations budget will allow.

BUT OIL IS A VITAL COMMODITY THEY WILL PAY
GIMME
GIMME
GIMME
I WANT THE MONEY I FEEL I DESERVE.

Wall Street has KILLED itself.
No one in their right mind will do "business as usual" with Wall Street.- no one has the common sense to close it down.

EVERYONE OUT DID THEMSELVES in 2008
NO ONE CAN BELIEVE IT
NO ONE HAS REALIZED EXACTLY WHAT THEY HAVE - shall we call it - ACHIEVED YET
AND EVERYONE IS TOO SCARED TO LOOK
LET ALONE ADMIT THAT THEY HAVE BITTEN OFF THEIR OWN FACES
DENIAL IS WHERE WE ARE ALL AT

If a crocodile bites off one of your arms, you don't go back so it can bite off the other.
WALL STREET IS DEAD.

I know it is 7 years & every 7 years there is yet another recession - a creaming off of the peoples money -
GOOD LUCK ON THAT ONE !

BURN THE OIL THE SOONER IT IS GONE OFF THE FACE OF THIS EARTH THE BETTER.
Saudi Arabia - in fact the whole of the Middle East is faster & faster running out of oil - only no one can bare to think it.

Clearly, there is absolutely no connection with the "destroy ISIS" crusade launched by the US which would, if Western "anti-terrorism" policy were ever logical and consistent, lead to the King's throne, or this foreign minister guy: they financed ISIS and it supports their official view of religion.
They know the Western public can figure that much out, and they hope, on the other hand, that that public will stop worrying if gas prices come down like manna from heaven.

Simple. They expect sanctions on Iran to be lifted, and they're preempting this by driving the price of oil down to minimize the windfall of hard currency that Iran would earn.

That's part of it. Another aspect is that countries such as Libya and Iraq aren't exporting up to their quotas due to unrest, and it has always been the preference of the Saudis to take advantage of such situations. They always play dirty and hit below the belt when it comes to the oil market; a similar scenario occurred during the Iran-Iraq War.

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