Oil Prices & Saudi Arabia's Endgame

Saudi Arabia Aramco

Photo courtesy of Saudi Arabia Aramco

Oil Prices & Saudi Arabia's Endgame
| published January 8, 2015 |

By R. Alan Clanton
Thursday Review editor

There are a lot of reasons why gasoline prices are falling dramatically in the United States and Canada. Many of those causes are of no particular or immediate worry to the average American. Most U.S. households are expected to save an average of $1100 (roughly $550 per vehicle) in the 12 month period beginning late last summer, when prices first began their slide down. That windfall will surely create additional disposable income for the majority of consumers—cash which economists believe will be used to make purchases deferred for years because of recessionary concerns. And all that injection of purchasing will spur more growth, more hiring, more taxes paid, and more confidence; all-in-all, a win-win from an economic standpoint.

Among the tapestry of causes for the decline in the price of gas at the pump: falling demand—the result, some believe, of a sea-change in the efficiency of vehicles on U.S. roads and highways; more frequent, better and deeper traditional extraction, both in the contiguous 48 states, and in the Gulf of Mexico; shale oil and other forms of trapped fuels extracted through fracking; better U.S. oil distribution through a variety of digital tools and software; even, some have gone so far as to speculate, Google, MapQuest, and a dozen other vehicular tools which use GPS devices to make driving more efficient.

All valid reasons, perhaps, but do these explanations go far enough to explain oil prices now at their lowest price since late 2008?

As of this writing, many countries around the world are swimming in oil, and U.S. reserves are at their highest level in more than a decade. One of the central reasons for the world’s oversupply is Saudi Arabia. Saudi Arabia has been pumping oil at 100% capacity most of this year, and many international business analysts and foreign policy experts say that the reason is simple: Saudi Arabia fears an energy-independent United States.

Saudi Arabia may be flooding the markets with cheap oil in a direct, unvarnished attempt to break the backbone of newly ramped-up forms of traditional oil extraction in the U.S., as well as newer, out-of-the-box forms of fossil fuel extraction—such as fracking, a process by which high-pressure water is used to fracture layers of rock and sediment under which oil and gas deposits can be found. In previous decades, extraction of oil from under such heavy layers of rock would have involved prohibitively expensive, dangerous drilling; fracking shaves off much of that heavy work and complex drilling. Some technology observers worry also that Saudi Arabia and some of its closest oil producing partners—Kuwait, Qatar, United Arab Emirates—are seeking to slow market momentum and market shifts toward battery-powered cars and other alternative energy vehicles, a manufacturing and purchasing sea change which could reach the tipping point within a few years.

In other words, according to these analysts and foreign policy experts, Saudi Arabia wants to do everything within its power to forestall U.S. energy-independence, and stymie further improvements to efficiency—not to mention push oil prices so low as to create a disincentive to Americans to consider cars made by the likes of Elio and Tesla.

In fact, Saudi Arabia is still selling oil earmarked for some Asian countries at pre-glut prices—proof, economists say, that the Saudis are engaged in a highly targeted attempt to alter the U.S. market, and its consumption preferences.

Some energy analysts had been suggesting—as recently as late December—that the New Year would bring an end to the downward slide. But Saudi Arabia has made it clear, even to its fellow OPEC member states, that it does not intend to cut production anytime soon. This has led to a belief that oil prices for the U.S. market may soon drop even lower. OPEC has been unable to craft a response to the problem—in part because Saudi Arabia intends to keep pumping at current levels. The crisis has pushed Russia’s already weak oil-based economy to the brink of recession, and international bankers fear that Venezuela—also on the ropes economically—will default on billions in loans it will be unable to repay because of a lack of cash. The oil price plunge has also had the unintended effect of diminishing the cash flow for ISIS, which controls some oil fields in Syria and Iraq.

Saudi Arabia, which met with other OPEC members in late November, has said it has no interest in any worldwide slowdown in production. In Europe, Russia too is pumping oil at near-record levels in a desperate attempt to keep cash flow alive and keep its banks solvent. Iraq is pumping at rates not seen in 35 years. Though neither Russia nor Iraq supply U.S. oil, their supplies add to a worldwide glut, and swollen reserves.

The downside for the United States is that when prices dip below about $47 per barrel, U.S. companies can no longer make money from drilling—or any form of extraction, for that matter. With crude oil already resting at $51 per barrel as of this week, there is genuine concern in oil towns like Dallas and Houston that a U.S. oil and gas recession is in the making, if not already under way. When the market price does finally dip past $47, energy experts say, the layoffs will begin in earnest across a wide array of companies—oil companies, pipeline and equipment manufacturers, refinery workers, drivers.

If U.S. production remains stalled because of market pressures, so this thinking goes, then many of those U.S. oil producers will permanently shutter some drilling and extraction operations, and cancel future exploration and drilling. Worse, Americans may lose any long-term interest in moving away—finally—from the inefficient and carbon-producing internal combustion engine.

But not everyone agrees with the gloomy assessment that the lower oil prices are part of an elaborate ruse by Saudi Arabia to cripple American energy companies, kill the battery-powered car, and halt any further construction of the Keystone Pipeline. U.S. energy hawks say that the objective all along—expanding fracking operations, more drilling, aggressive exploration, better distribution —was to create energy-independence for the United States, while also fostering competitive forms of oil and gas extraction. Along the way, the economy would inevitably improve with more energy jobs, more construction, and lower gas prices.

Still, some suggest that Saudi Arabia is simply looking long-term by keeping its production levels robust, even when there is a worldwide glut of oil. King Abdullah, in a major speech to his country this week, expressed concern for the shifting market realities, but gave no hint that he would recommend slowing production as a tool for nudging oil prices upward.

That means that, despite those fears of oil and gas layoffs in the United States, the average American may see gas prices at the pump drop even lower in January and February. Many states already have average prices below $2 per gallon, and some analysts say that if Saudi Arabia keeps up its frenetic production pace, the U.S. could see prices drop even more.

Many Wall Street traders are leading a charge toward selling-off stocks, a slide which began after New Year’s Day and continued through the week. However, most business experts and Wall Street analysts say that the sell-off is almost entirely the result of energy stocks, as investors wait for clarity on where to place their money in what appears to be a shrinking energy market.

Oil prices started their slow but steady decline last July, when it was apparent that the crude oil being extracted from U.S. shale fields was not only of a high quality, but also generating far more supply than ever imagined—even by the optimists. At almost the same time, automotive analysts suggested that the tipping point was fast approaching where the cost of battery and electric powered cars would come within reach of middle class car-buyers—and the experts now predict that market threshold could come as soon as 2018. A recent report by Navigant Research (title: Automotive Fuel Efficiency Technologies) predicts that conventional gas-powered cars will be outnumbered by all others—hybrids, battery-powered, electric, fuel cell, hydrogen, solar—by the end of 2017.

Elon Musk’s California-based Tesla plans to soon open a massive assembly plant—in partnership with Panasonic—designed to produce lightweight batteries for cars. Once completed, the Tesla plant will be the biggest battery-making operation in the world. Tesla has opened up its patents to any interested firms, a move which Musk hopes will spur other carmakers to incorporate the Tesla battery design into their products and create an avalanche in consumer interest in non-gasoline-powered cars.

Related Thursday Review articles:

Energy Uncertainty Sparks New Year’s Dow Plunge; Thursday Review; January 6, 2015.

Can Russian Economy Avert Recession?; Thursday Review; December 30, 2014.