Friday, January 09, 2015

Oil prices and Saudi Arabia

Sara Vakhshouri, president of the consulting firm SVB Energy Internation, argues in For Saudi Arabia, Supply and Demand Trump Geopolitics LobeLog Foreign Policy that market concerns are driving Saudi Arabia's decisions on supplies that are decisively influencing low oil prices and not geopolitical concerns, though the latter are plausible motivations on their face:

The recent price decline has unquestionably hurt oil-dependent economies, particularly those with large populations such as Algeria, Iraq, Nigeria, Russia, Venezuela and Iran. The situation is especially problematic given that most of these countries’ national budgets are drafted on a “break-even” oil price of over $100 per barrel. But if we look at this phenomenon through a geopolitical lens and link it to Saudi Arabia’s short-term regional strategic interests, only one conclusion seems possible: a Riyadh-Washington conspiracy in which the Saudis have either acquiesced to or colluded with a U.S. strategy to exert unprecedented fiscal pressure on Iran and Russia, in particular.

In fact, this is a rather shortsighted analysis, one that more conveniently fits political science models as opposed to rigorous empirical scrutiny. The reality is far more complex and nuanced than armchair geo-strategists would allow. The Saudis are certainly great chess players. They know how to achieve simultaneously their market and geopolitical objectives with a single sweep in the oil market, effectively killing two birds with one stone. Yet the reality of the markets and basic laws of economics are what are truly at work here. Indeed, simple market fundamentals of supply and demand bear the greatest responsibility for the price plunge we have seen. [my emphasis]
Robert Reich points out on his Facebook news feed for January 5 that low oil price slumping world are also driving the low oil prices:

Today the price of oil dipped below $50 for the first time in more than five years, prompting a big sell-off across the entire stock market. Why? Because it’s starting to dawn on investors that the plummeting price of oil doesn’t just reflect its abundant supply after the surge in American production. The price drop also reflects the lack of global demand for oil, which raises the specter of a weak if not comatose global economy. And that specter, in turn, means less demand for all the stuff big corporations are selling. Hence, the hit in today’s stock market. (The drop in oil prices will also mean less payoff for Keystone XL and for fracking overall.) [my emphasis]

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