You may have noticed a pleasant surprise at your corner
service station this week: lower gasoline prices. Are SUV owners finally getting
a break?
Yes; and they can thank Saudi Arabia for the lower prices.
However, Vladimir Putin isn’t thanking the Saudis. He is
more likely cursing them. They just threw his regime to the wolves.
What do the Saudis have against Putin? Nothing... and
everything.
Oil prices are plunging. Brent North Sea crude, the
benchmark contract for Europe, dropped to its lowest level in four years today.
Like every commodity, crude oil’s price is a function of
supply and demand. A falling price indicates some combination of increased
supply and reduced demand. Right now, we can see both in the crude oil market.
You already know that the North American shale boom is
tapping massive oil and gas deposits that were untouched and largely unknown
just a decade ago.
Middle East supplies are also growing.
* Libya’s oil output climbed by 280,000 barrels per day last
month, the fifth consecutive increase as Libya emerges from a long civil war.
* The possible end of U.S. sanctions on Iran may bring some
of that country’s untapped potential back online.
* The Islamic State, despite its violent tendencies, seems
uninterested in interrupting oil shipments from Iraq. They are instead seizing
oil facilities intact and smuggling the oil to market at discount prices.
On the demand side, signs of a global economic slowdown are
making analysts cut their consumption estimates. Today, the International
Energy Agency chopped its 2014 demand growth estimate to 650,000 barrels per
day — that’s 250,000 below the prior forecast.
If the oil supply grows faster than oil demand, as now seems
likely, prices have to fall. That’s simple economics. Saudi Arabia is okay with
this. Russia is not.
The Organization of Petroleum Exporting Countries (OPEC)
cartel tries to maintain world oil prices at a level it deems most profitable.
OPEC can do this thanks to Saudi Arabia’s ability to dial oil production up or
down.
In orchestrated leaks over the last few days, Saudi
officials informed the world they will let crude oil drop as low as $80 a
barrel and stay there for up to two years.
Why would Saudi Arabia do this? They want to defend their
market share by keeping Asian customers dependent on Saudi oil.
China, Japan and other Asian oil importers have the opposite
goal. They want to pit OPEC against other oil producing nations like the U.S.,
Russia and Canada.
When crude oil was over $100, there was plenty of incentive
to build pipelines across Siberia and Canada to feed Asia’s energy thirst.
Saudi Arabia needs to remove that incentive. Pushing oil down to $80 for a
couple of years may well do it.
Some other OPEC nations don’t like this idea at all,
especially Venezuela, but they can do little to stop it. Saudi Arabia has all
the cards in this game.
What about Russia? President Vladimir Putin is already in a
tight spot thanks to Western economic sanctions. Energy exports bring in
critical hard currency to Russia. Experts think Russia needs crude to stay at
$100 or more to sustain current government spending levels.
Barring some kind of catastrophic supply disruption, crude
at $100+ looks increasingly unlikely. That’s bad news for Putin.
Before you cheer too loudly, remember that Putin has
options. He can cause trouble in any number of global hotspots and drive oil
prices higher. I won’t be surprised to see him try.
So enjoy your bargain fuel bills this winter ... but don’t
think they will last forever.
No comments:
Post a Comment