Authored by Conrad Black via The National Post [13],
Responses to the decline in world oil prices have been mystifying — flummoxing, in fact. The secretary general of OPEC (the Organization of Petroleum Exporting Countries), Abdullah Al-Badri, said last week that speculation was to blame for the decline by 15% since the last increase in production. He ceremoniously denied that there was any attempt by the cartel to discourage production from shale or oil sands, or to put political pressure on Iran or Russia. In general, the world’s media have bought into the theory that discouragement of production from new sources that would reduce oil imports, especially by the United States, is the real reason for increased production and reduced price.
But Al-Badri has a limited mandate to give the agreed official line of OPEC and has no authority to speak for the motives of the individual member states, and even less standing to mind-read the authorities in those countries and speak for them. OPEC is a slippery cartel at the best of times, many of whose members are virtually, if not actually, at war with each other; the member states don’t necessarily speak truthfully among themselves and anything uttered on behalf of the whole group should be treated with caution. Some member states, including Iraq, Libya and Nigeria, do not really speak for the oil-exporting regions in the country, and there are many other oil-producing countries that either do not export, or even if they do, are not in OPEC, including Canada, Australia, Norway, the United Kingdom and the United States.
The explanation of speculation is nonsense, as no sane speculator would encourage the sale of oil at less than its real market value other than to himself, and where the claimed OPEC production is 30 million barrels a day, no unofficial speculation would cause the sort of gyrations in oil prices that have occurred. In general, the decline in China’s rate of economic growth, and conservation and alternate energy-encouragement measures in much of the West and the steady advance of increased domestic production in the United States, explain much of the price reduction. But there is no doubt that Saudi Arabia, as the world’s leading oil exporter, has increased production, whether it is advising Mr. Al-Badri of it or not, and there is no doubt that its motives are chiefly political.
Saudi Arabia has resigned itself to the fact that neither its oft-demonstrated ability to play the periodic U.S. resolve to reduce its dependence on foreign oil like a yo-yo by price-cutting until the impulse of self-discipline passes, nor the agitation of the environmentalists for restrained oil production, will work again. (Shale-sourced oil is relatively environmentally friendly.) President Eisenhower warned over the Suez crisis in 1956 of the dangers of relying on foreign countries for 10% of America’s oil supply; President Nixon did the same in 1973 during the Arab oil embargo, when the percentage of U.S. oil needs provided by imports had risen to 20%. In the late 1980s, President Reagan arranged for the Saudis to over-produce to bring prices back down by half, by selling Saudi Arabia advanced AWACS reconnaissance aircraft and America’s best interceptor jets and sophisticated air-to-air weapons systems. This was part of Reagan’s plan to squeeze the Soviet Union’s foreign exchange sources while spending them to the mat with his Strategic Defense Initiative. The nature of these arrangements really only came to light in the memoirs of some of those involved on the American side about 20 years later.
The principal impact of the reduction in world oil prices from around US$100 a barrel to the mid-50s, and of the cost of gasoline at the pump in the United States from $4.00 to about $2.60, has been severe pressure on the Russian currency (a 50% reduction against the dollar and euro), and the country’s whole financial system, causing severe inflation and drastic interest-rate increases in the usual effort of desperate regimes to maintain a semblance of a believable currency. The Russian ruble has never been a hard currency, even in the piping days of the Romanovs, and that country under Putin is, in economic (and some other) terms, not many rungs above a thugdom of the president and his cronies.
But oil speculators operating on their own accounts do not cause the Kremlin to put Holy Mother Russia on the rack of multi-point daily interest rate increases, causing large protests and some public disorder. This is a Saudi move that has ramified very seriously in Russia, far beyond its impact on new oil extraction techniques in the U.S.
If a $50 price is reached and maintained, it would negatively alter but not destroy the economics of heavy oil and probably reduce somewhat shale activity, where reserves are more quickly exploited and harder to estimate than traditional subterranean oil fields, even those that are off-shore. But a Saudi move on this scale, with the resulting self-inflicted reduction in their income, makes no sense for the marginal impact it will have on American future production and imports; it is a geopolitical move targeted much closer to home.
Al-Badri’s flimflam, for which there is much precedent in the history of OPEC (essentially, the cartel is a perpetual quarrel among thieves pretending to be price-fixing), naturally seeks to disguise the fact that Saudi Arabia is trying to discourage the use of Iranian and Russian oil revenues to prop up the blood-stained and beleaguered Assad regime in Damascus, to finance Iran’s nuclear military program, and to incite the continuing outrages of Hezbollah and Hamas in Lebanon and the Palestinian Territories against Israel. The exotic community of interest that has suddenly arisen between the historically Jew-baiting Saudis and the Jewish state is because the countries in the area fear, with good reason as far as can be discerned, that the UN Security Council members, plus Germany, may be on the verge of acquiescing in Iran’s arrival as a threshold nuclear military power. The oil-price weapon, in the face of the terminal enfeeblement of the Obama administration, is the last recourse before the Saudis and Turks, whatever their autocues of racist rhetoric, invite Israel to smash the Iranian nuclear program from the air.
It is perfectly indicative of the scramble that ensues when a mighty power like the United States withdraws, fatigued but undefeated, from much of the world, that Saudi Arabia, a joint venture between the nomadic and medieval House of Saud and the Wahhabi establishment that propagates jihadism with Saudi oil revenues, makes common cause with Israel in a way that inadvertently relieves much of the Russian pressure on Ukraine, which was not an objective in Saudi calculations at all. From the Western standpoint, this is a lucky bounce of the political football. But it is Saudi judgment of its self-interest opposite the contending factions in Syria and the hideous prospect of a nuclear-armed Iran that is discommoding the Saudi leaders, not the ineluctable exploitation by the United States of its own oil resources. It need hardly be added that any conventional definition of “speculation” has nothing to do with it; nor that the Western panic at the bonanza of a $500-billion reduction in the West’s energy costs or the obdurate failure of most Western commentators to understand the implications of the oil price reduction, are an unflattering reflection on the financial and political acuity of the pundits of our society.
