Of Oil Prices and Conspiracy Theories
The continued slide in the price of oil in international markets over the last four months is often blamed on Saudi Arabia for keeping its production level at approximately 10.5 million barrels per day. Other oil exporters such as Nigeria, Russia and Venezuela, want the Kingdom to cut production in order to try and keep the price of oil from sliding further, which has dropped from over $100 per barrel in June this year to the current $60. But Saudi Arabia tried this in the 1990s when the price of oil also fell, and saw that it could not prop up the price with cuts in production, not to mention the shrinking of their share of the market that they suffered when other producers, within and outside the Organization of Petroleum Exporting Countries (OPEC), jumped in to make up for the shortfall in Saudi production.
The dilemma of Saudi Arabia is that our officials are very discreet. They do not like the limelight, nor do they like to explain publicly and in detail policy decisions. Unfortunately, this does not play well in the international oil market, which starved of any real information proceeds to react to any gossip that appears with dramatic swings in the price of the barrel. And now we see the lower price of oil making the US dollar shoot up in value against other currencies. This made the Russian ruble lose 45 percent of its value against the US dollar since October 2014. The Russians were forced to raise their yearly interest rates from 10 percent to 17 percent in one go earlier this month in an attempt to curb the fall of their national currency. And that’s when a lot of conspiracy theories emerged: That Saudi Arabia was in league with the US to economically hurt Russia and Iran with the low oil prices
Another conspiracy theory was that the Saudis wanted to hit the North American producers of shale oil, who in the last five years have found new oil reserves in the US and thus diminished America’s dependence on oil imports. This theory sounded possible, but I was left with doubts after reading that the most expensive part of the investment of US producers of shale oil, the exploration to find areas rich in shale, had already been done and that these producers could therefore endure a price of $60 per barrel and still cover their costs and make a small profit.
Saudi Oil Minister Ali Al-Naimi in an interview with CNN denied on Dec. 22 that Saudi Arabia was plotting to push other oil producers out of the market. “There is no effort against anyone in the international oil market. There are no plots against other countries,” he said. The minister also stressed that Saudi Arabia would not cut its oil production levels. “The other producers can cut their production levels if they want, but certainly Saudi Arabia will not cut. This position we will keep forever, not only in 2015,” said Al-Naimi.
This Saudi position may seem irrational in its inflexibility. But according to a Dec. 21 article in the Wall Street Journal, Saudi Arabia tried several times to convince Mexico, Venezuela and Russia to cut their production levels, but could not get a deal. The Russians declined upfront, claiming that they could not cut their production of 10.6 million barrels a day for technical reasons.
Therefore, Al-Naimi was prepared to defend the Saudi position not to cut its production at the OPEC meeting in Vienna on Nov. 27. He entered the meeting with the full support of Custodian of the Two Holy Mosques King Abdullah and other Gulf producers, namely Kuwait, Qatar and the UAE. It is estimated that Saudi Arabia has foreign exchange reserves of $750 billion, which gives it the financial capacity to withstand lower oil prices for at least two years. The Russians have foreign exchange reserves estimated at $450 billion.
We can now see with all of this information, that the campaign against Saudi Arabia is not very honest. As in the past, other oil producers did not want to cut in any amount their production levels. For them, it is easier to blame the Saudis and play the victim card.