Blog Article

Until the last drop (…of oil)

By Eugenio Lilli:

Photo: Carsten ten Brink (creative commons)

Photo: Carsten ten Brink (creative commons)

Eight percent: that is how much the price of oil fell after OPEC’s decision last Thursday to maintain its oil output unaltered. This sharp drop was only the latest development in a trend that has seen oil prices on the world market tumble by nearly 40 percent since mid-June. At one point, the international crude benchmark even traded below $70 a barrel, the lowest since May 2010.

The current situation is the result of a combination of factors. On the one hand, a slowdown in the Chinese and European economies has led to a decrease in demand for oil. On the other hand, the so-called “fracking revolution” in the United States, added to an ahead-of-target OPEC production, has generated an increase in oil supply.

Despite a clear situation of overproduction, and repeated calls for a cut, OPEC, and especially Saudi Arabia, decided to keep its production ceiling unchanged. Given the undeniable strategic importance of oil for modern economies, such a decision is likely to have far-reaching implications. Here, we limit our discussion to the relationship between Saudi Arabia and the United States: a time-honored relationship that has come under pressure recently due to openly divergent opinions over events like the Arab Awakening and US-Iranian nuclear negotiations.

Experts have given several interpretations of Saudi Arabia’s decision to convince OPEC to adopt a policy that contributes to the ongoing fall in oil prices. Two of these are particularly worth noting.

The first interpretation depicts Saudi Arabia’s decision as being in line with US interests in the region. According to this view, Saudi policy to keep the price of oil low is part of a wider strategy to help the United States put meaningful economic pressure on Russia. In fact, according to the Financial Times, Russia needs to sell oil at a price of at least $110 a barrel to guarantee stability to its economy and financial system. An oil price at $70 a barrel therefore has the potential to further slow Russia’s embattled economy, since around half of the country’s annual budget revenue comes from oil and gas exports.

The current decline in oil prices has also affected the value of the Russian currency – the ruble. Since the beginning of the year, the ruble has weakened by 34% against the US dollar. A weak ruble makes it harder for Russian companies – including the energy giant Rosneft – to pay the interest on their foreign debts. In other words, by keeping oil prices low Saudi Arabia is actively contributing to the Obama administration’s effort to rein in a recalcitrant Russia.

A second interpretation takes the opposite view and describes Saudi Arabia’s decision as a foreign policy tool to test US shale production. According to this interpretation, a policy of cheap oil is primarily aimed at challenging US shale operators and driving out the highest-cost producers. In fact, the break-even price required for shale oil developments in the United States ranges between $40 and $115 a barrel. A Saudi strategy for a long period of low prices may therefore push many US producers out of the market and slow down the development of these new energy sources. In other words, Saudi Arabia may be assertively resisting the US’ steady rise to being the world’s top oil producer.

Certainly, the above interpretations are not mutually exclusive. In fact, the Saudis could be cooperating with the Obama administration against Putin while, at the same time, they could be challenging the United States for supremacy in the global oil market. However, a Saudi policy mainly based on a rationale of “cooperation” instead of one of “competition” could be a revealing sign of where the US-Saudi relationship is heading.


 

Eugenio Lilli is a PhD Candidate at the Defence Studies Department, King’s College London. His research focuses on US foreign policy toward the Greater Middle East, in particular on the Obama administration’s response to the Arab Awakening. Eugenio is also the founding chairperson of the King’s College London US Foreign Policy Research Group. You can follow him on Twitter @EugenioLilli

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4 thoughts on “Until the last drop (…of oil)

  1. Reblogged this on Fascinating Future and commented:
    Sooner or later oil will be depleted, at least that oil that could be extracted profitably. A post-peak oil society is an important theme in mundane science fiction. Here an interesting article about the economics and politics of oil production.

  2. Pingback: Until the last drop (…of oil) | Web Agora

  3. Pingback: Why won’t the USA leave the Persian Gulf? The story of the ultimate ‘frenemies’. | Strife

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