Oil Price Fall: Saudi Arabia targets US Shale Oil, Iran, Iraq, Russia

By Juan Cole

It is clear that among the major losers in the fall in the price of Brent crude petroleum from $115 a barrel last summer to about $75 a barrel today are Russia, Iraq and Iran. Petroleum sales are 50% of Russia’s income, and are also central for Iran and Iraq.

But the big loser will likely be shale oil producers and prospectors in the US, who probably cannot make a profit if the price falls into the 60s.

The cause of the fall, by $40 a barrel, in petroleum prices since last summer is almost completely on the demand side. Asian economies, especially China, are dramatically slowing, and won’t be requiring as much petroleum to fuel trucks, trains and cars to deliver people and goods around the country. Most petroleum is used to fuel transport. Some is used for heating or cooling, as in Saudi Arabia and Hawaii, but that practice is relatively rare. US journalists seem to feel it obligatory to mention US shale oil production as a contributor to the price fall, since prices are a matter of supply and demand, and US supply has increased by a couple million barrels a day. But frankly that is a minor increase in world terms– global production is roughly 90 million barrels a day. Between Iran, Iraq (Kirkuk), Libya and Syria, enough oil has gone out of production to more than offset the additional American oil. It isn’t that there is more oil being pumped, it is that the world doesn’t want it as much because of cooling economies.

The Russian and Iranian governments are said to be panicking , because both need high prices to support their bloated government budgets and popular subsidies.

The value of the Russian ruble against the dollar has fallen 19% this fall.

The Iraqi government of Haydar al-Abadi will also have much less income with which to fight Daesh/ ISIL.

While the fall in petroleum prices is hurting government budgets in Russia and Iran, ironically it may actually help workers. Iran’s economy has improved in the past year despite US sanctions on Iranian oil sales, which have reduced exports from 2.5 mn bpd to 1.5 mn bpd in the past three years.

One silver lining for the Iranian economy of lower oil prices is that they will weaken the value of the riyal and make Iranian manufactures, handicrafts and agricultural produce cheaper to export. This development will benefit millions of Iranians. It is mainly the government, and recipients of government subsidies, who are hurt by the oil price fall.

Nor should it be assumed that reduced oil income will destabilize the ayatollahs in Tehran. Saddam Hussein in 1990s Iraq faced much more severe oil sanctions, and the price fell steeply in 1997, but the Iraqi Baath elite cushioned themselves and survived handsomely until George W. Bush invaded and overthrew them.

Russian made goods may also benefit over time from the lower ruble and a smaller oil income. Putin may become less powerful, but Russian factory workers may see a rise in income because more in the global South can afford to import their products.

As for North Dakota and other fracking states, some of their production may continue because of sunk costs in drilling and infrastructure. But it is likely that new investment in fracked oil will dry up for the next year or so.

Saudi Arabia did not cause the oil price fall, though since 2011 it has been flooding the market to offset the decrease in Iranian exports because of US sanctions. Riyadh, however, is the main geopolitical winner here, which is why the Saudis stopped the Organization of Petroleum Exporting Countries from reducing country production quotas. (That step would have reduced supply and put up prices). As it is, the Saudis can afford to wait as fracked oil is driven out of the market because too expensive, so that they regain their market share.

The Saudis must enjoy punishing Iran and Russia for defying them by propping up the Bashar al-Assad regime in Damascus and the Da’wa Shiite regime in Baghdad.

The lower oil prices are unlikely to hurt electric vehicles or plug-in hybrids, because they are still such a tiny part of the auto market that there is room for sales to grow a great deal. And, even if US prices average out at $2.70 a gallon, that can’t actually compete with free fuel, which is what a lot of electric auto owners get, via their rooftop solar panels or subsidized parking in cities or at work.

Natural gas and petroleum are dead men walking– they are worthless but the markets just haven’t realized it yet. By 2016, solar and wind will be grid parity everywhere in the US with coal and natural gas for heating and cooling buildings. That means it will be as cheap or cheaper to build a solar or wind facility as to build a new coal plant (the latter won’t likely even be allowed because of anti-pollution laws finally being implemented by the Obama administration).

Because it is harder and more expensive to replace petroleum for transportation than to replace coal and natural gas for heating buildings, oil may have a longer run than the other hydrocarbons. But as auto battery costs come down and as more and more buildings have solar panels or are supplied with electricity by wind, gasoline-driven autos will also, over the next 10-15 years, become uneconomical. (Not to mention that Asian demand will revive and even possibly go into overdrive, as India, e.g. turns to automobiles from bicycles.)

That is, Saudi Arabia, Iran, Russia and North Dakota are all up the creek in the medium term. But for the latter three, which have complex economies and in the case of Russia and Iran, sizeable populations, the economic benefit of inexpensive renewable electriicity will likely outweigh the loss of oil income. Everywhere, renewables are likely to put money and power in the pockets of ordinary people and workers, and may spell a weakening of the oil-based rentier state.

Saudi Arabia should enjoy its brief moment of triumph. Its business model is actually a dinosaur, as is that of the rivals it is punishing.

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23 Responses

  1. You should know that Brent Crude fell down into the 60’s on Friday; it closed at $69.94 with January futures down to $66.07. OPEC decided not to cut production on Thursday which caused the drop. You made some very good points but one thing that is being overlooked by most everyone is how this is going to impact the banking industry. Many equity funds and banks are heavily invested in both energy bonds and energy producing real estate. This drop in oil prices could become a major problem for them as well.

    • Indeed.
      For this reason the enemies unite to slow down the deflation in oil and other commodities until a replacement bubble is created.

  2. Soula Avramidids

    There was a glut in oil all the time but the price fall came one month after th3 feds hinted at interest rate hike and ended qe measures. The idea that saudis control the oil price is silly

  3. Hmmm. Nobody has yet explained to me how airplanes and ships will convert to electric or battery power. The short answer is, they won’t, and no technology to make airplanes run on anything but petro-fuel is on the horizon. Same goes for container ships. As long as we continue to fly and ship goods over the ocean, there will be a large and healthy market for oil. Private automobiles are only a fraction of the picture.

    • No offense, but you’re not keeping up. British Airways has very serious plans for biofuel, and solar flight is already being explored. Solar powered ships are entirely practical, as are wind-powered (as we always knew). Petroleum is so 20th century.

      • The appeal of aviation biofuels is probably that aircraft have lower maintenance costs when they run on very pure fuels, which biofuels tend to be. It also is a chance to steady the price fluctuations in fuel that have bankrupted so many airlines.

        However, the most likely change in shipping is the addition of sophisticated wind assist systems, basically kites, to existing freighters.

        What Tinwoman is missing is that cars are a large part of the ADDITIONS to fuel use thanks to China, et al, and that another large part comes from construction equipment, which might more easily be converted to electricity if governments recognized the pollution it creates downtown.

        However, if Asia pulls the world into another recession, this will be an excuse (like everything is in capitalism) to demand short-term thinking and shortsighted budget cuts. Oil production never stopped in the Great Depression in Texas even when the stuff was so worthless that governors sent troops into the fields to shut down the wildcatters and prop up prices. Imagine any politician having the guts to do that now.

      • No offense but biofuels are so twentieth century. Stripping the planet of plant matter to put into engines is even less workable than what we’re doing now.

        Conservation–reducing consumption– is a more immediately doable than anything else we’ve tried, but we seem to have some aversion to it. And any belief that we can painlessly convert to “green technology” (and biofuels are hardly green) is probably misplaced.

      • I would point out additionally that biofuels are hardly magical. They are burned, they produce pollution. It doesn’t really matter what we burn– we have to stop burning stuff generally to get anywhere on this matter.

        • Biofuels are produced via variety of means. The most promising aviation biofuel is algae based and would not burden the human food chain. It is, under specific conditions, nearly carbon neutral. So the aviation industry may save the day if it leads that way. Corn/grain ethanol or Palm oil based biodiesel etc. are alarming in the current modes of production. These latter do not have the specifications required of aviation fuels.

        • You are right about the quantity of plant matter required but wrong about “it doesn’t really matter what we burn.” It matters because of the carbon cycle. Burning fuels made from crude or coal increase equilibrium carbon levels because the source was buried outside of the carbon cycle for tens of millions of years. Burning biofuels is within the carbon cycle–the plants absorb their carbon content from the carbon cycle (tilled soil and mostly from photosynthesis) and it is returned to the carbon cycle (assuming no emission controls) when burned. It is also true that biofuels are near pure whereas crude is a mixture of all sorts of compounds, some volatile. That’s what makes filtering and other controls of petrol near impossible to do well.
          When I worked with technologies to make ethanol from lignocellulose (plant woody matter but not starchy grains), the amount of plant mass required to replace the demand for auto fuels with ethanol was ridiculous. The only area where it made sense was to ferment the 40 percent of the garbage stream that is lignocellulose and allow the still its share of the tip fees. If you did that with the entire waste stream, it wouldn’t account for 1 percent of demand.
          The biggest problem for all biofuel is all the wheres required to meet an inkling of demand and the salt buildup in soils and water tables. One irony is the amount of fuel required to grow, harvest, and transport raw materials and then there is necessary fertilization–the land goes sterile rather quickly when you take away the biomass. Economical fertilizers are .petroleum byproducts.
          They make great promises for algae in the attempt to skirt some of these problems but equivalent problems happen with growing biomass in water.
          The net irony of the utopian vision of a world running on biofuels is that it takes about 80 percent of the energy produced by biofuel to produce the biofuel in the first place. So these analyses are myopic. They work in science where all other (practical) things are ignored while a narrowly defined problem is researched. The narrow method of science ignores the wide context of feasibility from a policy perspective.

          Note: I became interested in ethanol from biomass after MIT and some other universities promised great potential for new distillation technologies using new membrane technology. The first thing my research uncovered is the claims they made exceeded the 100 percent theoretical yield of ethanol from corn or any other biomass. Exaggeration is a common human trait.

  4. Professor Cole,

    While it is true that lagging emerging market growth has cooled demand for oil, you are incorrect stating that the supply glut is not the main culprit of the price drop. A two million barrel per day increase is not insignificant-OPEC routinely exerts huge influence on prices with cuts between 500k to 1.5 million bpd. In fact, the largest cut in history was 2.2M bpd and that was in 2008 no less.

  5. “By 2016, solar and wind will be grid parity everywhere in the US with coal and natural gas for heating and cooling buildings.”

    While the progress is tremendous and most welcome you are leaving out a very important aspect. The quality of power that is referred to as “dispatachbility” in the industry. I.e. the ability to balance demand when it is needed. Neither wind, solar or coal has this but NG powered turbines do. They can very quickly ramp up and down production, and are currently key in keeping the grid stable.

    The DOE has recognized this gap, hence the focus on battery technology to complement wind and solar.

    Energy storage technology is going to be the crucial cornerstone in weaning us of fossil fuel.

  6. ‘the Russian and Iranian governments are said to be panicking , because both need high prices to support their bloated government budgets and popular subsidies.’

    Ah they should be more like us. Put it on the credit card

  7. Good article. However, US shale production is a bigger factor in the equation than you suggest and has been growing sharply. I’m sure the Saudis think that tripping up that business is one of the reasons to allow oil prices to run low. Also, as much as I wish you were correct, your view of renewables (and electric cars) is downright utopian unless you are expecting the governments of our struggling world economies to ramp up the subsidies renewables already receive, with a sense of urgency. I’m not seeing that trajectory.

  8. Could there be any connection between Saudi Arabia’s production/price decions and their support for the current US military campaign?

  9. Saudi Arabia is investing in other industries so that their economy will survive the phase out of the petroleum industry. They are also investing in solar and other renewable supplies of electricity with the goal of supplying all their electricity from renewable sources by the year 2030.

    • Given the wealth of Saudi Arabia, they could easily have all internal energy usage to be non-petroleum well before 2030, BUT . . .

      Saudi Arabia has MAJOR social problems that will hold it back:

      – almost 60% of their human resources are not usable due to extreme religion. That is, almost none of the women nor the Shi’a men can have positions of leadership and contribution, thus wasting a huge part of their basic resources.

      – Many of the Sunni men have chosen to not actually participate in the economy, leaving most of the work to “hired hands.” As a result, Saudi Arabia has not built a very big pool of capable, entrepreneurial leaders.

      If Saudi Arabia actually wanted to, it could easily build very large solar energy harvesting systems and use the energy to convert sea water into hydrogen which could be exported for use as portable energy. Or they could additionally invest in harvesting CO2 from the air and combining it with hydrogen and making artificial hydrocarbons. So far they are not doing anything major.

  10. recently, the ex-wife of a top exec in the electricity industry complained that her $ 1 Billion divorce settlement wasn’t fair,
    that she was worth much more.
    The 1%’ers are going to accidentally trigger a backlash among the doped up masses,
    who will then launch Occupy-style attacks on coal fired plants, and the associated T&D systems.

    the future of electricity in the USA is small, local generation.

  11. If the US had an attack of rational behavior we would slap a nickel a gallon gas tax and use the money for our crumbling infrastructure and get a few people working.

  12. One thing to notice here is that value of dollar will also decrease if dollar circulation decreases due to lower value of crude and other petroleum products. Also friend of USA Saudi Arabia will also be troubled along with Russia and Iran. Why do you forget Saudi?
    Solar and Wind are slow energy generators, you should not forget. Currently sales of battery powered cars is very slow, people and transports still rely on cheaper oil. This drop is just momentary. What if Russia and Iran stops or reduces oil production, prices will increase for sure. You will see this step in near future.

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