The crude oil price tanked 50% the 2nd half of 2014. On first glance, you could write this off to higher world supply coupled with lower demand. Upon deeper inspection, a deliberate effort to manipulate the price becomes plausible. The prevailing theory is that prices have been pushed lower to hurt Russia.
Theorists cite a september 11th meeting between U.S. Secretary of State John Kerry and Saudi King Abdullah at his Red Sea palace. The plan is to punish both Russia and Iran for both supporting Syria, and to finish wiping out the Syrian government. Near the end of 2013, the U.S. & NATO tried to knockout Syria but Russia came to it’s aid.
It all ties to oil. The plan to get rid of Syria could be the retaliation to a 2011 plan between Syria, Iran and Iraq to build a pipeline through their countries that could supply gas to Europe. This would be a predominantly Shiite economic agreement competing with the current Sunni powers in the Middle East. In 2009 Assad refused to allow Qatar to build a pipeline through Syria that would have sold Sunni gas to the EU. Saudi Arabia and the United States want Russia to stop supporting Syria for their own political motivations.
First there are trade wars, and then when global finance is deteriorating, its pretty normal to launch a hot war. The current 21st century Cold War is now tilting toward a potential World War 3. The recent severe oil price volatility could be just the right catalyst.
After the epic price fall, the oil cartel known as OPEC announced at their November 2014 meeting that they decided not to lower its production target. OPEC is keeping production at 30 million barrels per day; a ceiling that it’s members often have exceeded anyway; cheating since 2011 by producing more each month.
OPEC is not set to to meet again until June 2015. The Saudi oil minister said they have no plans to cut even if the price reaches as low as $20 a barrel. Basically, they’re telling the world “deal with it,” as they produce as much oil as they want, to keep market share.
Saudi Arabia is producing nearly 10 million barrels per day, but it could make up to 12 million which they have stated they’re willing to do, to gain more market share. Though OPEC accounts for 40% of the world’s crude production, this is the lowest share of the market they’ve held in 25 years.
An analyst from Saudi’s capital city actually said in October that they will sell oil at $50 per barrel to Asia; China in particular. This forced already struggling Iran to lower its prices to 6 year lows; this was before the massive drop to $60 oil on the open market and probably the cause of it.
Iran, who holds one of the world’s largest oil reserves, has been limited in production due to sanctions which, if lifted, would increase global supply by 1 million barrels per day.
Multiple other factors have also thrown world supply and demand out of balance.
Libya’s supply quadrupled with further headroom for more production. Iraq just reached a new high in production over 3.2 million barrels per day in 2014. The world market is oversupplied by at least 1 million barrels per day and maybe up to one and a half.
Demand has dropped due to slow economic growth in multiple regions. China could see the slowest economic growth in 25 years. Japan is expected to import less oil, with plans to restart their nuclear reactors in 2015. The E.U. has a negative outlook, Germany’s exports fell 5.8% and the IMF lowered their growth forecast to 0.8% for 2014.
Lower prices of oil does help net importers and consumers like Europe, China, Japan, the United States and India; but large exporters can be devastated; especially Russia.
Oil and gas provide nearly 70% of Russia’s exports and 50% of the federal budget. Russia breaks even at around $100 per barrel oil price. With the price crash, the Russian currency, the Ruble, dropped by more than 60% against the dollar in 2014; the biggest drop in 16 years. Back then in 1998 Saudi Arabia succeeded in dropping oil from $25 to $12 a barrel causing Russia to default on its debt. And now the Russian central bank had to raise interest rates to a massive 17% in order to stem “capital flight.” Russia loses approximately $2 billion in revenue for every dollar the price of oil falls.
Russia’s biggest oil company, Rosneft, stock dropped 38%. They produce 5% of the entire world’s crude oil and make up 40% of Russia’s output. The company owes $50 billion to banks and bondholders making it the world’s 2nd most indebted oil company by income. $20 Billion of this debt is due in 2015. In total, $100 billion in Russian private debt comes due in 2015; causing Russians to fear another default.
NATO is encircling Russia; as evident with the conflict in the Ukraine and continued sanctions against them.
Under this much pressure, we can expect Russia to retaliate against the West.
The Russian company Gazprom supplies nearly 40% of Europe’s natural gas. Back in 2009 Russia cutoff gas through Ukraine to Europe at the height of winter.
Russia could again hit Europe with a supply shortage; this time with the potential for civil unrest and a potential breakup of the Eurozone.
Russia’s recently been sending dozens of aircraft into neighboring airspaces to test NATO defenses. With sanctions and the U.S. led crisis in Ukraine, Russia will continue to drop the U.S. Dollar and may be pushed to respond in more direct, forceful means. The U.S. should not forget who is the world’s 2nd largest nuclear power.
Russia seems to be a main target of the price drop in this oil war; but there may be another.
This oil war can wipeout American shale oil along with the U.S. economy.
Shale oil production in the U.S. has grown by roughly 4 million barrels per day since 2008; making it over 5% of the current global supply of 92 million per day. Shale is only profitable long-term at oil prices above $75 per barrel. A sustained period under $60 per barrel could be devastating to the American economy.
It’s a game of which oil producer will blink. Russia and OPEC won’t budge, but the U.S. will.
To see how the oil war will affect the American economy, go to