The Price of Oil

The role of Saudi Arabia, he main OPEC oil exporter, in leading the  low price strategy. Lowering the oil price helps the friendly countries, and hits the Saudi competitors.

The price of oil has now gone down, a rare event, and seems to be staying there. Starting from the  fifties  in  the past century  it never stopped increasing , pushed by the  Organisation of the  Oil Producers ,   and more recently  , by the so called  "futures  oil market". Now, the price of oil has moved down, as the main producer of OPEC works to enlarge its market and its area of influence.

The first  people to talk about a lower price of oil  were the American producers of non conventional oil  and gas, who were  thinking  to export great  volumes  of both gas and oil  worldwide . The main crude oil exporter of OPEC, Saudi Arabia, was apparently   not worried by such a novelty. The Saudi  objected  that  the idea required a  high  level of production   which would  quickly   exhaust the existing reserves;  moreover,  they considered   that such a bonanza would be used to reduce the  heavy imports of oil into the USA  rather than for exports; and that  the new gas would be useful to  the US chemical industry, which would  create jobs , and increase  exports.

The great gas export did not yet materialise for the lack of export structures, as the gas has to be transported as a liquid, and the oil could not be exported, as it is forbidden by law.  The idea of a lower price of oil coming from the extra American production petered out , and the market went back to the usual  talk  about  an increase of the  crude oil price,  due to  serious turmoil in the Middle East , and  high crude  demand  in the East and  Far Est. However, the best analysts of the oil scene started being worried that the high price of oil   was having an effect on the demand first in Europe, but also in the USA.

Renewables were getting very popular, and a consumer lost may be impossible to get back. So,  the price was kept  fairly stable , and , after a while,   Saudi Arabia  started  offering discounts to good clients, the USA, China, and other  countries   in the East and  Far East, where oil demand  keeps increasing. Europe is not particularly interesting to the big exporter, as crude oil demand stagnates there, and it's actually declining, Europe being committed to reduce carbon emissions.

The main OPEC oil exporter, Saudi Arabia, took seriously the lead in this low price strategy.  Following their habit of operating quietly, the Saudi did not take an explicit position on the oil market: what they did was to offer discounts to some clients in the USA and in the Far East. The crude oil market took immediately the lead, the oil price fell, and it is still lower than before.

The moment was in fact well chosen. There is a war in the Middle East  , with the  extremists of the  ISIS trying to keep  the area they have already conquered  in Syria and in Iraq ,  where  they  produce  some relatively small sources of crude oil and sell clandestinely , at prices negotiated  for cash . Apparently, the ISIS relies a lot on the crude oil clandestine sales for money to buy weapons, and to train the new fighters, which seem to be quite abundant. A lower  price might cancel the advantage offered by the black market, and might reduce the   money available to the ISIS.

Presently ISIS  is under the menace from the sky by planes from the US and other members of the coalition set up by the USA, which includes Saudi Arabia. This seems to be a new position for that country. Few years  ago , the decision of the USA  to start negotiating  with Iran  was seen by Saudi Arabia  as a  radical  change of the American foreign policy, and the country  reacted by  refusing   the position in the key ONU Committee  offered to them. 

Saudi Arabia  is the main country  of strict Sunni religion,  while  Syria  and Iraq are  Shea  or  similar , and its authority , and its  resources  are quite  relevant.  The fact  that  Saudi Arabia is now a member of the group that sustain the bombing of the ISIS army  , and may also have has some activity of its own,  especially  as the war   still  goes on  in Syria ,  reinforces  strongly the anti ISIS position .

In any case, the Saudi strategy is not limited to the Middle East. Lowering the oil price helps the friendly countries, and hits the Saudi competitors.  The  low oil  prices will affect  the larger European  exporter  and competitor, like Russia , which might be hit  by  the low  price of crude oil , and of natural gas,that    Russia  always tied   to    crude. If Russia  comes to suffer a reduction of  the money flowing from  its  export of gas and oi , it  will have  less resources  to  buy what they  usually  bought from Europe, cars, machinery , oil equipment, and fashion.  The European exporters, and specially Germany, might suffer a decline of their best market.  The European economy , on   edge since a long time , is going to enjoy a bonus  on the price of  the oil they import ,  but will  suffer  a reduction of demand  for their  exports  to Russia .

In any case , the  Saudis might consider Europe as  an area which wants to reduce to a minimum the imports of crude oil ,  and therefore cannot be considered   a safe client ,  to be  treated   with  special attitude. Prices. Of course ,  the lower price will  affect all  markets , including  Europe , which will take advantage from the generalised lower price which  will ,of course, touch all markets, although in  different way.  Europe will take advantage from the cheaper crude  , but in the  European market , and especially the Italian, the prices of  gasoline and gasoil are loaded  with a number  of different impositions to support different causes,  which do not change  with  the change of the price, so the advantage for the drivers  will  not  reduce proportionally with the price , but much  less. It is not   yet success, although some  gasoline buying has already started to increase.  

Marcello Colitti

Economist. He was President of Enichem. His last book is "Etica e politica di Baruch Spinoza". Member of the Editorial Board of Insight