The Saudi Strategy Pushes Oil in the Free Market

Oil is a source of pollution, but its low price will reduce the ability to compete of the non polluting sources

To day, oil has to fight in order to keep its dominant position in the world economy, and the only way to do it is  
to keep the oil price low. The  drama  started almost  by chance with the decision  of the main producer-exporter, Saudi Arabia,  to  give   discounts  to some good  old clients in US and in China, two markets of great interest for Saudis. The futures market immediately took it over and the price fell perhaps more than the Saudi intended. 

Their move had in fact, a number of different targets. First, they had seen the building in many countries of plants to   produce electricity with solar or wind energy, which  were competitive because of the high price of oil. A lower oil price could perhaps stop this trend as those new plants would then appear as more costly than oil burning plants. This is a general  objective , which tries to keep oil as a  generally competitive fuel  not only to  natural gas  but  also to the new comers, the  renewables.  Second, and more specific objective, was  to hit seriously Russia, the main competitor/enemy on the word market, and with a minor impact, Iran and Iraq.  The American oil producers, who had been talking of exporting American crude, but are not doing it, were reducing the imports of crude oil into the USA, a menace to the large export of Saudi oil to the USA.

So, the Saudi producer felt that a floating price of oil would   make it difficult to menace its position of first world exporter. At this moment, information was appearing all over the press that pollution was to reach a  very dangerous level as the melting of the polar cap would liberate huge amounts of natural gas producing a strong acceleration of the global warming, well beyond the previous level.

To day, oil has to fight   for its place in the world economy and the fight's conclusion is not easy to predict. The enemy is not another source of energy, but the   increase of the temperature in the world, with the serious consequences of overall pollution.  Many countries in the world, including the USA and China, and all the European countries are trying to reduce the CO in the atmosphere, which means reducing the burning of oil and similar sources of energy.

In the previous situation, oil had a relevant role in the polluting the atmosphere, but also had a high price, which made it easy to substitute it with other, none polluting, sources.  So, crude oil was, in a way, encouraging the development of the wind and sun as producers of electricity. Many countries are developing these alternative energy sources, which have a cost that was competitive   with the high price of oil, but may not be so with an oil price as it is being quoted to day.  So the situation is somewhat puzzling.

Oil is a source of pollution, but his low price will reduce the ability to compete of the non polluting sources, like wind or sun. How will the situation develop, is difficult to say. The "light" energy plants  are now less competitive then before, but, on the other side, oil burning should be reduced. Probably, the European countries will be tempted to tax all oil, which is already been done with the two main oil products, gasoline and gasoil. The governments seems till to believe that the car is a luxury item, and not an inevitable instrument to move from the house to the working place. And the use of gasoil and gasoline is in fact absolutely necessary as the railways are not sufficient to move workers from the house and to the working place   and goods from production to market. Up to now, there is no solution in sight.

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