10 December 2014
The oil war: a crude sketch
Consumers may rejoice at plunging gas prices but while they benefit, international tensions may increase. Consumers, and commuters especially, will want to thank Saudi Arabia, which is glutting the market and pulling prices down. The Saudis seem to be waging a two-front oil war. On the geopolitical front, driving down oil prices hurts the economies of Iran and Russia, theoretically diminishing their ability to support the Assad regime in Syria and Iran's ability to create mischief in the Middle East as a whole. While overproduction should hurt the Saudi economy as well, the Saudis presumably have financial resources the Iranians and Russians lack and clearly expect to weather whatever storm their policy generates. It's easy to assume that the Saudis are acting in American interests in this respect, but the second front of their oil war, according to many analysts, pits them against U.S. oil producers. Specifically, the Saudi strategy seems designed to preempt the development of American shale oil reserves through fracking. The idea behind this is that fracking is expensive and requires high oil prices to be cost-effective. If the Saudis can hold prices down, fracking becomes unprofitable because frackers can't make their money back on the oil market. Given the ambivalence with which Democrats in the U.S. regard fracking, it's possible that the Obama administration could be encouraging Saudi overproduction to hurt Russia and Iran without caring much about the consequences for frackers. It seems just as likely, if not more so, that the Saudis have reasons of their own for their actions that have nothing to do with costs or benefits for the U.S. Were this a movie, this would be the part when someone tries to sabotage Saudi production, but in the real world we should assume that people have wanted to do that for some time, only to find opportunities lacking. Still, the Iranian president has described the Saudi policy as "treachery," while the Saudis' partners in OPEC can't be too thrilled with a policy that more likely hurts than helps them. We can't help wondering how much longer Saudi Arabia will get away with it. The Iranians, Russians and Syrians may want to do something about it, but the tipping point might come when Republicans take over the White House and the entire American government resolves to make the world safe for fracking. Meanwhile, although consumers may praise the Saudis now, inevitably they'll curse the Saudis when it's in the Saudi interest to limit production and drive prices up. These rumors of oil wars sound like an argument for the global socialization of oil production in fairness to oil producers and consumers alike -- while oil lasts, that is. Until that happens, we can only hope that oil wars don't turn into shooting wars.