In a very informative article over at www.foreignpolicy.com by Steve Levine entitled The Coming Oil Crash he details the problems petro states like Russia, Iran, and Venezuela among others face with the recent fall in oil prices. The article gives estimates on what each state needs the price of a barrel of oil to be to balance their budgets. Russia, for example, is said to require a price of $110 per barrel to stay in the black, oil was going for around $96 a barrel on Monday. In fact many of the other petro states are in a similar position to Russia, so our gain is their pain so to speak. Many analysts expect the pain to go up for the petro states for the obvious reasons: global economic slowdown reducing demand, US and Canadian shale oil deposits, and Saudi Arabia insisting on producing 10 million barrels a day when all they appear to be doing is hurting themselves by producing so much.
All of the reasons seem to make sense except for the Saudis, why on earth would they purposely drive down the price of oil when all it does is take money out their own pockets? Well, that is where it gets interesting. According to the article the Saudis are intentionally trying to drive the price of oil down for several different reasons. First, they believe cheaper oil will help the global economy weather this rough patch. They also apparently liked all the prestige they gained by driving down the price of oil in the late 90’s during the Asian financial crisis. Second, they feel threatened(the original article used the word terrified to describe how they felt) by the shale oil deposits in the US and Canada. They recognize that shale oil is harder and more expensive to obtain than normal liquefied deposits. Because of that oil has to be at a certain price to make going after shale oil worth it. Last but certainly not least, the Saudis are trying to impose their will on both Russia and Iran on two key issues. The first would be Iran’s attempt to get the bomb. The Saudis and Iran are natural competitors because one is Sunni and the other is Shia. The Saudis feel that a nuclear armed Iran would be unacceptable so they are purposely driving down the price of oil to put the squeeze on Iran to force them to give up the pursuit of the bomb. The second issue is with Russia blocking a deal being made on Syria. The Saudis once again feel they can pressure Russia into playing ball on Syria by driving down the price of oil. It will be interesting to see how long and how painful the Saudis are willing to make this. As the article points out they have one of the largest financial reserves in the world at around $700,000,000,000 so suffice it to say that they can keep this up for some time. If I was Russia and Iran I would be worried.