One night in his tent in Tripoli, Libya, Col. Muammar Khadafi told me, “the Saudis are a very rich family hiding behind high walls, terrified their neighbors will come and steal their wealth.”
He was right. The covetous neighbor most feared by the Saudis are Iran, followed by Egypt, Turkey and, more distantly, Israel. Iraq also used to be on the list until it was destroyed by the United States in 2003.
One must keep Saudi Arabia’s fear factor in mind to understand the oil wars that are now shaking the world’s economy to its foundations.
The Saudi royal family decided to kill two competitive birds with one stone – Iran and surging US shale oil producers – by kicking off a price war to run them out of business. Saudi Arabia is one of the world’s lowest cost oil producers. The Saudis also hoped to punish Russia for backing Syria’s government.
Price wars are the last recourse of all bad businessmen.
The problem with this ham-handed strategy is that your competitors will hang on desperately and cut prices to survive, even if it means running big losses. Price wars hurt all concerned. They dislocate production, markets, future investments and capital spending.
The result of Saudi Arabia’s oil price war has been to drive the once “black gold” down to around $32 a barrel from a high of $105 in 2015. Other Gulf producers joined Saudi Arabia in slashing prices. We have gone from panic over “peak oil” (worldwide shortages) to panic that we are drowning in oil.
So far, the Saudi oil war has indeed badly damaged the US shale and regular oil industry but has not put them out of business. However, oil industry dividends are being cut way back or eliminated. Blundering by the US, Canadian and Japanese central bankers has made things far worse.
Other major oil producers like Russia, Iran, Algeria, Malaysia, Kazakhstan and Indonesia have also been badly hurt but are hanging on. The oil war has seriously damaged the economy of the European Union. Japan should have been boosted by low oil prices but is also suffering relentless industrial decline, as witness by the humiliating sale of Sharp Electronics to China’s Foxconn.
Oil has become tightly correlated to North America’s stock markets, meaning that they rise and fall with the price of oil. Low oil prices may have helped a few industries like airlines, but they have created a worldwide recession. Canada, a dire example, has been battered by low oil prices and faces a bleak future unless resources rise sharply in price.
Efforts by OPEC and other oil producers to agree to cut back production and thus foster a price rise have so far failed due to fears that nations who reduce exports will see their former markets taken by cheating competitors. In economics, it’s known as ‘beggar they neighbors.’ The Saudis and Gulf producers keep blocking a decrease in oil production.
Now, the desert oil producers are deeply worried that Iran, freed from US economic prison, will soon begin exporting at least 500,000 bbls a day of oil. Iraqis oil production is finally returning to pre-US invasion levels. Oil prices could drop even further unless a deal is reached.
But Saudi Arabia is so petrified of Iran it is very reluctant to make a deal that will help grow the Islamic Republic’s economy – and hence even limited military power. So what’s to be done?
Some critics are saying that a group of obscenely rich Bedouins should not be allowed to hold the world economy to ransom. The western powers should press the Saudis to cut production or risk seeing vast Saudi investments in the US and Europe frozen – just as was done with Iran. The Saudis should also be told to stop their bloody war against Yemen that has killed thousands, cease their human rights abuses, and cease funding dangerous Islamic extremist movements, including ISIS and Syrian revolutionaries.
Why has this not been done? Because too many American and British politicians are on the Saudi payroll, and too much of Britain’s and America’s arms producers are dependent on Saudi business. The Saudis’ heads have swelled with arrogance while their dim-witted oil policies threaten the global economy.
The Saudis and OPEC must be offered a deal by the great powers that they can’t refuse. Otherwise, the Saudis may remain a bigger threat than ISIS.