Oil, once a commercial ace, strategic prince and political joker, is on the skids Hardly half a year since piercing the $100/barrel ceiling and peaking at $103, crude prices this week cracked the $65 floor, as some analysts predicted a $30 barrel sometime next year.
Such dives happen routinely in financial markets, but this one is different – because oil prices vector economic, industrial and geopolitical pushes and pulls more tellingly than any commodity, currency, bond or share.
And what these vectors now indicate is that along with its declining financial value, oil is also losing its economic status and political clout.
The oil glut is clearly about more than economic cycles.
Yes, recent data indicates that the global economy’s recovery in the aftermath of the 2008 meltdown has ended. With China’s growth slowing and Germany’s nearly halting, the markets sense a worldwide decline in demand, which in turn means lower oil sales – whether to factories, airlines or households.
Yet the market mayhem is fed not only by reduced demand but also by expanded supply, in the wake of recent years’ production of shale in the US.
The technique that enables extraction of oil hidden within rocks has intensified oil production dramatically in the US, so much so that Uncle Sam has recently become a net exporter of crude. Meanwhile, in the aftermath of the Cold War, Russian and Azerbaijani oil has been reaching the developed world, thus further expanding supply.
In other words, while the global economy’s cyclical dynamics reduced demand for oil in recent months, industrial developments increased its supply. Moreover, the success of shale production is now making other countries follow America’s example – most notably China, whose rapidly growing energy consumption fueled oil’s meteoric appreciation last decade, from nearly $10 at the turn of the century to $147 in 2008.
Beijing’s stated aim, to develop its own shale industry, is a strategic threat to its oil suppliers in the Middle East. This is what OPEC’s foreign ministers had on their minds during their emergency meeting last month in Vienna, amid expectations they would cut production, and thus stem crude’s depreciation.
Such were the expectations.
Instead, OPEC announced it would not cut production, and thus sent prices even further down – as if to give Americans a special gift just as they gathered around their Thanksgiving tables.
OPEC, to be sure, had other aims in mind, both political and industrial – but they were all doomed to fail.
Cutting production has been OPEC’s lethal weapon ever since 1973, when its Arab members, led by Saudi Arabia, threatened in the middle of the Yom Kippur War to pump less crude unless the US stopped emergency arms shipments to Israel. The markets panicked and oil soared within less than a year from $3 to $12/barrel.
The energy market had therefore transformed from a regular meeting place of buyers and sellers into a hypersensitive seismograph of political turmoil in the Middle East. And so, when revolution gripped Iran, oil prices more than doubled from less than $16 to nearly $40/barrel; when Iraq invaded Kuwait, prices journeyed from $17 to $36.
Perplexity in the face of the oil exporters’ clout and unpredictability was such that several weeks after Ayatollah Khomeini’s rise to power, US president Jimmy Carter told the American public grimly, as he abolished energy-price controls because they didn’t work: “I’ll give it to you straight: Each one of you will have to use less oil, and pay more for it.”
That was then. Now, despite the Middle East being ablaze from Libya to Iraq, and despite Iranian oil’s near-complete absence from the markets due to sanctions, prices are plunging. In other words, the markets have lost fear of the Middle East, and now ignore its caprice.
Faced with OPEC’s failure to cut production, analysts have been offering theories for its behavior, like Talmudic scholars in the face of an exegetic enigma.
Some believe OPEC is driven by alarm over shale production, as it surely should be, and is therefore out not to stem the price decline, but to accelerate it. This way, goes the theory, OPEC wants to sink prices to the point at which shale production will become unprofitable.
Just where that point lies is unclear. Some say it is at $70/barrel, meaning we are already past the threshold beyond which shale producers will start folding their equipment. The Saudis, by contrast, pay only $2 to produce an oil barrel and therefore have an edge in this war, goes this rationale.
Yet the Saudis must earn enough to buy arms, build cities and highways, schools and hospitals, and feed 28 million people. The sheikhs must therefore earn a lot more than the cost of a barrel’s production. Shale producers in North Dakota and Texas don’t have to run countries, and only need to make several dollars’ profit on each barrel they produce.
Furthermore, just like in the 1980s the developed world managed to reduce oil prices by learning to save energy, shale producers are busy developing new technologies that will sharply reduce their production costs.
This is besides the fact that in China, where shale production will surely mature sometime in the next decade, the government sees energy production as a strategic asset worthy of its direct investment, even if production costs remain high.
In sum, OPEC’s apparent quest to resist industrial development stands no more chance of success than the Luddites’ quest two centuries ago to fight mass textile production.
All this obviously has far-reaching political implications.
THE VICTIMS of plunging oil prices are its addicts, namely the economies that rested on the easy inflow of petrodollars while neglecting industrial development.
Among these, the most vulnerable are Venezuela and Iran. The former, which five years ago severed diplomatic ties with Israel as part of a broader meddling in distant affairs, now faces street violence, shortages, inflation, emigration and an economy that shrank by 5 percent in tandem with the decline in oil prices. Things will now get worse there, as oil comprises 97% of Venezuela’s exports, while its budget is based on oil values that no longer exist.
Iran has more of an industrial base, but its population is more than twice Venezuela’s.
Once sanctions are lifted, no matter when and how, Iranians will discover an energy market entirely different from the one they recall from last decade.
The same goes for Russia, where President Vladimir Putin cultivated the oil industry and neglected industrial development while picking fights from Georgia to Ukraine, all of which has sent the ruble’s exchange rate since January from 22 to 54 to the dollar.
What this will make Russia do is a separate question: Some maintain the Kremlin will now think more economically, others that it will be even more adventurous.
Either way, oil can already be faulted with having failed to finance Putin’s neo-imperialism.
Indeed, Russia’s petro- dependence has become such that some believe it quietly worked against a removal of sanctions on Iran, rightly fearing that Iranian oil’s return to the markets would push prices even lower.
It is, then, an entirely different world, one where petro- economies will be increasingly humbled, defensive and self-absorbed.
The implications of all this for the Middle East in general, and Israel in particular, can hardly be exaggerated.
Strategically, Israel’s enemies have pretty much lost the ability to harass the Jewish state through the energy markets. Economically, the unfolding glut will mean less money pouring into Israel from new gas exports, thus reducing the risk of the so-called Dutch Disease, whereby easy income from resource mining degenerates industry.
Yet the happiest result of oil’s humbling, from Israel’s standpoint, will be in its trade relations. With historic clients turning to new alternatives, regional oil producers will be in no position to be picky about their clients. Israel will thus eventually buy oil from its neighbors, the way it once did from Iran.
This is the context in which Saudi Oil Minister Ali al-Naimi told reporters last month that his country would sell oil to anyone willing to buy, “and the Jewish state is no exception.”
Autumn descended on Vienna as Naimi and the rest of OPEC’s foreign ministers and oil ministers gathered to seek new ways to stop their financial hemorrhaging, and pare down their political losses.
It had been but four decades since that forum conspired to blackmail the free world, and choke the Jewish state. www.MiddleIsrael.net