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Arctic Leaf

The Saudis and oil prices — the diminishing value of conspiracy theories

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saudi_1880139cEveryone likes hidden conspiracies, either fact or fiction. Covert conspiracies are the stuff of great and not-so-great novels. Whether true or false, when believed, they often cause tectonic policy shifts, wars, terrorism and ugly behavior by groups and individuals. They are part of being human and sometimes reflect the inhumanity of men and women toward their fellow human beings.

I have been following the recent media attention on conspiracies concerning oil, gasoline and Saudi Arabia. They are all over the place. If foolish consistency is the “hobgoblin of little minds” (Ralph Waldo Emerson), then the reporters and editorial writers are supportive stringers for inconsistency. Let me briefly summarize the thoughts and counter thoughts of some of the reported conspiracy theorists and practitioners:

  1. The Saudis are refusing to limit production and raise the price of oil because they want to severely weaken the economy of Iran. The tension between the two nations has increased and, to some extent, is now being framed both by real politics (concerning who’s going to carry the big stick in the region) and by sectarianism. Iran’s oil remains under sanction and the Saudis hope (and may even be working with Israel, at least in a back-office way) to keep it that way.
  2. No, you’re wrong. The Saudis are now after market penetration and are lowering the price of oil to impede U.S. development and production of oil from shale. Right now, they are not worrying so much about oil from Iran-given sanctions…but they probably will, if there is a nuclear deal between the West and Iran.
  3. You both are nuts. The Saudis and the U.S. government are working together to blunt Russian oil sales and its economy. The U.S. and Saudis can withstand low oil prices, but the Russians are, and will be, significantly hurt economically. If it hurts Iran so much, the better! But the Cold War is back and the reset is a failure.
  4. Everyone is missing the boat. The Saudis don’t really control prices or production to the extent that they did in the past. Neither does OPEC. Don’t look for conspiracies, except perhaps within the Kingdom itself. The most powerful members of the Saudi royal family understand that if they limit production to raise prices per barrel, it probably wouldn’t work in a major way. The U.S. has become a behemoth concerning oil from shale. If a nuclear deal goes through, Iran will have sanctions lessoned or removed relatively soon. Should the Russian and West reach some sort of cold peace in Ukraine, Russia will become a player again. When you add Canada, Iraq, Libya and the Gulf States to the mix, lower global demand, and increase the value of the dollar, you get an uncertain oil future. The Saudis, led by their new king, are buying time and casing out their oil future.

To me, the Saudi decisions and the subsequent OPEC decisions were muddled through. Yet, they appear reasonably rational. Saudi leaders feared rising prices and less oil production. Their opportunity costing, likely, went something like this: “If we raise prices, and reduce production, we will lose global market share and maybe, in the current market, even dollar or riyal value. Our production costs are relatively low, compared to shale development in the U.S. While costs may go higher in the future, particularly once drilling on flat desert land becomes more difficult in light of geology, we can make a profit at the present time, even at $30-40 a barrel. Conversely, we believe that for the time being, U.S. shale developers cannot make a profit going below $40-50. Maybe we are wrong, but if we are, our cost/profit equation is not wrong by much. By doing what we are doing, we will undercut American production. Sure, other exporting countries, including our allies in the Gulf will be hurt temporarily, but, in the long run, they and we will be better off. Further, restricting production and assumedly securing higher prices is not a compelling approach. It could cause political and social tension in the country. We rely on oil sales, cash flow and profit as well as reserves to, in effect, buy at least short-term civic peace from our citizens. Oil revenue helps support social services and basic infrastructure. We’ve got to keep it coming.”

The Kingdom understands that it can no longer control prices through production — influence, yes, but, with the rise of U.S. oil development, it cannot control production. Conspiracy theories or assumed practices don’t add much to the analysis of Saudi behavior concerning their cherished oil resources. Like a steamy novel, they fill our reading time, and sometimes lead to a rise in personal adrenaline. Often, at different moments, they define the bad guys vs. the good guys, or Taylor Swift vs. Madonna.

No single nation will probably have the power once held by OPEC and the Saudis. While human and institutional frailties and desires for wealth and power suggest there always will be conspiratorial practices aimed at influencing international prices of oil and international power relationships, their relevance and impact will diminish significantly. Their net effect will become apparent, mostly with respect to regional and local environments, like Yemen and ISIS in Syria and Iraq.

Recently, I asked a Special Forces officer, “Why is the U.S. fighting in Iraq?” I expected him to recite the speeches of politicians — you know, the ones about democracy, freedom and a better life for the citizens of Iraq. But he articulated none of these. He said one word, “Oil”! All the rest is B.S. I think he was and remains mostly right. His answer might help us understand part of the reason for the strange alliance between the Saudis and U.S. military efforts in or near Yemen at the present time. Beyond religious hatred and regional power struggles, it might also help us comprehend at least part of the reasons for Iran’s support of the U.S.-led war against ISIS — a war that also involves other “democratic” friends of the U.S. such as the Saudis and the Gulf States.

The alliances involve bitter enemies. On the surface, they seem somewhat mystifying. Sure, complex sectarian and power issues are involved, and the enemies of my enemies can sometimes become, in these two cases, less than transparent friends. But you know, these two conflicts — Yemen and ISIS — I believe, also reflect the combatant’s interest in oil and keeping oil-shipping routes open.

President Obama has argued that we should use alternative energy sources to fuel America’s economy and he has stated that we need to wean the U.S. off of oil and gasoline. Doing both, if successful, would be good for the environment, and limit the need to send our military to protect oil lifelines. Similarly, opening up U.S. fuel markets to alternative fuels and competition would mute the U.S. military intervention gene, while curing us, to a large degree, of mistakenly granting conspiracy advocates much respectability. Oh, I forgot to indicate that the oil companies continue their secret meetings. Their agenda is to frustrate the evolution of open fuel markets and consumer choices concerning fuel at the pump. Back to the conspiracy drawing boards! Nothing is what it seems, is it?

 

Photo credit: http://blogs.telegraph.co.uk/finance/

Arctic Leaf

Paul Revere: The Teslas are coming, the Teslas are coming!

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When he died, the patriot Paul Revere was embalmed in V8 juice, tanning lotion and several energy drinks. Surprisingly, he reappeared at a relatively recent conference of the Massachusetts Association of Automobile Dealers, looking fit and ready for another ride. The dealers had prayed for his second coming. They hoped that even though his previous ride was only one horsepower, he would consent to try a low-horsepower vehicle and ride the state, warning their brave residents that Tesla is online and in-store sales of electric cars coming. The dealers’ marketing folks felt that a reincarnated Revere would do wonders for their shaky image as wheeler dealers (excuse the pun). His deep, holier-than-thou, Fred Thomas-type voice (you know, the actor-turned-politician-turned-actor who now sells most anything on TV for money) would convince all but his former peer group (dead people) that Tesla was anti-American.

“What did Tesla do wrong,” asked Revere? Oh, it’s trying to sell its non-horse, torque-engine vehicles directly to modern-day patriots. Can you imagine euthanizing horsepower? Tears came to Revere’s eyes. But there’s more, paraphrasing a former automaker and cabinet officer Charles Wilson, one of the dealers indicates that what’s good for automobile dealers was and will always be good for America. What Elon Musk, the head of Tesla Motors, wants to do is eliminate dealerships. If the present case before the courts in Massachusetts is won by Tesla and Teslas are sold online, from a storefront, or shopping mall, surely Ford, Chrysler and General Motors will not be far behind. Forget capitalism, forget free markets, forget competition, even forget, Paul, your membership in the old Tea Party in Boston (you know, the taxation-without-representation crowd). Forget everything you fought for. By eliminating dealerships, Tesla will cost jobs. Dealers soon will have to close their doors. Bypassing dealers to sell cars will also first limit and then end our community philanthropy — you know, Little League teams, Fourth of July concerts, community picnics, jerseys for kids etc. Tesla’s headquarters is in California, and it’s a crazy state with Hollywood and all that. Californians act like foreigners. Tesla’s founder believes in global warming, he isn’t satisfied with life in America and he is developing a spaceship where the elite can, someday soon, travel to a second home and ruin our local economy. Losing dealers will make every community less American. Sure, vehicle costs may come down and emissions may improve, but what American is unwilling to pay extra to save his or her friendly auto dealer?

Revere was puzzled. He was a merchant way back then and he believed that competition and the free market were part of the American Dream. (To be honest, he also feared riding and did not understand how he could ride a multiple-horse powered vehicle. He had only mounted one horse.)

But he understood what the dealership folks were trying to tell and sell him. While in his heart, he was a bit ambivalent, he finally said he would do the famous ride again, and this time, because mileage capacity had increased and population of Massachusetts had grown, he agreed to try to go farther west than in his famous, poet-legitimized and sanctified ride.

But just as he gave them the okay, the dealerships received an email from a colleague in Boston that Tesla had won in the Massachusetts court. One dealer started crying. Several others criticized “those activist judges.”

Revere asked to read the email. It indicated that the Massachusetts Supreme Judicial Court unanimously determined that the Mass. State Automobile Dealers “lacked standing to block direct Tesla sales under a state law designated to protect franchises owners from abuses by car manufacturers” (Reuters, Sept. 15, 2014). Succinctly, the law was tied to the franchise relationship rather than unaffiliated manufacturers like Tesla.

The court’s finding should make it easier for Tesla to secure positive rulings in many other states. Earlier this spring, senior officials from the Federal Trade Commission strongly indicated that laws outlawing direct sales harmed consumers. Revere, after looking at the email, felt guilty that he had all but agreed to replicate his famous ride. But he was consoled by the fact that freedom and competition won out, at least in the Tesla case in Massachusetts, and that at least consumer democracy was alive and well in the state. He couldn’t help but muse on the fact that Texas, a state supposedly committed to minimal regulation and almost zero interference by government concerning businesses and citizens’ lives, turned its back on Tesla because of lobbying by dealers. Tesla cannot sell directly in Texas. But, as Ralph Waldo Emerson suggested, “foolish consistency is the hobgoblin of little minds.” After driving a Tesla (with no horsepower), Revere went back to the halo- lit neter lands happy. We haven’t heard from him since. But on faith alone, his experience with reincarnation likely would have made him a fan of Tesla’s electric cars and other alternative fuels.