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

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/

Report: ISIS keeps making money from oil despite airstrikes

Islamic State, or ISIS, continues to earn millions from ill-gotten crude oil sold on the black market, according to a story by the Reuters news service.

ISIS is “still extracting and selling oil in Syria and has adapted its trading techniques despite a month of strikes by U.S.-led forces aimed at cutting off this major source of income for the group, residents, oil executives and traders say.”

This report largely contradicts a story last week by Bloomberg, which has done extensive reporting on ISIS’ finances.

(Photo credit: Shutterstock)

Bring back Woodstock and passion, and bring on replacement fuels

The ‘60s and early ‘70s were exhilarating at times and depressing at other times. America seemed angry and divided about the Vietnam War, the struggle over civil rights and equal rights for women. Many of those who were against the war and supported civil rights for minorities and equal rights for women were passionate about their views and saw themselves as change agents in an America that they viewed as perfectible but not perfect. They debated, they marched, they shouted, they irritated, and they (at times) exceeded legal boundaries. Some even took personal risks by becoming Freedom Riders in the south. By the early ‘70s, they had made a positive difference. They had become legends in their own time, capped off by Woodstock — an exotic, culture-changing, music rebellion concert. America would never again be the same!

I ask myself why the effort to break up the oil industry’s monopoly at the gas pump has won intellectual interest among some, but not the passion and the emotion of the ‘60s. No one is riding in a vehicle column through the nation, stopping at gas stations to plead for an opportunity for consumers to choose among alternative or replacement fuels. No one is shouting en masse about the extensive environmental harm and economic loss caused by our reliance on gasoline. Very few are concerned with the widening income gap and increasing poverty in America. Where is the concern about the negative impact that gas prices have on the purchasing power of the poor?

Surprisingly, very few Americans seem worried that most of the wars we are fighting either overtly or covertly involve (to some degree) our or our allies’ dependence on oil and, sometimes, lead to our becoming allied with some unsavory folks. I keep remembering a relatively recent conversation I had with a special services soldier who quite clearly indicated that he and his colleagues believed the U.S. was in Iraq not because of the quest for democracy or freedom, but because of the West’s need for oil. He indicated that it was b.s. — all this talk about building democracy. Whether it’s Iraq, Syria, or Egypt, Americans themselves are having growing doubts about why we have been, are now, or might be in the future, involved in Middle Eastern wars. Many, if not most, hope that their kids are not the first in and the last out.

What is it going to take to stimulate the adrenaline of Americans when it comes to the oil industry’s ability to limit competition at the gas pump through price management, franchise agreements, and political muscle in Congress? I suspect the draft helped energize the public’s antipathy toward the Vietnam War, but for the most part, the anti-Vietnam movement secured the intense support of only a minority of Americans. Indeed, polls at the time indicated that both the women’s and the civil rights movements also had less than majority support. Yet, in all three instances, the overlapping minorities among the population wielded a big political voice, bigger than their numbers.

Why? I suspect media-savvy, bright, and committed leadership had much to do with it. Further, they were helped by the tragic assassinations of President Kennedy; his brother, U.S. Attorney General Robert Kennedy; and Martin Luther King, Jr. Growing public distrust of politicians caused by the gap between the facts on the ground and press releases concerning Vietnam increased the willingness of the American public to support the marchers. Polls began to shift on the war, civil rights, and equality for women. All three issues won increasing numbers and granted legitimacy to efforts to end the war and to assist the “have nots” and the “have less” among us. Given the federal budget authorizations and appropriations, an argument could be made that the halcyon days of the Great Society actually occurred during the first years of President Nixon. This is not heresy. Look at the budget details from 1965 through the early ‘70s.

Can we replicate the passion associated with the Vietnam War, civil rights and women’s rights movements and focus it on more democracy and freedom for consumers concerning choice of fuels? Probably not! The issues involved are difficult to grasp for the public. It is unlikely that families will sit down at the dinner table and stimulate conversation on the benefits and costs of replacement fuels or flex-fuel vehicles. Americans are not going to “March on Exxon” as they did on the Pentagon or gather at the National Mall in D.C. in the hundreds of thousands as they did for civil rights.

The term “silent majority” has been used without a hard and sustained predictable meaning in the last four or five decades. It’s a phrase that needs amplification and definition today. It could become the missing public change agent concerning replacement fuels. Coalition building among supportive pro-environmentalists, businesses, consumers, and anti-poverty groups could lead to the development of multitasked, innovative, and interactive national education program with a broad reach (e.g., town meetings, the newspaper and website articles, webinars, Twitter, movies, YouTube, etc.). Its success could convert a now-silent majority or near majority into a thoughtful, articulate majority focused on breaking up the monopoly at the pump. Success would be reflected in poll numbers supportive of federal, state, and local leaders who are willing to push for open fuel markets and increased FFVs. There would be a coalition of the willing; that is, an increasing number of Americans who would provide backbone to public policymakers who, in turn, would commit to challenging the oil companies’ understandable desire to sustain restricted fuel markets and the status quo favoring gasoline over environmentally better, safer, and cheaper replacement fuels. Their support would be conveyed through voting, and the use of innovative communication technology, rather than marching. The results would be illustrated by new, important, expanded democratically made choices by you and me, regarding fuel and vehicles — and maybe a new Woodstock composed of music celebrating America’s new freedoms. I didn’t go to the last one, but will go to the next one celebrating expanded choice for consumers, a healthier economy, and an improved environment. ­