Cheap Seats 2016
NOPEC - 03/02/16
By Rich Trzupek
The world changed in a big way last week, though few seemed to notice. Saudi Arabian Oil Minister Ali al-Naimi announced that his nation would no longer act as the Organization of Petroleum Exporting Countries (OPEC) swing producer. That’s great news for western consumers, will shake up global politics in ways that we can’t even imagine and, by the by, offers further proof that our current commander in chief doesn’t have a clue about the way economics works.
Back in the seventies OPEC was able to manipulate oil prices at will. The world’s largest oil producer, Saudi Arabia, was the key to the deal. By cutting or increasing production, Saudi Arabia could effectively dictate the price of crude oil on the world market.
This lead to an often uncomfortable love-hate relationship between Saudi Arabia and the United States. On the one hand, the Saudis needed protection on the world stage and allying itself with the US and western Europe was far preferable to the only other viable alternative, the Soviet bloc.
On the other hand, the US was and is Israel’s strongest ally. The ruling Royal House of Saud needs to perpetuate the myth that Israel is the ultimate enemy of the Arab world in order to focus the considerable anger of its populace in a direction that doesn’t involve the Royal House of Saud. Thus, a great deal of US-Saudi cooperation has to take place behind the scenes, lest the rulers of the desert kingdom appear to be too approving of the great Satan.
It’s no secret that the primary motivation for this unhappy marriage was economics. We needed OPEC’s oil and OPEC needed access to our markets, the only markets large enough to provide them with the sort of income they wanted. And so the price of crude, and thus the price of gasoline, fluctuated over the decades, chiefly according to Saudi self-interest and American resolve.
When the Saudis felt relatively safe prices might rise, when they felt threatened prices might drop. A no-nonsense administration could help push production up and prices lower, while a more compliant administration would have the opposite effect. But, in the end, the Saudis – and the Saudis alone – set the price of this singularly important global commodity.
Minister al-Naimi’s announcement effectively represented surrender in a complex economic war that the United States and OPEC have waged for over four decades. Al-Naimi said that Saudi Arabia wasn’t happy about a world where crude sold for $20 per barrel, but they could live with it. Other nations with access to conventional, cheaply-accessed reserves like Kuwait can live with $20 too.
Unconventional producers, like those drilling in the shale formations of North Dakota and the tar sands of Canada need a price point closer to $60 to be profitable. The same goes for some OPEC states like Venezuela, Nigeria and Angola. The new Saudi policy sucks for all of the above, but it’s a victory of the free market over price fixing and the world should rejoice. The price of oil, and thus the price of gasoline, will once again reflect the price of production, not the arbitrary decisions of a small group of people trying to manipulate that price.
That doesn’t mean that the Saudis won’t shift production according to their own perceptions of their own self-interest. They will and I, for one, am OK with that. But they will no longer shift production in order to prop up petty despots in places like Venezuela and Nigeria.
This victory happened because the United States was able to do what President Obama sneeringly said we could not do: we drilled our way to $2 dollar gas. Candidate Obama dismissed advanced and enhanced exploration as a moronic way to increase energy production and reduce energy prices. Today every gas station in America now pays witness to how negligently or willfully ignorant he is.