Insight and inspiration in turbulent times.
I believe that the Saudis and the Russians are trying again to destroy the shale oil industry in the United States with their dance of uncertainty. As of this writing, the world has been told that the Saudis’ on-again, off-again fight with the Russians is off-again resulting in a new deal to cut production.
It’s what you can’t see—the oil beneath the Arabian sands—that potential investors in Saudi Aramco’s on-again, off-again initial public offering (IPO) ought to focus on. The truth about the remaining oil resources beneath the Saudi desert continues to be a state secret.
The recent retreat of Saudi Arabia from its planned IPO is not only an important financial event. It’s an important informational event in that it highlights the opacity of the world’s oil producers. It should remind us that the numbers we accept from major governmental and international organizations regarding oil reserves worldwide are largely based on unverified sources, namely, the word and only the word of most of the world’s national oil companies.
With Donald Trump’s decision to shred the Iran nuclear agreement, announced last Tuesday, it’s time for the rest of us to start thinking about what a Third Gulf War would mean. The answer, based on the last 16 years of American experience in the Greater Middle East, is that it won’t be pretty.
We are, of course, discussing Saudi Arabia, which has been much in the news lately. This essay will review recent events centered therein and probe their significance. As we will see, the main actors in the drama are an ambitious young Saudi prince, the Trump administration (and its own ambitious young prince), Iran, and Israel (which has a hand in just about everything of significance that happens in the Middle East)—with Lebanon, Qatar, and Yemen as possible staging grounds for the unfolding of further action.
Why are the Saudis content to allow oil prices to remain this low and possibly drift lower? I believe it’s because their war on shale never ended; they mean to destroy the long-term financial viability of oil from shale deposits–and that job won’t be finished until investors say, “Never again!”
Investors keep hoping that the Saudis don’t really know what they are doing. So far the Saudis appear to have the upper hand, and I’m guessing that those buying newly issued oil company shares these days are miscalculating once again.
Saudi Arabia is not trying to crush U.S. shale plays. Its oil-price war is with the investment banks and the stupid money they directed to fund the plays. It is also with the zero-interest rate economic conditions that made this possible.
It is popular these days to speculate about why Saudi Arabia cajoled its OPEC allies into maintaining oil production in the face of flagging world demand. Was the real reason for the decision to maintain production the desire to undermine rising U.S. tight oil production–which has now proven embarrassingly vulnerable to low prices after years of triumphalist talk from the industry about America’s "energy renaissance"?
The world is in a dangerous place now. A large share of oil sellers need the revenue from oil sales.
It’s likely that the Saudis are encouraging a fall in oil prices. In the face of what looks like declining demand, rather than cut production to maintain prices as they have done in the past, they’ve decided to maintain their market share worldwide by cutting prices.
The Saudi regime has long been considered a pillar of political stability in the Middle East, a country that commanded respect and prudence from all its neighbors. This is no longer true, and the first ones to recognize this are those who are important internal players in the regime. Today, they feel besieged on all sides and quite fearful of the consequences of turmoil in the Middle East for the survival of the regime.
