There may be a simpler explanation for Saudi’s willingness to see prices slide than an attack on US shale or a “political plot” against regional rival Iran, though: a change in the Saudi view on peak oil.
The Saudis have two choices with their oil: sell it now, or sell it later.
If they think oil is running out, it is reasonable to think prices will keep rising in future – perhaps rising much faster than the returns they could earn by deploying the money elsewhere, particularly since they invest a lot of their excess foreign exchange in US Treasury bonds paying almost nothing. The logical thing to do is to keep as much oil in the ground as possible, pumping only enough to keep the global economy ticking over.
On the other hand, if peak oil is so much bunkum, at least for the foreseeable future, then it makes sense to pump a lot more oil. Worse, if peak oil is the opposite of the truth – that demand for oil might go into a long-term decline – then it makes sense to pump as much as possible as soon as possible, whatever the price, because it will only be worth less in future.
Not being a senior member of the Saudi royal family I don’t know the truth. Perhaps the Saudis did a secret deal with the US to hurt Russia. Perhaps they are trying to pressure the Russians to cut off Bashar al-Assad in Syria.
It is true that the simplest explanation isn’t always the best in the strife-torn Middle East. But new technologies are making it easier to access oil from shale, Brazilian pre-salt formations and Canadian oil sands, while global warming, ironically, is making the Arctic look like a potential new source of wells.
At the same time, human ingenuity has done what it always does when prices of one resource are very high: find ways to replace it with others. Electric cars have gone from an expensive toy to the edges of the mainstream, and demand for fuel efficiency made smaller cars a popular choice in the SUV-loving US once again.
Some Saudi comments suggest they are just fed up with being the swing producer, letting inefficient high-cost countries make money when they could be instead. But if the Saudis believed in peak oil, it doesn’t matter at all. If oil is running out, then the value of the Saudi fields goes up the more Russian or Venezuelan fields are depleted, no matter how inefficient their production.
Behind all the debates, a simple change of mindset is enough to explain why oil has plunged. If this is really the deeper explanation, then oil may well never see $100 a barrel again.
Why Saudi Arabia’s best bet may be to increase output – FT Alphaville
When the cartel bursts, Brent edition – FT Alphaville (Oct 27, 2014)
Is the end of the oil era nigh? – FT Alphaville (Mar 27, 2013)
It’s a super market price war! (in oil) – FT Alphaville
Is Saudi Arabia starting to panic? - FT Alphaville (Jan, 2013)
Saudi Arabia resorts to Jedi mindtricks – FT Alphaville (May, 2012)