Baiting the Bear

[courtesy Google Images]

The Wall Street Journal:

“On Sunday [October 4, A.D. 2015], Saudi Arabia made deep reductions to the prices it charges for its oil, hard on the heels of cuts last month by rival producers in the Gulf.

“With U.S. production still increasing despite lower oil prices, members of the Organization of the Petroleum Exporting Countries are battling to keep their share of the last growing markets in Asia.

“The move comes as Iran, Iraq and other countries in the Middle East made deeper cuts in their official prices than Saudi Arabia last month.

“Saudi Arabia has vowed to keep pumping at high levels as it hopes lower oil prices will stimulate Asian demand and hit rival production in the U.S. that is expensive to produce.”

The Saudi price war on crude oil is largely seen as a Saudi attempt to diminish or destroy America’s increased reliance on fracking.

And it’s clearly true that the resulting price fall from over $100/barrel to under $50/barrel has devastated the American fracking industry.

However, while a falling global price of crude oil has damaged the American fracking industry, it hasn’t hurt, and may even have helped, the overall American economy by providing cheaper energy costs.  It’s possible that the US government is willing to sacrifice the US oil industry in order to support the US economy.

•  The only national economies that have been damaged by the Saudi price decline are those of nations whose income and standard of living are primarily derived from the sale of their crude oil. Any of the OPEC nations would be examples of national economies that are significantly dependent on the sale and profits derived from selling their crude oil to foreign buyers.

OPEC nations should be furious that the Saudis have pushed oil prices down by over 50% in the past 14 months.  We can suppose that some of those OPEC nations would be willing to work to destroy the Saudis’ power to set crude oil prices.

•  However, the single biggest—and most dangerous—victim of falling oil prices is Russia. Russia’s economy and standard of living depend to large extent on the sale of Russian crude oil.  A 50% price decline has to be a tough pill for President Putin to swallow.

More, there’ve been claims that the US expressly encouraged the Saudi’s to lower the price of crude oil last year for the primary purpose of injuring Russia as retribution for Russia’s taking of the Crimea as well as for Russia’s continuing support of Ukrainian separatists and rebels.

If Russia was the real target behind the US and Saudi moves to lower the price of crude oil, Russia should be angry at the US and at the Saudis.

And now, Russian military has entered the Middle East for the expressly declared purpose of protecting Syria’s President Assad from rebels within Syria.

Who knows?  Maybe that claim is true.

•  Nevertheless, I keep wondering if Russia’s real target is Saudi Arabia.

For over a year, Russia has had reason to be angry at the Saudis and the US.  If Russia could help topple the Saudi government, Russia would almost certainly cause the price of crude oil to rise—which would be good, probably great, for Russia.

More, the Saudi’s decision back about A.D. 1971 to sell their crude oil for only US fiat dollars was the cornerstone for the fiat dollar being valued at the world’s “petro currency” and World Reserve Currency.  If something were to happen to destabilize or destroy the Saudi government, the US dollar would lose much of whatever remains of its value as the “petro-dollar” and World Reserve Currency.  The US financial system and economy would suffer serious declines if the dollar were separated from Saudi support.

Thus, it seems likely that, given any sort of opportunity and viable pretext to openly or covertly strike and/or topple the Saudi government, Russia would happily do so.

Helping Syria’s President Assad is Russia’s current justification for placing military in the Middle East.  But I suspect that Russia’s real objective is to punish Saudi Arabia for helping to attack last year’s price for Russian crude oil.

If the Saudis started the crude oil price decline last year, they could stop (or at least slow) that decline today.  Instead, they are choosing to continue to suppress the global price of crude oil.

Insofar as the Saudi’s  continue to push oil prices even lower, they’re continuing to bait the bear.  That’s a dangerous game.  No one should be surprised if the bear reacts violently.  No one should be surprised if serious pressure is brought to “bear” on the Saudis.  No one should be surprised if Saudi Arabia–a fabulously rich but inherently weak and unstable nation–is pushed into oblivion in the next two or three years.