There have been plenty of wars where the objective is to control resources, as we all know, oil really is black gold, it brings huge wealth and power to those who control it. Here however, I want to look at things from a slightly different perspective.
I have been watching the plummeting price of oil with great interest over the last few months. This year we have seen the price drop from a high of over $105 per barrel to a low, so far, of about $81 per barrel for WTI Crude. It seems the price still has further to go before it bottoms out. There are two immediate reasons for this, the first is the global economy, it isn’t particularly robust at the moment, the second, is the fact there is a now a glut of oil. Oil production in the USA is now at the highest it’s been in decades. The world is now awash with the black stuff.
Oil as a weapon
So where does economic war come into all of this? Market share and geo-politics is the simple answer. The producers are having to battle to maintain their market share in this time of abundance and falling prices. OPEC, led by Saudi Arabia, has decided for the time being not to cut production as a way of pushing up prices. It appears it is happy to let the price fall rather than risk losing customers, add to this the fact that its cost of production, for the moment, is the lowest of all the oil producing nations. It can afford to see the price fall for a while as a way of squeezing other producers.
The boom in Fracking in the USA doesn’t come cheaply. Evironmental concerns aside, it costs a fortune to produce oil this way. The vast majority of Fracking companies are taking on huge amounts of debt, billions of Dollars, to finance their operations. As the global price of oil falls the pressure is being increased. If the price of oil remains this low for any period of time then it would appear many of these companies could become bankrupt. Could it be the next big bail-out in the USA will be for these companies? Will taxpayers be expected to take another hit as they did when the banks were given their money for free? I wrote in more detail about the economics of Fracking in the article, Fracking a Ponzi scheme?
The US government might decide helping them to keep producing and building energy independence is a price worth paying as it wants to see Russia’s Vladimir Putin suffer. For sure, current prices are now below breakeven costs for Russian oil. With sanctions now biting in Russia, it is more than ever dependent on oil revenues to prop up its system. It is developing closer ties with China to aid economic development, but there too its economy is slowing. If anything China will be the senior partner in that relationship, its economy is so much bigger and can dictate the terms. Russia will have little choice but to go along, it needs the cash too much. Looking ahead, I don’t see Russia making any big gains out of this partnership.
What this all amounts to is economic warfare. Saudi Arabia wants prices to fall in the hope of putting severe economic pressure on those countries whose production costs are much higher, maybe forcing them to close operations so it can increase its market. The USA is happy to see prices fall because of the huge financial burden it puts on Russia, even if it could well mean a bail-out for its own Fracking industry. There is a race to the bottom going on, to see who will blink first, with the winners being able to take the spoils. If that isn’t war by other means then I don’t know what is!