Asian stock markets continued to fall today, propelled at least in part by the adverse reaction to the Saudi announcement yesterday that they would let oil prices fall to $80 a barrel. And further reports indicate that the Saudis intend to keep oil prices low enough to force a realignment of prices not just among various grades of crude, but also for intermediate and long-term substitutes.
It is critical to remember that the Saudis have no compunction about imposing costs on other nations to maximize the value of their oil resource long term and hence the power they derive from it. The 1970s oil shock produced a nasty recession in the US and most other advanced economies and gave a further impetus to inflation, which was already hard to manage and dampened growth by discouraging investment.
The current alignment of factors gives the Saudis the opportunity to make life miserable for a long list of parties they would like to discipline, including the US.
The sharp rise in the dollar means that lowering the price of oil in dollar terms is unlikely to leave the desert kingdom worse off in local currency terms. But it undermines US energy development, both fracking and development in the Bakken, as well as more development by the majors, who were regularly criticized by analysts for how much they were spending on exploration when the math didn’t pencil out well at over $100 a barrel. Countries whose oil is output is mainly heavy, sour crude, like Iran and Venezuela, find it hard to sell their oil when prices are below $100 a barrel (or at least when the dollar was weaker, but the $80 price point, even with a strong dollar, may be low enough to cause discomfort).
In other words, this is a classic case of predatory pricing: set your price low enough long enough to do real damage to competitors, and reduce their market share, not just immediately, but in the middle to long term.
Now admittedly some pet targets may not be hurt as badly as hoped. Russia will suffer more of an opportunity loss than an actual cost from the price reduction, since the ruble has fallen significantly against the dollar. The Saudis may hope to partially displace Russia as a supplier of oil to Europe (now roughly 1/3 of the total) but refineries would need to be retooled to refine the Saudi’s light crude, so it isn’t clear whether even what amounts to bargain prices will offset this cost (and readers point out that Russian crude may also produced a better mix of distillates for European use, since they are much heavier users of diesel fuel than the US).
But aside from the not-inconsiderable economic impact, the surprise Saudi step looks to be an even bigger geopolitical winner. The US and Riyadh have been at odds for over a year; the Saudis were particularly unhappy over the US failure to try to topple Assad last summer (you may recall the intensity of the Administration warmongering versus the dubious US interest; even Congress showed an unexpected amount of backbone and made its lack of support for Syrian adventurism clear). The Saudis have also long been less than happy with the US refusal to attack Iran (which is a rare case of the US acting as a responsible hegemon and curbing a putative ally with a bad case of blood lust). That unhappiness has ben compounded by the US now effectively helping the Assad regime and working in as distanced a manner as possible with Iran in targeting ISIS.
These parts of Marcy Wheeler’s analysis are spot on:
Cutting prices will make it far harder for Iraq’s Shia led government to invest in the fight against ISIL. So long as Western sanctions continue, it will destabilize Iran significantly, not only making it a lot harder for Iran to help Iraq and Syria, but also undermining the government that has chosen to deal with the US. The cuts will also destabilize Iran’s allies in Venezuela and Ecuador. Oligarchic forces have been trying to foment a coup in the former country for some time and this may well help to do so…The Saudis have been trying to undercut Russia for some time and — to the extent the ruble exchange with the dollar doesn’t shelter Russia from these changes [Update: though see Mark Adomanis on how this is hurting Russian consumers] — this price cut will hurt Russia too.
Ultimately, though, I suspect the US is just as much the target of this move as Iran and Russia are. Since the US refused to take out Assad last year and inched forward with its Iran deal, the Saudis have been worried about having Shia Iran and Iraq take over its role as the swing producer in the world, mirroring what happened in 1976 when the US replaced Iran’s Shah with the Saudis. By destabilizing the government in negotiations with the US, the price cut will make it a lot harder to achieve such a deal.
Just as importantly, the US is now a petro-state. And this price cut will make fracking (and deepwater drilling) unprofitable. We’ve been fracking largely to give ourselves some breathing room from the Saudis; cutting the price will make it far harder for us to sustain that effort (and will make some renewables uncompetitive).
To me, then, this move looks like part of an effort to force the outcome the Saudis have been chasing for a decade and even more aggressively since the Arab Spring: to paralyze Shia governments just as the chaos of ISIL threatens to remap the Middle East.
The Saudis may well claim to be supporting our fight against ISIL, but the long-term commitment to dropping oil prices, looks more like an effort to undercut it.
And as Pam Martens and Russ Martens point out in a post today, Oil Price War Throws the Fed into Crisis Mode, the Saudi move has the effect of increasing deflationary forces, which is a nightmare for the Fed and other central banks. So just as the Saudis used their oil weapon to amp up inflation in the 1970s, so they again they look to be willing to provide more firepower to another war central bankers are losing. From their article:
It was only a matter of time until the evidence became irrefutable that the only way out of a global deflation on the order of the Great Depression was to address the fact that 571 U.S. billionaires simply don’t have enough hours in the day to spend adequate money to buy enough goods that would require the restocking of shelves, create new factory orders and thereby ramp up job hiring to keep a nation of 317 million people afloat.
A nation where the top 10 percent reaps more than 50 percent of the income is doomed to end up in the quicksand of deflation, dragging down the rich along with everyone else….
A key component that has allowed both the Fed and Congress to keep from taking strong measures to address a looming deflation has been the price of crude oil. Because oil impacts everything from transportation costs that inflate the price of food and other products to the cost of an airline ticket or heating a home, the high price of this commodity has, to a degree, masked the growing deflation threat.
Now the mask has been removed. Oil prices are in freefall and an oil price war has broken out among OPEC members, raising the specter of 1986 when oil prices fell by 50 percent in just an eight month span. A serious global slowdown has effectively turned the oil cartel, OPEC, into a beggar thy neighbor band of go-it-alone dealmakers who hope to sign individual contracts with customers and grab market share before prices decline further…
In other words, a sudden, sharp drop in inflation expectations caused by an oil price war raging around the globe was not present in the Fed’s crystal ball just a month ago. But it should have been: other commodity prices have been sending up red flags for some time now…
The market has delivered epiphanies to the Fed on multiple fronts – some of them blazing with sirens – but the Fed seems to have had its head in the sand just as securely as it did heading into the 2008 crisis.
Yves again. As much as central bankers detest inflation, they fear deflation even more, particularly when debt loads are high. I differ with the Martens as to the Saudi cuts being driven by desperation; oil market analysts expected them to hold the line at $90 a barrel. But whether this move is informed opportunism or aggressively defensive is moot. It throws a massive wrench into the global geopolitical and economic equations, both of which were already looking plenty rocky.
As much as I am no fan of Riyadh, it’s hard not to admire their strategy. The Saudis look to have executed a masterstroke. They come out winners on many fronts that are critical to them and appear to at least hold their ground on others. And I have a sneaking suspicion that the neocons, who have US energy independence as one of their core assumptions, were caught flat footed by this audacious move.
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Saudis of course are run by self-interest. This will help consumers in The US while costing jobs in the energy and related sectors.
Notice, that the target is “nations”. As The US leadership has amply demonstrated through targeted sanctions of individuals, this is no longer about nations; more about individuals. Oligarchs heavily invested in the oil industry may suffer some losses if they are not diversified. The average citizen of any nation run by plutocrats and oligarchs are expendable up until a point where revolution occurs. Plutocrats and Oligarchs do not care about the average peasant as long as they maintain some semblance of control and wealth.
Something people need to incorporate into their everyday thinking when discussing such issues. No longer is this about the effect on the people who comprise a nation, but about individuals and their institutions of control – banks, corporations, etc.
‘self interest’ indeed: Countries that suffer when the oil price plummets
Oil price a which national budget breaks even from income & taxes
http://www.economist.com/blogs/graphicdetail/2014/10/daily-chart-7
The Kingdom is in the midst of a big fiscal boom as it tries to diversify its economy and improve living standards. For 2014, the Saudi Arabian government plans to spend $228 billion, up by 4.3% on last year.
Honestly, it’s hard to see this as anything but an ultimate good. The oil needs to stay in the ground. Now? Buy stock in wind gen and solar and disconnect from the middle east and be done with it.
Ah well, hope springs eternal. Having been out of work for 2 years now, a fall in prices is simply a relief. Anybody think this will lead to a change in policy toward moving the money down from the top and getting this show on the road again?
I had such hopes for the *last* crash…
It certainly is an attack on U.S. elites, with most drilling operations run entirely on debt, punishing their banks. It seems like a friendly act to us common people who’d rather have clean groundwater, lakes, and rivers.
I am all for getting our nose out of the rest of the world’s problems (many of them created by US) and taking care of our myriad problems here at home. That said, if our idiot “leaders” are bound and determined to blunder into another war, I’d much rather they bomb the hell out of Saudi Arabia (and the rest of those crappy little Sunni sheikdoms along the Persian Gulf) rather than Iran and Syria. They’ve been a pain in our ass for 40 years. In 20-20 hindsight, we should have let Saddam take Kuwait — and then helped him roll right on into Riyadh as well. Why do we keep destroying modern, secular Arab countries (Iraq, Libya, Syria) and protect the medieval religious fanatics that finance and export Wahabi terrorism to the world?? After all, bin Laden was Saudi, as supposedly were most of the 911 hijackers. Cut off the head of the snake — send all the Gulf “royals” to see Allah and get their 70 virgins! That would go a helluva long ways toward solving a lot of the world’s problems…..
Bravo! Though the head of the snake resides in Washington DC.
Not going to happen as long as they can wag the dog with their oil, with the backing of the big names in European and American oil.
Great comment, Texan. It’s interesting what we will do to control oil. Even tho’ we keep dealing with the Saudis (and there must be a good reason for that) they are looking like they don’t care about our partnership. And they seem perfidious to the max. But I wonder about their internal politix because this situation is so irrational it looks like theater. If ISIS were to actually be a legit conservative Sunni organization (which I doubt) then Saudi could be overthrown without us there to help them because those pontificating oligarchs are very naughty infidels. None of the pieces fit together right now except the price war against Russian oil and the Saudi determination to run a gas pipe thru Syria. As far as fracking here in the US goes, that bubble burst last year didn’t it (?), so what’s the point of keeping the price of oil high? This post was full of really great info. Especially the part about the Fed’s hair on fire over deflation – that is the single most interesting point in many, many days. It all makes me think there has been a tectonic shift in global politix; maybe some threshold consensus has been reached about how to slog forward thru the current mess. Some new plan?
This must be where the NSA is holding the cards.
And then Americans wonder why the rest of the world hates them.
Do yourself a favour and read Michael Scheuer’s Imperial Hubris: Why the West if Losing the War on Terror. A former CIA analyst, Scheuer argues that Americans have utterly failed to understand the nature of militant Islamism because rather than trying to engage it on its own terms they rationalize it in a way that renders it comprehensible in terms of their own preconceptions and prejudices. Hence for example they tell themselves that Islam is an atavistic religion founded on an anti-rational rejection of modernity – or as you put it, one dominated by “medieval religious fanatics”. But could there be some other more proximate reason that people like bin Laden have a bone to pick with America?
Let’s consider Scheuer’s comments on America’s foundering Afghan project:
So to summarize: after using and abusing the mujaheddin for ten years to prosecute a proxy war against their ideological enemies, the US cast them aside on the cusp of victory in order to hand the spoils to their preferred elites who had mostly spent the war in comfortable exile, if they weren’t actually supporting the Afgan communist regime.
Why do they hate us? The only possible explanation is that they are religious fanatics blinded by their hatred of modernity!
On pages 36 to 38 of Scheuer’s book you will find a cheat sheet to the numerous other grievances bin Laden and other Islamists have with the US, from sponsoring authoritarian regimes throughout the Middle East that oppress their populations, to insisting that these regimes use American-approved educational materials that promote liberal, secularist values and American interests, to waging economic war on Muslims in multiple countries through sanctions, to granting Israel a blank cheque to oppress its Palestinian population (often with weapons supplied by the US), to the brutal invasion and occupation of two Muslim countries, and much more besides (drones, anyone?). The point is that from the perspective of bin Laden and his fellow travelers they are fighting a defensive jihad to protect the Muslim Ummah (community of believers) against a sustained, remorseless assault by the United States and its allies being simultaneously prosecuted along multiple axes.
Bin Laden said exactly this in multiple public pronouncements after 9-11 – not that anyone in America was listening. The insipid “they hate us for our liberties” mantra had taken hold on the notoriously parochial American brain and it was a sacred patriotic duty to blindly uphold this bromide against every counterfactual – most especially any that cast the slightest doubt on the agreed narrative that America was a blameless victim of a savage and unprovoked attack by fanatical Islamic medievalists. Since America’s elite regards the country’s Middle East policies as non negotiable they are incapable of admitting those policies are costly failures and, like a gambler trying to reverse a losing streak by doubling down on each successive bet, they are trapped in a dynamic in which they must continuously broaden the War on
MuslimsTerror(tm) in order to maintain the illusionary hope that some future victory will redeem past failures.Why do they hate us? It is surely one of life’s great imponderables.
Excellent comment. Indeed these Islamist groups are far from “primitive” and “irrational”. ISIS is a glaring example. Their leaders are technologically proficient, well read, and patient (something lacking in the West’s dogma of the four quarter business cycle). To be honest, I have always feared the West far more than any Orientalist presentation of extremists cutting off heads and implementing draconian legal systems. We have been doing a fine job at running the entire planet into the void. Unfortunately, everything is already quite FUBAR by the West’s and their proxies hands. Doing nothing is the best option right now. Let the massive fire burn itself out.
Hint: ISIS is a US funded strawman. There is no “there” actually there. Trick or Treat!
It’s amusing how U.S. energy-independence–so beloved of Uber-patriots–is, like everything else so many of these same people claim to love about “free markets,” so vulnerable to those same supposedly free-market forces. Americans–with Obama at the lead–were going to free oursleves from the yoke of foreign petroleum product suppliers by developing our own independent sources. Now, Saudis demonstrate how, by bearing their short-term losses–can put “Paid” to that strategy. It’s getting harder and harder to avoid noticing how thoroughly the Saudis have played the U.S., over generations, for colossal suckers.
Let’s see– we’ve still got the long-ignored global climate-change threats, and, with them, world-wide terrorist insurgencies, a formerly-thought Arab-spring now turned to inglorious winter; Europe more and more the site of vicious class-driven strife between an ever-richer elite and everyone else, with, at the bottom, ever-more desperate and growing numbers of poor; we’ve now got a deadly infectious blow-back from this same rich-poor divide that threatens to invade wealth’s supposedly safe havens; and we’ve got social and political drift and disarray, leaving people–at least those who aren’t engrossed in video games’ distractions, feeling bewildered about what is happening around them and why and just how far wrong things shall go before they start seeing and feeling causes for optimism. Fortunately, the young are naturally optimistic; though they, too, are suffering under these circumstances, not least in life-ruining unemployment underemployment and dis-employent.
At some point, the prospects for rich royalty just have to take a downturn, don’t they?
The US/Saudi partnership worked wonderfully for elites in both countries – the petrodollar is the de facto global currency, and both the US and Saudis want to keep it that way. Nothing, and I mean nothing, would be better for the US and world than for the US to walk away from that relationship – but until Saudi reserves head into clear, undeniable decline, the wealthy/powerful in the US will do anything to maintain the twin levers of control of world: Saudi oil and the $ global reserve currency. A lot of the options now available to the US, Saudis, Russians etc., lead to war and/or economic mayhem. Time for some very serious thinking in Washington, Riyadh and Tel Aviv about the very real trade-offs that are going to be required to regain global stability and some semblance of peace – for the first time this century.
Playing hard-nosed power games at this point is a huge error, and will put us into a hole so deep we may never dig our way out.
What the Saudi oil price cut will allow is for Europe to make it through the winter with a modest impact on their budgets due to gas shortages caused by them trying to avoid buying Russian gas in order to try and hurt Russia. But as the powers that be are not very good at chess, just two moves ahead is the fact that all of this economies are already heading into recession, the resultant deflation should make for a particularly nasty mix over the coming months. The question is for how long can the Saudis keep this up. As for Russia, as they are already making moves to decouple from the west, and imports especially food from latin america will have a modest impact on inflation (given the transport costs should be lower), I don’t see this as having the major impact that the US and Saudis believe on Russia. There will be some pain, but overall Russia is in a far better position than every western country.
It’s an interesting revolt. The Saudi’s are still incredibly dependent on us for military technology and of course for purchasing oil. This move seems so aggressive as to potentially upset what good relations the US has with the Saudi elite. I don’t see how hurting Russia gets them any points either.
Though mind you, I won’t complain about reduced heating expenses this winter if it comes to that. See, I can think like a self-interested individual too.
Ha ha, I don’t see the Saudis using any of their military technology. They seem to have a lot of it, but still expect someone else to fight their battles for them.
My gut reaction is the Saudi actions are encouraged by the US to hurt Russia’s income from exports. Maybe there is no truth to that, but it has been done before with the USSR and I haven’t seen enough evidence to change that opinion.
News radio this morning said US and Saudis were jointly bombing IS in Syria.
Of course if my gut is right, then there would have to be articles and analysis like the ones quoted above to make it appear that it wasn’t sanctioned. Until the secret papers are uncovered 20 years from now, we may never know.
Yves,
Marcy Wheeler finally made her excellent emptywheel blog https default yesterday.
Can we hope for the same from Naked Capitalism in the very near future?
We looked into this and don’t see any meaningful advantage to reader, frankly. The mythology around https exceeds reality.
Yves,
“The mythology around https exceeds reality.”
Please look into it again. The advantages it provides to the reader:
1) The government and private entities cannot mass collect and aggregate who is merely reading your site.
2) The government and private entities cannot mass collect and aggregate who is leaving comments, along with their content.
3) The government and private entities cannot add malicious code (or just tracking code) to the pages you serve to your readers.
There is a reason pretty much all civil liberties infosec folks are pushing so hard for all news/media sites to implement https default, and have done so themselves.
There is a reason that both Edward Snowden, as well as the folks who’ve had access to the Snowden trove, have called so forcefully for a move to https default.
There is a reason the NYT chief technologist pledged to make the NYT https default by the end of 2015, and called for all other news/media sites to do the same. (The delay of big institutions like the NYT is due to challenges in integrating their multiple 3rd party ad networks into https, some of which are not compatible today.)
There is a reason Marcy, who has been covering this stuff for a looooong time moved to https default.
If you re-investigate, I feel very confident that you’ll find that your current conclusions are incorrect, as I feel very confident that you have good judgment. Too many knowledgable and reliable folks are making an utterly compelling case for the move to default https to protect readers. As always, reading Christopher Soghoian is an excellent place to start to get up to speed.
It’s not mythology. It’s not hype. It’s real. And, again, I feel very confident that if you re-investigate, you’ll fully agree that it’s real.
As I said, we have looked into this and we don’t read this the way you do. I’m sorry but that is where this stands. I’m not open to further discussion on this topic. And I must point out that those of us who produce this blog are at vastly greater risk than people who read it or comment on it.
“And I must point out that those of us who produce this blog are at vastly greater risk than people who read it or comment on it.”
Agreed! Fully agreed!
I do love the blog, and do appreciate the efforts you folks make, and the risks they entail.
“As I said, we have looked into this and we don’t read this the way you do.”
Can you very briefly describe why you don’t read this the way I, and pretty much the entire civil liberty infosec community, do? I’d really appreciate understanding your reasoning.
As always, thanks for engaging. I only continue to bring this up because I think it’s quite important, and think I have the entire reality-based community on my side. I’m trying to improve the blog, in what, as best as I can suss, is a non-crank stance.
Also, if this is not your department, please feel free to have someone else whose responsibility this is respond. I’d be happy to engage in a civil discourse, and either convince them, or learn something myself.
What about httpss (with a second S)? Nobody’s heard of it because it’s like Double Secret Probation in the movie Animal House!
Google has indicated that they will include https as a positive factor in determining search rankings.
They have made clear it is only as a minor factor. And this may be another way for Google to give higher ranking to shopping sites, which generally use https already.
It’s an absolute failure of your site and every other to not be 100% https today.
You make anyone who visits your sites susceptible to an injection attack. Just because you don’t believe in information security or OPSEC, you shouldn’t prevent your users from protecting themselves.
The costs are negligible to implement it.
Your willful ignorance of TLS/SSL encrypted traffic makes me doubt the quality of the rest of the content on your site.
This is a remarkably uninformed comment.
1) The government and private entities cannot mass collect and aggregate who is merely reading your site.
2) The government and private entities cannot mass collect and aggregate who is leaving comments, along with their content.
Both of these are true, but NC is not hermetically sealed. It lives within the reality of the commercial web. It is apparently necessary for NC, like many sites that put up content on a daily basis. o take external ads. That means every person who visits NC is automatically loading content from several third parties. . Site like this have ad containers, and they have agreements about the type of ads they use. But their level of control over all the external content loaded into the site is very limited, and so it is trivial for external agencies to do what you say. These ad containers not only contain ads, they contain user tracking code. That’s not for NC, it’s for our advertisers. Any site in a specialised market that uses an ad network is in the same position.
Additionally, even under https, it’s trivial to monitor and catalogue the readers of a site. All they need to do is put an advert on the home page! And if comments are indexed by Google, then a simple google search with well-formed queries can be enough to monitor the comments of people. What https does is makes it impossible to load a site with stuff that the site owners don’t know about and use it to track users.
3) The government and private entities cannot add malicious code (or just tracking code) to the pages you serve to your readers.
Same as above, with one addition: User behaviour is the biggest cause of problems in security. That means what counts is good security practice behind the scenes at Naked Capitalism. While that does not stop cross-site attacks, ‘man-in-the-middle’ attacks etc., as far as security is concerned, unless NC can guarantee the veracity of the entire chain of content, for then to proclaim “we are secure” would be to give you a false sense of security.
Now, Yves made a good point: there’s mythology about https. Not about the protocol itself, but about what it’s good for. There is no hidden data behind the site. It does not have have member logins. Every single piece of data that you see is visible to every single person. The key thing that’s different between http and https for the end user is that with https, the end user can know that the content has not been modified by a third party. Except, as I said above, NC’s content is modified by a third party, which in turn allows other parties to modify it. Emptywheel does not seem to have any advertising on it at all – it is therefore in complete control of every pixel. That’s what makes it easy to go https.
Any site dependent on ad revenue is pushed into this situation. Are you avoiding all sites that run ads? That’s what you need to do if you are really concerned. Sites that run https but still run ads are NOT secure. I suspect you’ve deluded yourself in a serious way about this issue, given the heatedness of your remark.
I agree with Snowden. The default for the net should be ‘highly encrypted, highly secure’. Of course it should. People should stop using Dropbox and start using box.net, stop reusing passwords and start using massive random-character passwords. We should all do more. But people should do things that make a material difference. Encrypting most of a website is pointless, and the false sense of security it generates can make things worse.
real tech guy,
Thank you for your comment. We are in far more agreement than you suspect.
(breaking into two parts to avoid moderation queue due to length)
“Sites that run https but still run ads are NOT secure. I suspect you’ve deluded yourself in a serious way about this issue, given the heatedness of your remark.”
Fully agreed! (At least on the first sentence there.)
I am well aware of the issues surrounding 3rd party ad networks in this context. Not deluded at all on the topic.
However, there is a movement stirring to develop 3rd party ad networks that either eliminate tracking, or implement better privacy policies and practices. This movement will only pick up steam over time. So there will be significant amelioration of this issue as time marches on. This is why orgs like the NYT are only pledging to move to default https by the end of 2015. I know that doesn’t change the equation right now in the least, but it’s worth noting.
“Encrypting most of a website is pointless, and the false sense of security it generates can make things worse.”
While again, I agree with much of your comment, here is the main point where we have significant disagreement.
I don’t claim that moving to default https while using current 3rd party ad networks will provide anything like ‘perfect security’. And a prominent disclaimer of the lack of ‘perfect security’ is important. See the prominently displayed Privacy Policy of The Intercept, which uses default https, for an example of this. They are making it very explicit to readers and commenters that they should not have a false sense of security. This is good and proper.
real tech guy,
Thank you for your comment. We are in far more agreement than you suspect.
(breaking into three parts to avoid moderation queue due to length)
“Sites that run https but still run ads are NOT secure. I suspect you’ve deluded yourself in a serious way about this issue, given the heatedness of your remark.”
Fully agreed! (At least on the first sentence there.)
I am well aware of the issues surrounding 3rd party ad networks in this context. Not deluded at all on the topic.
However, there is a movement stirring to develop 3rd party ad networks that either eliminate tracking, or implement better privacy policies and practices. This movement will only pick up steam over time. So there will be significant amelioration of this issue as time marches on. This is why orgs like the NYT are only pledging to move to default https by the end of 2015. I know that doesn’t change the equation right now in the least, but it’s worth noting.
It is hard to see how a 20% lower oil price is anything but good:
– U.S.business has always used a high oil price as the reason for holding off on investing. Now they have no excuse.
– But if the Fed is spooked by imminent deflation, and they can communicate that to our ostrich congress, then whacking up the per gallon levy to maintain a price support will liberate hundreds of billions of dollars for infrastructure and renewables investment. A levy that is pitched specifically as a price support can reassure that portion of our risk-driven opportunists that won’t invest unless they can see some stability in the future. Just that I don’t see that this option can be countenanced by the Confederacy of Dunces in Congress.
As for the climate, burning more Saudi oil in the short term won’t accelerate the forthcoming disaster more than, say, bringing more tarsands on-stream will.
I welcome lower fuel prices for however long it lasts . It will free up dollars for other necessities that are always climbing in price. The only thing not climbing is wages, particularly for those working in small businesses.
I wish the Saudis could take the price down to $50.00 per barrel, and throw an anvil into the plans of clueless central bankers instead of just a wrench. All economists at all central banks need to experience the unemployment line. That will give them a clue.
It is a sad day when lower prices are seen as a threat to the people.
Falling wages.
For a wage earner (that covers a lot of people in America), the real inflation is (living expenses) – (wage).
So, for example, if the house you are thinking of buy is up 10% yoy and you wage fell 15% over the same period, that’s a hyper-housing-inflation of 25% [(10%) – (-15%)] in a year.
You can do that calculation for your medical expenses, your food, etc.
The ‘usual’ inflation, that our 0.01%’s economists tell you, should include wages and you add that to your inflation calculation.
And they proclaim, with all that money creation, there is no inflation.
For the government and corporations, profit/asset inflation is not inflation, but wage inflation is THE only inflation that matters, and they publish inflation numbers according to this Government/Business-centric world view.
For the people (or most of the people), wage inflation is not inflation, but what is needed for survival, and profit/asset inflation is the real inflation. This is a heretical world view.
ISIL is the Saudis’ pet rat who lives in the crawl space under the house. It ventures out to strike terror in the neighborhood, syphoning off the more radical elements in Saudi society while it undermines Shiite regimes in the region. Chopping of heads is just one of the many things they have in common. Can they keep it from biting them while it does their dirty work? That’s what their betting on and it seems to be working.
The Saudis’ participation in the Coalition perhaps explains why the bombing is not having the desired effect.
Love the metaphor!
Agree on this point. As yet this is not a serious effort to deal with ISIS, as these ‘jihadists’ were, after all, ‘our guys’. I don’t think Obama or any other recent President would have any particular qualms about taking down their own proxies, but rather see ISIS as a still useful tool for the US/Saudis to play against Assad and even Iran further down the road a bit.
Action that hurts Iran, Venezuela, Ecuador and Russia. I’d say the obvious conclusion is that the US is behind this strategy, not a victim of it. I expect it to become clear that a deal has been cut with the Saudis promising that the ISIL attacks will be used to topple Assad. In return the Saudis reduce oil prices to hurt America’s “enemies”. Maybe one faction in Washington cares only about fracking, however the rest are having wet dreams over toppling the governments of Syria, Iran, Venezuela, Ecuador and Russia. Flatfooted neocons? I imagine they’re foaming at the mouth right now.
‘I’d say the obvious conclusion is that the US is behind this strategy, not a victim of it.’
Ditto. Absent evidence to the contrary, our baseline assumption should be that the US is acting in concert with its dismal little middle eastern client states, with Israel at the head of the line and Saudi Arabia right behind it.
If Marcy Wheeler’s thesis is true, then why wouldn’t the US release the 26-page classified addendum to the 9/11 Commission’s report, which evidently provides damning evidence of Saudi involvement in the attack?
It ain’t gonna happen, because the US and Saudi Arabia have a common vested interest in suppressing the truth.
Because you don’t do that in poker or diplomacy?
The US is not in a position to push the Saudis around, and the Saudis are mighty unhappy with the US right now.
You are operating from a dated set of assumptions.
I wouldn’t say anyone is pushing anyone around. Mutual benefit here. The Saudis get rid of Assad – possibly replaced by their clients ISIL – a major victory in the Sunni-Shia civil war and a new pipeline to Europe. Democrats get low oil prices in time for the mid-term elections. Neocons get to dream of regime change in numerous countries. The Fracking industry loses short term but may get to take over new markets, like Venezuela, soon. Plus Obama gets to make a Mission Accomplished speech after Assad falls.
Granted all that is based on the assumption of regime change in Syria. Yet no politician in the West has taken that goal off the table. In fact, they continue to insist it is the #1 goal. Therefore bombing ISIL should be seen as an avenue to bomb Syria, ultimately Assad. Exactly what the Saudis want! Do you really think the assumption is dated?
Seeing that Washington politicians are bought and the House of Saud has as much money as anyone, the two governments are kind of joined at the hip. At least until the day comes when the Saudis decide to defect from the petrodollar to their fellow Asians, the ones with all the gold.
Could not agree more, Eoin. I’m not sure where some people get the idea that this will hurt the US. It may hurt North Dakota, but the US as a whole is still a net importer and will be for a long time to come. This will also help Europe and Japan, while hurting the other major oil producers, such as Iran, Iraq and Russia. That seems to be KSA’s principal goal here. I’m sure this is related to their desire to overthrow the Syrian government. Russia and Iran are Syria’s biggest allies.
Did you miss the discussion of deflation risk? And the energy boom is one of the few drivers of what passes for growth in the US.
America’s whole energy strategy was built on three pillars: 1) incredibly cheap money; 2) very high global oil prices; 3) the Republicans and Democrats agreeing to dump any commitment to what used to go under the rubric of Ecology. America controlled (more or less) 1 and 3, but the Saudis have shown that they can influence 2. The edifice was a house of cards to begin with, predicated on a set of conditions that were deleterious to the economy (and society) at large. It is part and parcel of an elite that cannot see how A influences B and leads to C. Everything is compartmentalized and nothing viewed holistically. And, everywhere the elites imagine that they are in control and can game any situation to their advantage. Well, the world is spectacularly out of control. Sad to say the elites will flounder and fuck up rather than face their own limitations and try to work towards some end beyond their own immediate selfish gain.
This analysis puts a different spin on the one I assumed previously as to why the Saudis are lowering oil prices, namely to hurt Russia at Obama’s request. This still may be true, however, as this is not necessarily at odds.
Here are two articles with interesting views and relevant actions in response to the Saudi oil actions. Please note this source does not provided the backup and for it’s articles as is done here at NC, and it clearly has it’s own agenda and seems to be RT sympathetic, so take if for what is it worth. But very interesting IMO.
http://www.sott.net/article/287172-Russia-responds-to-US-Saudi-oil-market-manipulation-by-dumping-dollars-to-protect-currency-and-falling-oil-prices
And
http://www.sott.net/article/287236-Iran-and-Russia-to-establish-joint-bank-for-bilateral-trade-and-to-bypass-sanctions
The Saudis want to hurt the Russians all on their own for giving Obama a graceful exit out of his plan to attack Syria. They don’t need US goading.
Thanks for this thought-provoking analysis. I would add a couple of footnotes that relate to some elements in the situation that could be interpreted differently. I don’t know that these alternative interpretations are any better than yours, but FWIW will bat them up for the commentariat.
1) Gasoline at $3.25 and dropping is a huge gift to the incumbents in the run-up to a US election. You put this together with the obvious pressure from declining oil on non-friends of the US government – the Russians, Iranians and Venezuelans, for starters – and you have to wonder whether there has been a package of quid’s and quo’s worked out between Washington and Riyadh, with the Saudis to get their payoff at some time in the future.
2) You could account for the data equally well by seeing it as nothing more than a pre-emptive jacking up by the Saudis of the rest of the cartel. i.e. there will have to be production cuts, especially if the Iranian sanctions are lifted, and the Saudis are unwilling to do more than what they see as their share. Both the Iranians and the Iraqis have claimed that they face special situations that should exempt them from any requirement to constrain their volume. So the Saudis will let them think this over for as long as they want, in the context of $80 crude. My guess is that the Iranians and Iraqis will cave by Christmas.
Very interesting piece. I particularly liked reading in the Martens’s piece the explicit link between wealth concentration at the the top and the failure of the Fed’s policy model. Maybe someday the brain trust at the Fed will notice this.
I see two possible situations:
1) It will not really hurt other producers. Just because Saudi Arabia lowers prices does not mean that other producers have to lower theirs. If SA lowers prices AND increases volume it would have this impact. For example, if the world were buying 200 barrels and SA were selling 100 barrels. The world would still need to buy the remaining 100 barrels from the other producers at the prices they were selling them.
2) Saudis are lowering their price due to the fact that there is much lower demand due to a hurting economy. Their announcement has less to do with hurting competitors than it does about the market realities. If this is the case, all producers will need to lower their prices and will be hurt.
I’m not sure you understand the economics of the thing, Armchair.
KSA plans to lower prices by increasing the volume it pumps. In economics, whenever you increase supply, that automatically has a tendency to lower the price. The only thing that could foil their plan would be a massive (and very unexpected) increase in demand at the same time. Since KSA has larger reserves than most other suppliers, and a much smaller population to support, they can afford to undercut their competitors for quite a while. This is exactly what they did back in the 80’s to weaken Iran, when the Iranians started whipping up on Iraq too badly.
Increasing volume is not required to lower prices. If the goal is to impact the price that other countries receive, they will need to. It remains to be seen if they will or even can raise volume.
The oil price crash, fueled by this decision by the Saudis, may achieve political objectives, but at the same time it might be viewed as the inevitable result of a chain of events caused by other nations and policies. I think the alternate cause-effect chain goes like this: sovereigns desire greater economic growth by directing central banks to loosen monetary policy; easy money creates asset bubbles, which effectively act as price supports for commodities; the higher price of commodities in the asset bubbles, as a tangent, has the wrong effect of increasing consumer prices and suppressing wages; the higher price of commodities in the asset bubbles send the wrong signal to markets and producers increase production of the commodities; ramp up of production takes five years, on average; facing diminishing returns, producers start a price war to make up profits through increasing market share, as the Saudis are doing; one result of the price war, as a tangent, is relief or stimulus to the consumers of the commodities; mainly, the price war leads to the bankruptcy of smaller producers of the commodities, and their assets are bought up at low cost by the largest producers; consolidation of producers results in markets controlled by remaining producers in the form of a cartel; the final result is the cartel pursues rent-seeking activities, firmly in control of the supply of the products. Using this reasoning, it is possible to predict other price crashes, besides oil. After oil, perhaps next we could expect a price war to break out among producers of automobiles. I think the basic point is learning that monetary stimulus policies have consequences, and the consequences may neither be intended nor pleasant.
I don’t see this as deflation in importing countries. The US is still a big importer, and the EU is still, collectively, a huge importer – so this is overall good for the US and especially the EU at a time when they need it. The US dollar getting stronger should further cement this.
For exporters like Iran and Venezuela is this causing major currency devaluation as well? Even if not, they are still losing a lot of purchasing power.
The dollar strengthening is also deflationary…..aieee….
What Yves said. A stronger dollar will increase our trade deficit and put downward pressure on employment.
Sounds like https://en.m.wikipedia.org/wiki/Quid_pro_quo between USA and Saudi Arabia
The Economist has put together an excellent and timely chart on some of the key oil producers. Iran, Venezuela, Nigeria and Russia are clearly in trouble. Iran, Venezuela and Nigeria can expect some serious pain, if not already.
That’s interesting, thanks for the link.
However, I’d rather see current account surpluses/deficits. The MMT crowd here knows that budget deficits aren’t a real problem, but trade/current account deficits can trash your currency, if you don’t have enough reserves and a willingness to use them to defend it, causing imported inflation. That’s the real pain point.
Isn’t Israel presently trying to break into the energy production biz? Don’t they have gas fields coming on-line? Won’t this screw them, too? Maybe that will be the eventual resolution – Israel bombing Saudi refineries to “force” a price increase. Or perhaps Israel will just attack Iran thus starting a massive PersianGulf war.
Gas and oil are not so fungible. The whole game of regime change in Syria is because Assad is holding out on the KSA-Qatar-Europe gas pipeline planned to cross Syria, which has been in the works for a while. Oil is another matter entirely — and it’s my understanding that KSA’s discounts aren’t for European customers (now how the hell that is supposed to work out *against* Russia, I do not understand).
Also, it’s my understanding that most of “Israel”‘s gas reserves are rightly Gaza’s, which, in combination with the recent pushes against the occupied territories, rather supports their own potential interest in a pipeline.
In the longer-than-medium run, this Saudi action could be a good thing. If it bankrupts and shuts down for good a lot of oil production “elsewhere” and then allows Saudi Arabia to re-price its still-pumping oil to $200 or $1,000 or whatever their little hearts desire; the combination of less oil available to burn with less economic activity seeking to burn oil anyway will lead to lowered carbon skydumping from burning oil. It will have a better global dewarming effect than any policy or agreement.
Watching and hearing seemingly endless RR tanker cars filled with Bakken crude roll through the small town where I spent the weekend, and contemplating fracking-related issues at the wellhead, I’m also thinking that this isn’t a damaging development.
Would be interesting to know the scope of the Israelis’ agreement with the Saudis.
As far as I can tell, the only possible snag in KSA’s plan would be China. China is one of the world’s largest oil importers and it imports virtually all it consumes, so this should an economic godsend for Beijing. I just read an article stating that the Chinese have agreed to a massive currency swap to help the Russians stabilize the ruble. What if they also decide to shower some largess on Iran and Syria, too? The PRC is already Iran’s principal sponsor, though they have previously not had much to do with Syria. What if that changes?
A very good point.
I mentioned it also yesterday – time for China to add to her Strategic Petroleum Reserve, instead of holding US Treasuries.
Yves, What strong measures? ” A key component that has allowed both the Fed and Congress to keep from taking strong measures to address a looming deflation has been the price of crude oil.” I was under the impression the fed was out of tools ? and congress is up for re-election! If debt becomes more expensive , dollar strength and interest rates on national debt rise? This very well may be the monkey wrench , that unforseen happening causing the rates to jump! yes? “trade wars can lead to fighting wars”
The economy is slack and the Fed is missing its inflation targets. A lot more fiscal spending is what is needed, but Obama is too much of a Republican to push for that.
I wonder how much of this could be due to some drying up of hot/easy speculation money. There has apparently been much more of this money in these commodity markets than valid hedges. Surely people can make productive use of lower commodity prices. And surely this speculative money could be redirected toward labor and capital investment, health, education.
As noted in my prior comments on the 2 previous articles posted by Yves on the fall in oil prices, I urge great, great caution when it comes to buying into the idea that the US/Saudi relationship has been damaged as badly as is presumed here and elsewhere. There are a complex of factors at play, the most important being the slowdown in China, which could be massaged by ‘markets’ and media so long as QE flooded the system. But China inexorably slowed, taking a raft of commodity speculation and commodity-based lending in China with it. China’s slowing nullified Abenomics, slowing Japan and other key Chinese trading partners, while the sanctions against Russia have virtually assured another European meltdown. Cap that with the end of QE in the US, the lost of faith in QE everywhere but on Wall Street, and the growing sense of alarm that the overall global situation was spinning out of hand, and the makings for a market and oil crash were already at hand absent any move by the Saudis.
I don’t think the US is being forced to do anything. I think the Saudis have the US exactly where the US wants to be vis a vis Assad (he will be ousted) and ultimately, Iran/Russia – and Wall Street more than happy to except some more QE to ‘be on the safe side’. Right.
That does not mean there cannot be another huge miscalculation, as with the entire US misadventure in Ukraine, but I will state again my belief that we are headed over a much larger cliff than is generally believed if the US doesn’t stop aggressively de-stabilizing so many areas of the globe at once – and embraces a path to resolve the deliberately ignited Sunni/Shia split (meaning Israel must get on board) and the frankly idiotic ‘war’ on Putin.
Israel isn’t going to get on board. Their government is controlled by extremists, too. Drunk with their power over our politicians.
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I appreciate your comments, Fiver.
And I yours.
Too true, but such is the end behavior of empires.
With friends like the Saudis, who needs enemies?
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“The Prize” is a fantastic book on the subject. Straight up info with an almost unimaginable apolitical presentation considering the issues discussed. After reading it one will have a difficult time not pointing a finger of guilt squarely at the USA and Great Britain (though many Western European countries were involved as well). We can complain about the idiocy of middle eastern governance all day, but the West has willed it as such, and we continue to do so.
The Saudis’ own spending programmes definitely require a price well over $80/barrel, over anything but a short term. Low oil prices would undermine the Saudi regime’s ability to buy domestic political support.
If the Saudis are price-cutting, that means their government is performing on behalf of allies, or under pressure from its protectors.
My guess would be that the USA is pressuring the Saudis to ramp up pressure on Russia.
And yet, Putin and Poroshenko discussing restoring peace to east Ukraine (whatever that means), US and Russia to share ISIL intelligence… I haven’t seen any pink elephants yet so I’m assuming I’m not intoxicated…
Correcting for unintended consequences, mollifying Teh Market, setting up Putin to be the patsy for some plan that hasn’t yet revealed, the US flipping the bird right back at KSA… there are so many potential angles and counter-angles. Which one could it be?
China is a beneficiary. Canada is the collateral damage.
However, if the West gets its desired regime change in Russia or Iran, then China suffers the loss of some geo-strategic oil import security. Once all oil exporters are made subject to the Western Bloc, China can be brought to heel at whim.
If by collateral damage you mean this could shut down the tar sands industry, wouldn’t that make Greater Canada a co-beneficiary? In terms of saving its land/air/water/fish/game/etc. for a viable future? As well as skydumping less carbon?
Only Albertastani Tarsandistan would be “collateral damage”.
You’d have to go back to the Fur Trade to find a time when the Canadian economy as a whole (not just Alberta) was so dependent on the export of a narrow range of raw commodities.
A hit to Canada’s energy exports is big trouble for Canada. Tar sands, LNG, and a housing bubble basically constitute the only strong sectors in the Canadian economy. Tar sands also contribute a disproportionately large share of both provincial and federal revenues.
To the extent that the export losses cause a drop in the Canadian dollar, it will relieve some of the pressure on whatever’s left of Canada’s mfg. sector.
It was always stupid to allow Canada’s economy to become over-dependent on raw material exports. But that’s the globalists’ wonderful plan for Canada’s future. In the zoning scheme of the neoliberal world, Canada mines tar and pumps water.
Insofar as the last number of years unconventional oil both land and sea has been fed into the global market, it is this sector that has high expense and less to profit….while Saudi oil has low expense to bring it out to market. The Canadian oil sands has high expense and if the barrel reaches $80 and lower, there will be cessation of continuing to operate many sources and probably 25% reduction for a number of years.
How can this be true when they were selling it it in the year 2000 for $30 (in 2010 $)? Did they exhaust all their cheap reserves in a ten year period?
Google image for “oil price history” and you’ll pull up charts showing that $80 is well higher than the oil shock prices of the 1970’s. These countries should be rolling in dough.
So– what have we learned? I’d say that the upshot from the thread’s best insights is that
A.) in the mid-terms just ahead, phony Democrats should be shunned and left to lose their (incumbent) seats (or their (new first-time challenger) bids for a seat) to their near-clones, the Republicans; though it’s extremely hard to teach the bubble-dwelling political class a lesson in anything, this is about as close to “teachin’ ’em a lesson” as the crooked-casino politico-economy allows–short of open insurrection, of course.
B.) Just as others around the world ought to do, don’t join actively in any present or future war as a member of the official armed forces of your country. Instead, abstain, refuse to join, or, if a member and you possibly can, refuse to serve or to be deployed. That, of course, is an act of rare courage and few can reach that far. But the main point is simple: in a world carreening toward ever-greater heights of chaotic violence, refuse to participate in the spreading violence of warfare–of whatever sort, declared or not.
C.) The daily realities of many are already extremely harsh and, if the words and deeds of most of the various European heads of state are any indicator, there is more hardship to come from their intended policies. So, if and when the most privileged and pampered reach the point where they and their elected servants, the political class, need and ask for the public’s help and cooperation, those demands should be promptly met by counter-demands spelling out clearly as preconditions some costs to those privileged attached without which, as the song says, “it’s ‘no dice’.”