We have seen oil drop some seventy percent over the span of a year and a half roughly. The question that everyone wants answered is
what does this imply going forward? What exactly does this mean?
There are today many theories about why oil prices dropped so precipitously and these must be asked and answered as best we can always subject to the limitations of the human organism. However a precise cause is not going to be possible even ideally. There are too many inherent difficulties in answering the question, just as there is too much going on in the Middle East and Europe to know “precisely” what is going on at any moment. There are too many variables and processes at play, and too many of these are hidden and can only be approximated. And the testimony is always subject to corruption.
The price of oil is not being caused by any one factor in itself. This is certain. Especially now that it has already gathered downward momentum.
For example: We can see now that Oil is on a severe downward trend but what we might fail to understand is that once this happens it will gather momentum. There will therefore be reasons for it to continue once started.
More Debt, Cheaper Oil, More Oil must be Sold
One such reason is the enormous amount of debt that is carried by all the players. There is no nation, or supplier of oil that is not in some way obliged to some amount of debt. Whether this is Saudi Arabia, or the wild catters trying to frack their way to riches in the United States, all of those in between have debts, obligations and commitments.
What this means is that as payments must be made, obligations kept viable, and social commitments fulfilled (Saudi Arabia, Venezuela for example) a certain amount of cash is needed. As the price of oil spirals downward, these players have to sell more oil to make their payments. And so the spiral continues. If you have to sell five barrels of oil to make your payment today as opposed to one barrel you had to sell yesterday, that will prompt you to sell cheaply and quickly..but it also means that you will have to keep doing that if everyone else is doing the same. All the while it costs more to extract five barrels than it does to extract one.
So this is a particular reason why the present trend in oil price is continuing and may continue.
Stagnating Global Economy
Another reason too may be that there is some perception of a stagnating global economy. This too adds to the problem. However, this is the least “real” of causes since in reality oil consumption has not really dropped all that much over the past few years for all the problems with the economy. As more people all over the world have access to cheap automobiles, the consumption of oil increases. So demand drop is not likely a chief cause in itself.
However, there is no doubt that supply and anticipation of demand was one of the chief causes of the present down turn in the price of oil. In general this can be attributed to loose credit. An overabundance of credit made it possible to oversupply the market with oil and resources, and at the same time gave the impression that demand would be far greater than it is today. It was assumed the global economy would expand much more rapidly but of course it did not. Thus the oversupply of credit caused the overproduction of commodities. And so this too was a force against the price of oil. Even as we have already made it clear that debt obligations are now causing the rapid, and cheap sale of oil all over the globe.
Strategic reasons for oil price drop
Yet for all this, the chief catalyst for the tremendous price drop may have been strategic. It may have in fact been an act of war.
The United States, Israel and the United Kingdom are in some difficult circumstances at this time. They have realized that Russia with its military prowess and present attitude can become a serious strategic concern going forward. They realize too that the Russians, probably in control of a vast amount of oil in 6.5 million square miles of territory would be subject to compromise only if the price of oil is firmly under control. With the events in Syria, which we have discussed before, and the strategic considerations of Europe it probably became necessary to control the price of oil by any means necessary.
Russia being a natural bridge between Europe and Asia(two very productive spheres in need of resources), and especially with the possibility of Turkey joining the European Union, and thus having the United States lose a substantial amount of control over the nation and mid east region would imply serious dangers to strategic objectives of the present establishment. The Russians refusal to allow the fall of Syria and Iran made it clear that manipulating the price of oil might be the only way to persuade the Russians to submit. However, for various reasons this is not likely possible since the Russians themselves now sense an existential threat from the present U.S. stratagem anyway. It is likely that China itself is on the same strategic page as Russia, and the United States would most desire to keep such a confrontation with both powers at once from happening.
Therefore something to weaken Russia, and appease the Chinese was needed.
The way of doing this was to supply the world with oil from difficult fracking operations temporarily, since this is not a sustainable source of oil in all probability, and by having OPEC continue to oversupply oil even as prices were falling. These actions in addition to some market manipulation.
Supplying cheap oil killed a number of birds with one stone. It might help to keep the world’s demand from sinking at once, at least the retail end, it might appease china with cheap resources, and would help to fend off the challenges of Russia, Iran, and Venezuela.
Nor should the fact that the Saudis continue to pump oil be taken as an act of “free will” for most likely it is not. We must remember that for oil to stay cheap at this level of oversupply not only the Saudis, but the Kuwaitis, Iraqis, Qatar, the UAE, as well as the American Fracking industry all need to keep pumping at max levels. It is not an act of free will but some particular command and manipulation that initiated this behavior.
Nor is it a matter of market share so much. The United States and its allies continue to control the fate of the Saudi Kingdom, as well as all the others mentioned. These kingdoms in particular are at the complete mercy of the United States and this should be quite clear. Its amusing to think that even Al Qada could probably be commissioned to overthrow these kingdoms if need be. Simply put, these “Royals” have few friends either within their kingdoms, or without. This would lead us to believe that they will accommodate whatever policy the United States and its allies want them to accommodate or face very dangerous repercussions. There is too much complexity here to go into all this in detail, but suffice it to say that Iran is not the only threat to the Sunni Kingdoms.
The recent understanding between the U.S. and Iran was probably necessary. It should not go unnoticed that the Russians really did not have to do all that much to supply the Iranians with ready made nuclear bombs if push came to shove(as China did with N Korea?) Of course the Russians would have preferred not to, but the threat of this is quite obvious. If for example nukes were delivered to Iran, the United States and its allies could not counter by arming their own particular allies in the region since arming Turkey, or the kingdoms would not be acceptable or strategically sound. Thus there was no real alternative to the Iran deal save but get what could be gotten out of it at the bargaining table. The United States sought some inroads to Iran since there would be absolutely no way to defeat them militarily without actually using nuclear weapons, and that was not possible. So the “deal” with Iran was a necessary deal so as to avoid a much worse escalation.
Israel and Iran
However, this was not particularly advantageous to Israel, nor was Iran suddenly our friend. What Israel would most desire is the dissolution of Iran. But this was not to be, and the attempt to dissolve Iran could well lead to a cataclysm. It goes without question that the Russians would not allow a complete domination of the Mid East by the United States and its allies since this would compromise their relations with Europe. So things being as they were, the oil strategic option could be used to lessen Iran’s future growth by putting a limit on the price of the oil Iran would produce. It might also add some financial leverage as Iran might once more be open to some western credit, and this too might be a sub-plot in all this.
Most likely Israel understood all this from the start, but since Israel’s existence depends more than anything on its public relations with the U.S. and Europe, the counter position of dissent was publicly pursued so as to salvage something out of a difficult, and distasteful reality. For the time being at least, it seemed that an Iranian “deal” would be the only thing available.
But the problem still remained. A stronger Russia, stronger Iran, Syria and Venezuela, and possible Bric cooperation was not what the allies desired, or were willing to accept.
It is most likely this thinking that led to the initial diffusion of oil prices, and once started would continue.
However, this has had domestic consequences. The oil industry, actually the most powerful industry in the United States is in this way compromised. Fracking, for better or worse was the strongest of all economic sectors. Taking it away, would have domestic economic consequences, as well as political consequences. But it is again likely that Obama, and Democratic party would welcome some cooling of the rights power. We can take the Keystone pipeline resolution by the Obama administration and supporters as some indication of their intention to keep the oil industry in check.
In any case, once the weakening began, it simply gathered steam downhill. Prices collapsed and will probably stay collapsed.
The reason for thinking that prices will stay low(though oil is in fact a scarce commodity and should not be selling for 30 dollars a barrel) is that any sudden rise of oil prices will almost certainly burden the world’s economy and immediately result in a collapse of actual consumption. Thus the way back up the hill is going to be much harder than the way down was to be. Moreover, there is a very serious possiblity for a complete collapse of prices, and industry. Should commodities rise in price, the natural economy will react in kind and most likely(again a matter of some probability only) any benefits from increased cash flow in resource rich nations is not going to be enough to restart the economy, especially with the terrible burdens the natural economy faces beyond this particular issue. Debts, war, and inefficiency are all by themselves enough to depress the economy till some critical point is reached from which growth can occur naturally; what that point is however, would be difficult to estimate- assuming it even exists. Oscillatory reactions towards some temporary positive growth may be possible, but these would be minimal and temporary. The trend is downwards.
With all this said however, the problems in the Mid East are obvious. We are in fact on the outskirts of the third world war. The problems in the Mid East are many, the encounters many, and little of this is reaching the American population in earnest. There are few if any possible solutions, and so economic warfare will most likely remain as the only possible way to control the emergence of an outright war.
If there is a silver lining to economic degeneration it may be that there is so little money left that waging major global wars may not be economically feasible to the major powers after all.
A post script is needed here:
The Free Market
To some this may sound like a conspiracy theory, but some caution in judgement is required also. The United States is an open democracy to those who have the power, will and money to administer it. There is a mind here at work, and it should not be assumed that this mind will not use all available tools at its disposal.
Yet it is true, that there are many factors, and many objectives intertwining all the time. But those who think that the “free market” is autonomous are very likely misinformed and misguided. The “free market” is subject to brute force, coercion and manipulation as it is now in existence.
All subject to probability
All that is said here is subject to probability. So much is true of all human interpretation on all subjects. We can never know the handshakes, winks, and various silent agreements posited and actualized. Nor can we ever be certain of the testament that assures us these occurred at all. All we really have is what we see before us, and this cannot easily be covered or altered by mere testimony.