Saudi Arabia Did Not Just Wave the White Flag

This is the problem with not making it into the office until 7am. I missed this little nugget from Seeking Alpha, in which it was intimated that the oil price was going to shoot up because the Saudi Arabian ministers signaled their desire to continue to “cooperate” with OPEC and non-OPEC members to support the price of crude oil.

By the time I made it in to start posting for you dear reader (thanks, Jimmy, for following!), the markets already decided increasing the price of oil based on this non-statement was inane.

You see, cooperation, as defined by Google, is the “process of working together to the same end.” The issue we have here is that Saudi Arabia is the only member of OPEC who is willing to compromise… Meaning that, historically speaking, the production coming out of OPEC has varied by the amount of oil that Saudi Arabia was willing to not produce to support the price. When you see people posting about the Saudis being the “swing producer” for the world, this is what they’re talking about.

Meanwhile, in recent developments, the Saudis have become understandably tired with this arrangement. Member countries like Venezuela, whose politics – let’s say – do not mirror those of the Saudi royal family, have gotten rich by breaking quotas and making additional money on the oil price the Saudis supported. Late last year, Saudi Arabia thus sent a message to world markets, as well as to other members of OPEC, by saying that the leash was now off… No longer would they thin their own wallets so that other countries (and private organizations) could make a killing in the world market by taking Saudi market share. Instead, they would maximize their own production and let the vagaries of supply and demand dictate the world oil price.

Lest you think that this strategy has never been tried before, these actions are exactly what the Rockefellers did during their own oil wars in the United States – calling it a “good sweating” of the market. If you think the Saudis do not understand how effective that strategy was for Standard Oil, you’re kidding yourself. (The Saudis in particular are good students of American history… OPEC, after all, is based on the Texas oil regulator, the Texas Railroad Commission – a topic which I intend to revisit in another post.)

So, when you see quotes like these from ministers like Eulogio Del Pino from Venezuela, do not read too much into the statements made… He says “OPEC has to do something very soon…” What he means is that Saudi Arabia (not OPEC) needs to come to the rescue to help balance the books of a rapidly destabilizing, near communistic oligarchy. The way Saudi Arabia needs to do this is to curtail its own production, so that Venezuela can start realizing better prices on the market for its own oil, the production of which Venezuela has literally no intention of slowing itself.

Hence, there is no cooperation on the table for Saudi Arabia. The Saudis would happily accept a proposal for multi-lateral production quotas somewhere less than they are now… If history has shown anything, however, it is that these will not be forthcoming. The market quickly realized the same thing, which is why the price of oil (as of the time of this post) is already down almost 1%.

One last thing… referring back to the statements made by Del Pino. He also discusses how he feels that the price of $88/bbl of oil would be better for world consumers and his personal concern that a price lower than that is bad for consumers! How MAGNANIMOUS! I do not remember seeing such quotes from Mr. Del Pino or anyone else about the destructive prices of oil when it was $147/bbl… He must have just now discovered how prices affect we poor consumers. Either that, or his statements are disingenuous pleadings from someone who desperately needs to see a price rise in the market. One of those. (I was going to call it bull%$#@, but this is a family column, after all.)

This entry was posted in Economics, Foreign Policy, Oil & Gas, Oil Prices, Public Affairs, Uncategorized and tagged , , , . Bookmark the permalink.

2 Responses to Saudi Arabia Did Not Just Wave the White Flag

  1. Nilda says:

    Great topic and well written. Do you have any more resources about this that you reccommend?


  2. Elena says:

    Great topic and well written. Do you have any more resources about this that you reccommend?


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