The price of oil

The current price of crude oil at less than $35 a barrel is a major factor in current world politics, particularly in the Middle East.  From a high of over $110 a barrel it has lost 70% of its value in the past 6 months.  The main causes for this have been two-fold, the extra sources of oil from the US and Canada, particularly the exploitation of shale oil, that has added to the glut from the usual sources.  The second reason is that Saudi Arabia, that was experiencing a gradual loss of market share, decided to start overproducing so as to flood the market and undercut the cost of both the production of shale oil and alternative methods of energy production, such as solar, wind and wave.  But, they may not have anticipated the very sharp and continuing drop in price, which means that both their income and that of other oil-producing countries has experienced a sharp decline.

This has produced a strange phenomenon, not seen before for many years, namely that a crisis between two major Muslim oil-producing countries, Saudi Arabia and Iran, that straddle the Persian Gulf through which a huge percentage of the world’s oil flows, has not had any significant effect on the price of oil.  Instead of sharply increasing as it has done before under such circumstances, the price has continued to drop.  Does this mean that the Arab oil weapon is definitively a thing of the past?   I think the answer is yes.  It is very unlikely, given the gradual development of alternative methods, the current glut of oil in the world and the sources of oil in N. America, that the Arabs can ever use oil as a weapon to blackmail the West ever again.  This is certainly a great advantage for Israel, that now also has huge deposits of oil and natural gas from major wells in the Mediterranean off Haifa.

According to the agreement between the US and its allies and Iran, the sanctions against Iran are supposed to be lifted soon in response to the Iranians stopping the development of their nuclear weapons program (that they deny having).  Iran was expected to immediately begin to sell its oil, to receive much need financial income to support their failing economy.  But, now with the price of oil so low, they will have a hard time earning enough money.  It might even be that this was a long-term plan of the Saudis to lower the price of oil to undercut the economic recovery of Iran.  Whether or not that is true, we in Israel and the West can in effect celebrate our delivery from the Arab oil weapon.

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One thought on “The price of oil

  1. This was a very interesting article, Jack, and paints a welcome and more optimistic scenario. I certainly appreciate your helping me understand the complicated events and dynamics that impinge on us. Thank you. Sharon Bacher

    Like

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