[Originally published in the Herald of Randolph]
In the most recent OPEC session, the Saudis pushed very hard for approval to raise the output of crude oil. They were rejected by a majority of the membership.
Such a rise would likely have pushed the price of oil down to the $75 dollar per barrel range, which would have been a boon to all of the countries now trying to deal with the ongoing recession, most emphatically including the United States.
At the same time, you may have noticed that the Saudis are anything but pleased with what they consider to be America’s ill-advised new policy of supporting the Arab Spring. They are particularly displeased with our support of the Egyptian rebellion.
Why then, would the Saudis want to do something that would be pleasing to the United States, like trying to put some sort of cap on the ever-rising price of crude? Don’t be confused about this, their decision had very little to do with the Unites States or with international politics. It had to do primarily with their own internal economic situation.
Saudi Arabia has one of the world’s largest oil reserves. It has very little else going for it economically. As long as its reserves last, which is estimated to be around 75 years, Saudi Arabia will stay economically healthy. But it must keep the rest of the world comfortable and happy with the price of crude oil.
If that price goes too high, the consumer countries, which include the most technically advanced and innovative countries in the world, will start looking for alternative sources of energy. If they can’t easily find them, they will look to create or invent them. In the end, one or more of those countries will find energy sources that are close enough in price to crude and politically far more stable than the crude oil energy offered by what are, arguably, among the most unstable countries in the world. That would be bad news for Saudi Arabia.
This internal economic reality runs headlong into political reality in OPEC where Saudi interests are in keeping customers by maintaining reasonable prices. Unfortunately for the Saudis (and the world’s leading consumer – the United States), this view is not shared by that majority of OPEC members who do not have the oil reserves required for them to have a truly long-term policy on crude.
In fact, such producers, most of whom simply cannot significantly raise the output of their product because they have neither the reserves nor the facilities, want to avoid a drop in the price of crude at all costs. A drop from today’s price of $100 per barrel to the Saudi’s hope for $75 per barrel would mean a cut of 25% in the income of those countries from oil.
A perfect example of this dilemma is in Algeria, where a cut of 20% in income from crude oil sales would result in a 10-15% drop in their overall GDP! That is a massive economic blow to a country like Algeria. Because so many of these low-volume OPEC oil producers are countries that do not enjoy the benefits of either affluence or real self-determination, GDP cuts in that range are highly destabilizing and thus to be avoided at all costs.
Iran, Iraq, Kuwait, the UAE, Libya, Nigeria, Ecuador, Qatar, Venezuela and Angola, for example, are 10 of today’s 12 OPEC member states. Most of those states are far more interested in the income produced by crude today than they are in crude produced in 100 years. Thus, they represent a bloc opposed to any Saudi plans to lower the price of crude today.
However, the reality is that the Saudis are going ahead and raising production on their own by up to 13%, with the sale of the surplus going largely to China and other expanding Asian economies. The net result of this overall rise in world production will be a drop in the worldwide price of crude oil.
The lesson for Americans who consume such an outrageously large proportion of the world’s production is that we are going to run out of oil. No matter what you hear from the Oil and Gas industry in their constant barrages on television, we will be without oil far sooner than anyone realizes. If our past behavior is predictive, we will ignore this reality because we can drive, heat and cool, etc. today. We will rather stupidly wait for the inevitable Armageddon.
Imagine the misery we could avoid and the money we could make if we addressed and solved the problem of alternate forms of energy before the crude runs out!
