There has been a lot of speculation about the aims and objectives of Saudi Arabia in their efforts to win the current ‘oil war’. This ‘war’ has seen a barrel of oil losing around $86 of it’s value in 18 months with talk of more drops to come. The Chinese economy is slowing, sanctions on Iran have just been lifted, allowing them to increase oil production (set to increase by 500,000 barrels this year alone) and no countries are willing to cut production for fear of losing market share. The price of oil just keeps on falling. The Saudi’s stated objective in driving the price of oil down is to see off competition from U.S. shale oil. What else might they be hoping to achieve?
U.S. Shale needs a global oil price of around $50-$60 to be viable and today oil is trading at around $28. Indeed, the US is already losing production capacity with output predicted to slip by 380,000 a day through this year. However, when shale production stops, the infrastructure stays in place. Once prices rise to $60 for a barrel of oil, the shale fields can simply be turned back on again, flooding the market with shale oil and driving the price back down. With this market mechanic in place, the Saudi’s can never hope to see off shale oil for good. Doesn’t seem a very achievable long term objective. What if their aims and objectives go far beyond U.S. shale competitors and are actually focused on the death of oil as a essential, high demand commodity.
Saudi Arabia has the worlds second largest reserves of oil and an economy heavily dependent on oil revenues.What if the Saudi’s have looked down the road and seen the coming death of oil. The black gold is only valuable as long as the world needs it. What if the Saudi’s took a look at their projected oil reserves and compared that to the predicted date peak oil demand with occur on Earth. What would they find? If they find that they will still have untapped oil reserves by the time green technologies take us away from oil dependency, that oil becomes worthless.
Much research and development in the car manufacture sector is focused on increased fuel efficiency. The range and MPG of conventional and hybrid cars are far superior to what they used to be and continue to improve all the time. Rapidly increasing urbanisation in developed and developing countries will actually make the concept of private car ownership less viable. Cities already account for around 66% global energy use, with some forecasters predicting cities will account for 80% of global energy use in the future. Threats from air pollution and endless congestion on the roads of future mega-cities will push consumers away from private car ownership.
China, the beating heart of global economic growth, has committed itself to becoming the world’s major exporter of solar panels and advances vehicles (they aim to produce 5 million electric vehicles per year). China is already the world largest producer and user of green energy and wants non-fossil fuels to account for 20% of total energy consumption by 2030. The West had a very very dirty industrial revolution. Now green technology is available to developing countries today and can be implemented in their infrastructure development before they build everything around antiquated fossil fuel systems.
Saudi Arabia has mammoth financial reserves to draw upon. They are also considering the flotation of oil company Aramco, viewed by many as the worlds largest business conglomerate. A flotation could raise revenues in the area of $3 trillion which would certainly help refill the Saudi coffers. The money can also be used to diversify the Saudi economy, moving away from an over reliance on petro-dollars, all while driving other nations out of the oil game through the continued suppression of crude oil prices (leading to increased Saudi dominance in the market as other producers lose market share).
The price of oil will eventually recover, but due to the U.S. shale mechanism, the price shouldn’t rise much above $60 in the long run. However, in the short term, the price of oil will continue to fall due to market pressure. The Saudi’s still have a lot of oil to pump but green energy will always be preferred over dirty fossil fuels. Have the Saudi’s looked down the road and seen the end of oil? If they have, they might as well open the taps and let the oil flow. Oil’s days as a valuable commodity are, while not completely numbered, certainly entering a new phase where the quest for high fuel efficiency and green technologies are eroding oils hold over the world.
Strategic Debrief 