Thursday, October 8, 2015

Don't forget oil's role in the current Middle East shenanigans

The Telegraph provides a timely reminder of how oil is at the root of much of what's going on in the Middle East at present, from the Russian intervention in Syria to the multi-state conflict in Yemen to the crisis over ISIS.

After hanging on for almost a year, the US shale oil industry is on the brink of complete capitulation. The reason for its impending downfall is simple: the lowest cost producer always wins.

. . .

The insurmountable problem the US shale oil industry faces is that it is too highly dependent on debt and too reliant on crude trading above $60 per barrel to remain profitable. Break-even prices in America’s most productive areas, such as the Eagle Ford and Bakken, are thought to range from $54 to almost $70 a barrel, which currently means producers are operating at a loss, living in hope that Opec finally relents and cuts production.

. . .

However, the group of 12 mainly Middle Eastern oil producers is itself feeling the pain of lower oil prices. Its wealthiest members, such as Saudi Arabia, the United Arab Emirates and Kuwait, are having to fall back on their foreign currency reserves for the first time in almost 20 years to make up for the shortfall in revenues.

Poorer member countries such as Venezuela, Algeria and Nigeria are now at economic breaking point. Without vast sovereign wealth funds and an abundance of cheap oil, they are close to buckling and are demanding that Opec meets to revise its current strategy.

. . .

And then there is Iran and Iraq. Combined, these close political allies in the Middle East pose the biggest challenge to Saudi Arabia’s dominance of Opec. However, both countries desperately need higher oil prices to help shore up their battered economies.

Baghdad has compensated for falling oil prices by pumping more crude. The second largest producer in Opec is now pumping around 4m bpd of crude to replenish its dwindling foreign currency reserves, which have fallen by around 20pc this year.

Iran is also champing at the bit to increase production – with the end in sight for its economic isolation from the rest of the world. According to the Iranian government, the country could increase oil production by around 500,000 barrels per day within a few months of economic sanctions being fully lifted. The Islamic republic is already laying the foundations for a return of international oil companies, which could help to boost output.

. . .

Of course, there are risks. Geopolitical issues are once again acting to put a floor under oil prices. Russia’s deployment of military forces in Syria has raised the temperature in the region to boiling point. Oil has ticked back above $50 per barrel following the move, which has emboldened Bashar al-Assad.

Russia’s involvement in Syria gives Vladimir Putin a foothold within easy reach of the world’s major oil supplies and threatens the influence of Gulf states such as Saudi Arabia which are funding opposition groups not linked to Islamic State in Syria. Meanwhile, Riyadh and its Arab allies are also fighting a bitter and increasingly intractable conflict in Yemen against Iranian-backed rebels.

Russia has also suffered from the decline in oil prices, and the smouldering embers of instability in the Middle East could still result in oil prices skyrocketing if a wider conflict between Iran and the Arab Gulf states is ignited.

Faced with Russia’s vast military power and the reluctance of the US to get involved, Saudi Arabia’s only weapon against the Kremlin is to maintain lower oil prices.

There's more at the link.  Highly recommended reading for those keeping up with geopolitical developments.

All this could have profound consequences for the world economy.  At present everyone's enjoying low oil prices.  If anything happens to change that, and they revert to the levels of a year or two ago . . . well, on top of all the other economic problems currently afflicting us, that would be just about the last straw that broke the camel's back.



trailbee said...

How would that affect the XL Pipeline? Is this what Obama was waiting for? Then Canada will probably ship to China from BC.

Anonymous said...

Remember the 1980's? What happened when a few naval mines were sown in the Persian Gulf?

What happens if it occurs again?
Russia would profit. So would Iran. That is motive. Who has mines, expertise and now has access? I am almost surprised it has not happened already...

We may find out how good the LCS is at mine clearance?

Douglas2 said...

Russia is one of the countries suffering from the low oil price...