Oil A Strategic Weapon?

Well, it certainly has been used that way since 1973. In any event, Edward Lucas writes at the Daily Mail:

The world has become used to Vladimir Putin giving tub-thumping speeches about the glory of modern Russia. His three-hour press conference last Thursday — by turns bombastic and duplicitous as he deflected questions about his country’s teetering economy — was no exception. 

Railing against the sanctions enforced by the EU and America in response to the annexing of Crimea, he warned darkly against shackling the Russian bear and tearing out its ‘fangs and claws’. 

During a recent visit to Turkey, however, he was forced to adopt a very different tone, announcing in clipped and petulant terms that his country’s prized new South Stream gas pipeline to Europe would not be going ahead. 

The £25 billion pipeline across the Black Sea and the Balkans would have given the Kremlin a stranglehold on the energy supplies of a slew of European countries — Italy, Bulgaria, Serbia, Croatia, Slovenia, Hungary and Austria. 

It would also have contemptuously demonstrated Russia’s superiority over the European Union, which had ruled the pipeline plans illegal. (The rules of the European energy market — strongly backed by Britain — say that the same company cannot own both a pipeline and the gas that runs through it because it gives them too much control over supply and pricing.) 

But Putin has had to eat humble pie and cancel the whole project. 

Why? The collapse in the oil price across the world — down by nearly half since June — is emptying the Kremlin’s coffers. 

As the third-biggest oil producer in the world, Russia is heavily dependent on a buoyant price, deriving more than half of its budget revenues from oil and gas extraction. 

The kleptocrats in the Kremlin rely on oil and gas exports to sustain Russia’s bloated and bribe-ridden bureaucracy, as well as its ruthless aggression against other countries.
But the price per barrel of oil hit a five-year low of $58.50 last week, and though it has recovered slightly, it is still far too low to keep Mr Putin’s regime running at full blast, especially given the economic sanctions the West has imposed. 

No wonder the value of the rouble has plummeted, causing panic buying in Russia, the movement of money out of the country and even the jacking-up of interest rates to an eye-watering 17 per cent in a bid to stop the currency sliding further. So these are very bad times for Russia, where no one has forgotten that low oil prices brought down the Soviet Union in 1991 by eviscerating its economy. Today, they could spell doom for Putin’s attempt to recreate that Soviet empire. 

He has naively set out his spending plans for the next three years based on an oil price of around $100 a barrel — which now looks wildly optimistic.

Lucas then focuses on the impact on OPEC:

At its meeting in Vienna last month, the OPEC oil cartel — which controls nearly 40 per cent of global production — faced a fateful choice. 

Would it curb production and thus, by reducing supplies, try to ratchet the oil price back to something near $100 a barrel — the level most of its members need to balance their books? Or would it let the glut continue? 

The organisation’s 12 member countries, including Saudi Arabia, Iran, Iraq, Kuwait, Venezuela and Nigeria, chose to do nothing, proving that its once-mighty power has withered. Oil prices subsequently fell even further. 

One central problem is that several of OPEC’s members detest each other for a variety of reasons. 

Above all, Saudi Arabia and its Gulf allies see Iran — a bitter religious and political opponent — as their main regional adversary. 

They know that Iran, dominated by the Shia Muslim sect, supports a resentful underclass of more than a million under-privileged and angry Shia people living in the gulf peninsula — a potential uprising waiting to happen against the Saudi regime. 

The Saudis, who are overwhelmingly Sunni Muslims, also loathe the way Iran supports President Assad’s regime in Syria — with which the Iranians have a religious affiliation. They also know that Iran, its economy plagued by corruption and crippled by Western sanctions, desperately needs the oil price to rise. And they have no intention of helping out. 

The fact is that the Saudis remain in a strong position because oil is cheap to produce there, and the country has such vast reserves. It can withstand a year — or three — of low oil prices. 

In Moscow, Vladimir Putin does not have that luxury — and the Saudis know it. 

They revile Russia, too, for its military support of President Assad, and for its sale of advanced weapons to Iran.

It is doubtful that oil prices will increase soon. The Financial Times reports:

Opec will not cut production even if the price of oil falls to $20 a barrel, the cartel’s de facto leader said, spelling out a dramatic policy shift that will have far-reaching implications for the global energy industry. 

In an unusually frank interview, Ali al-Naimi, the Saudi oil minister, tore up Opec’s traditional strategy of keeping prices high by limiting oil output and replaced it with a new policy of defending the cartel’s market share at all costs.

“It is not in the interest of Opec producers to cut their production, whatever the price is,” he told the Middle East Economic Survey. “Whether it goes down to $20, $40, $50, $60, it is irrelevant.” 

He said the world may never see $100 a barrel oil again. 

The comments, from a man who is often described as the most influential figure in the energy industry, marked the first time that Mr Naimi has explained the strategy shift in detail. 

They represent a “fundamental change” in Opec policy that is more far-reaching than any seen since the 1970s, said Jamie Webster, oil analyst at IHS Energy. 

“We have entered a scary time for the oil market and for the next several years we are going to be dealing with a lot of volatility,” he said. “Just about everything will be touched by this.” 

Analysts say that Saudi Arabia is throwing down the gauntlet to all the high-cost sources of crude — from the oil sands of Canada and US shale to deepwater Brazil and the Arctic — in an attempt to face down the threat they pose to its market share. 

Mr Naimi said that if the kingdom reduced its production, “the price will go up and the Russians, the Brazilians, US shale oil producers will take my share”.

However, the next time OPEC attempts to raise prices, the moratorium on shale oil production on Federal land in the U.S. may have been lifted. The result is that the next time prices rise, people in Utah and Colorado may benefit since that is the site of the Green River Formation--the largest shale oil reserves in the United States.