Yesterday, I posted an infographic that shows how the US dollar performed in 2014. It was the only currency to gain against all other major peer currencies. This is partly due to the fact that oil price was down by 60%
Why is oil price so unexpectedly low?
This is because of Saudi Arabia, the sheik of OPEC and pretty much the entire oil industry.
The cheaper oil prices achieved multiple goals for Saudi Arabia and I reckoned that it is one of the most strategic and brilliant moves in recent diplomacy.
For one, the depressed oil price assist Saudi Arabia’s major ally, the United States. Low oil price is detrimental to anti-US countries that derived much of their power from oil. Russia and Venezuela, major producers of oil, are experiencing major hemorrhaging in their domestic market. The Russian ruble is down and some expect the Russian GDP to decline by 4.5% this year. Venezuela might possibly default and Iran isn’t able to finance their budget. So, Saudi Arabia’s insistence on maintaining oil output, and hence the low oil price, is doing major damage to anti-US countries.
Western media have generally viewed this positively and US consumers love the low oil price. But, while it’s nice to think that an ally is willing to forgo billions of dollars to assist the US, the realpolitik of modern diplomacy makes it unlikely that the House of Saud did it simply for ideological or moral premises.
Saudi Arabia is maintaining the low prices to bankrupt US shale oil companies. The very same companies that allowed the US to become the biggest producer of oil in 2014 and helping it to realize the path towards energy independence.
It was profitable for shale oil companies to extract oil from difficult-to-drill places and used a new drilling technique like fracking because the oil price was high. Now that the oil price has dropped by 60%, it’s difficult for these shale oil companies to conduct their business profitably. So the “oil boom” that the US experienced during the last 5 years may be coming to an end and it’s all because of its good ally.
Low oil price is not only detrimental to oil regimes, but also US energy producers. If the US manage to achieve energy independence, its foreign policy will not have to factor in energy reliance as much and many countries will have less leverage in negotiation.
The last thing to bear in mind is that the US trade deficit would have grown even larger these past few years, if not for the “oil boom”, and that if these energy companies are gone, then the US trade deficit will descend to an even steeper precipitous level than it is now.
Given that oil is the source of their power and wealth, it’s unlikely that the House of Saud didn’t consider all aspect and ramification of the decision to maintain the low oil price.
In essence, what Saudi Arabia offered the US was a double-edge sword, able to hack away at its enemies, but also injuring itself along the way.
The ideas were derived from the following readings: