Like most Americans, I am totally enjoying the recent downtrend in oil prices, which has translated quite nicely into lower gasoline prices. However, I’d like to draw my reader’s attention to a very ominous, but not necessarily obvious problem being generated by this scenario. I’m talking about the fact that countries like Algeria, Libya, and Nigeria are economically dependent on oil for their well-being, but their target price needs to be in the $120 per barrel range. The price necessary for Venezuela is closer to $180 per barrel, so the $30 range we touched and the $45 range we find ourselves in now are wreaking economic havoc on these countries.
Even perceived oil powerhouses like Iran, Iraq and Kuwait require $80 to $100 per barrel. The hardship being created is crippling many of these countries and unfortunately the poverty and unemployment generated provides the perfect breeding ground for ISIS, ISIL and any other acronym willing to fill the economic vacuum created. It’s not a question of choice, but survival. Behind all the bloviation, regarding Iran’s resurgence in production and exports, the country’s infrastructure and economy are collapsing, providing another perfect breeding ground exactly where it’s needed least.
Saudi Arabia is the Mid-East oil kingpin and where they lead, OPEC must follow. They’ve continued production and permitted a glut, in order to keep prices low and try to squeeze Russia out of the Asian market. The U.S. is actually the largest non-OPEC supplier, but our production is not at all centralized like other countries, so the government cannot speak for the U.S. oil industry. In spite of economic concerns, Russia has decided not to cut production until OPEC makes that decision.
The biggest question remains, how long can Russia and Saudi Arabia continue this pissing contest, at the incredible expense of many global economies? There’s no doubt that Saudi Arabia has the ability to endure indefinitely. So how long before declining extraction rates, financial losses, and an increasingly desperate lack of technical expertise and working capital forces Russia to capitulate? And moreover, what kind of tally will reflect the true global expense?