Home' Trinidad and Tobago Guardian : December 28th 2014 Contents A21
December 28, 2014 www.guardian.co.tt Sunday Guardian
Six years ago, the price of oil
went on an incredible roller-coaster
ride. In January 2008, oil hovered
around $90 a barrel.
By July, it had reached $147 a bar-
rel. By the end of the year, it had
plunged to under $35 a barrel.
Saudi Arabia, and the other mem-
bers of the Organisation of the Petro-
leum Exporting Countries, hate that
kind of volatility. When prices are
too high, Opec s customers, the
petroleum importing countries, suf-
fer economically, which means they
cut back on energy use and search
for alternatives to oil.
But if prices go too low, many
exporting countries face enormous
financial problems because their
economies depend on oil staying in
the $100 to $130 range, according
to 2015 projections.
We tend to think of Opec as a
cartel whose goal is to set the price
of oil---and set it high.
But stability is also an important
goal. Without a cartel controlling
supply, oil can be the most volatile
Which, of course, we are learning
anew, as we ve watched oil fall from
$115 a barrel to about $60 in the last
six months. In 2008, Saudi Arabia
stepped in both when the price was
rising rapidly and again when it
dropped. And guess what happened?
Nothing. Most of the rest of Opec
didn t follow Saudi Arabia, and the
Saudis were exposed as having lost
their ability to single-handedly con-
trol the price of oil.
This time around, what has been
most noticeable as the price of oil
has dropped is that the Saudis seem
completely uninterested in trying to
prop it up. The Saudi oil minister,
Ali al-Naimi, gave an interview to
CNN in which he declared that Saudi
Arabia would "never" cut produc-
tion, despite the steep drop this year.
"We are going to continue to produce
what we are producing," he said.
"We are going to continue to wel-
come additional production if cus-
tomers come and ask for it."
Part of the reason for this new
Saudi attitude is that the country s
leaders are tired of doing all the
heavy lifting for the other Opec
members---who then keep their spig-
ots completely open and take advan-
tage of the high prices the Saudis
are making possible. Part of it is that
the Saudis are unwilling to lose mar-
ket share to other countries, and
they have the wherewithal to with-
stand lower prices for a much longer
period than virtually any other
exporter. But part of it is also that
Saudi Arabia doesn t want a repeat
"The worst thing from the Saudi
point of view would be to announce
a production cut, and the prices keep
falling," said Jason Bordoff, the
founding director of the Center on
Global Energy Policy at Columbia
University. It doesn t want to be seen
as the emperor with no clothes.
And then, of course, there is the
effect of the shale revolution in the
United States, where oil production
has nearly doubled, to nine million
barrels a day from five million a day,
in the space of six years. The con-
ventional wisdom holds that the
Saudis "fear" the influx of shale oil
onto the market---as The Wall Street
Journal put it---and that they want
to see the price go down in order to
drive out some of that shale pro-
But the Saudis don t really fear
shale oil. "I ve heard officials in Saudi
Arabia call shale a blessing," said
Robert McNally, the founder and
president of The Rapidan Group,
who is also affiliated with the Centre
on Global Energy Policy. "Shale oil
is light," he added.
"Saudi oil is medium and heavy,
and their real competitors are the
Iraqis and the Iranians." The Saudis
can adjust to shale oil more easily
than many other countries.
In effect, shale has the potential
to play the role of the "swing sup-
plier," which is the role the Saudis
used to play. At a certain price, it
will be uneconomical to drill for shale
oil, at which point the price will sta-
bilise. But the shale revolution is still
too new for anybody to know what
that price is.
In a sense, what is going on now
is an effort to discover how low oil
has to go before shale production
declines and the floor is found for
the price of oil.
Opec is hardly the first group to
try to control the price of oil. In the
early years of the industry, John D
Rockefeller s Standard Oil controlled
the price. For decades before the
formation of Opec, the Railroad
Commission of Texas (now the Texas
Railroad Commission) would have
a monthly meeting to set production
More than anything else, the
events of these past months, as oil
has dropped and dropped again,
shows that it is the market, rather
than a cartel, that will dictate the
price of oil for the foreseeable future.
Hold onto your seatbelt. (New
• Douglas Mendes' column will
return next week.
SHALE AND THE FALLING PRICE OF OIL
A motorist drives along the temporary Manzanilla/Mayaro Road on Wednesday, which was opened to vehicular traffic six weeks after torrential flood waters partially washed away the road.
PHOTO: ABRAHAM DIAZ
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