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May 03, 2006
Would You Believe Me If I Told You That Glenn Reynolds Fundamentally Misunderstands the Global Oil market?
By Ezra
To jump on some of John's points below (where he responds to Reynolds' plan for invading Saudi Arabia and opening their oil spigots), to think that the Saudis are purposefully keeping oil prices high is simply nuts. Everyone knows the age of oil is coming, within a number of decades, to an inglorious end. What the Saudis want is to keep oil cheap enough for long enough that the world doesn't get serious about conservation or alternative energy until the Saudi's reserves are near-exhaustion. To think that they're pushing oil prices into the atmosphere before their reserves are out, forcing immediate conservation and real pressure for substantive end-of-oil strategies, is to fundamentally misunderstand the dynamics of the global oil market. Indeed, it lends itself to one of two conclusions:
1) The Saudis are insane, don't wish to make money, and are hoping the world ceases purchasing their primary export;
2) They're already running out of oil, or at least excess capacity, and they're not tamping down prices because they need their remaining reserves to stretch.
Take your pick.
May 3, 2006 | Permalink
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Scott Lemieux catches Glenn Reynolds' mask askew:Of course, if we seized the Saudi and Iranian oil fields and ran the pumps full speed, oil prices would plummet, dictators would be broke, and poor nations would benefit from cheap energy. But [Read More]
Tracked on May 3, 2006 3:42:51 PM
Comments
The stability in their own country that the Saudis wish to preserve is dependent on incoming outside cash in exchange for their oil. So ongoing cash flow that doesn't decrease is absolutely essential.
Increases in cash flow go to infrastructure in SA, internal social support in various ways, or have to be invested elsewhere. So far their investments have been mostly in the US (treasury bonds and hard assets). In the financial sense, as well as in the social stability sense, the Saudis are and have to be deeply conservative. A financial collapse in the the west is not good for their investments. A 30% writedown in the value of the dollar would be a disaster for them.
So they balance. Enough oil is pumped to support the existing oil order in the west and pay for internal stuff, but they don't want to run out their reserves and upset their social applecart. They'd be crazy not to like increased cash flow in exchange for their oil, but not so much that they run out of oil or push the west to exhaustion or to seeking alternatives.
They have a two weapons: oil and T-bills. They can destroy the US and the west with either of these. But they don't. Bush therefore likes them, and I guess we all should to some degree.
That this internal need in SA neatly meshes with the needs of the oil corporations and BushCo is more than accident, but still not necessarily truly bad. We hold each other's hand, literally and figuratively.
The US dollar is believed to be 20 to 40% overvalued in today's market world. No major player wants or benefits from a crash in the dollar-dominated world, so lots of hands are involved in keeping the US's leaky financial boat afloat. Especially including the Saudis.
Posted by: JimPortlandOR | May 3, 2006 3:45:18 PM
What the Saudis want, I presume, is to maximize the present value of their oil. That isn't achieved by maximizing current oil revenues by maximizing price x quantity, since it could lead to lowered demand later on, but it isn't achieved by minimizing prices so that future demand will be higher too: they'd be giving up too much money now. I'm not sure exactly where the ideal price from a Saudi profits perspective is.
I don't really know. Maybe the ideal oil price from the Saudi perspective is currently lower than they're able to achieve, but if I were a Saudi, I wouldn't exactly be too worried about oil prices being high.
Posted by: Julian Elson | May 3, 2006 4:03:08 PM
Julian: but if I were a Saudi, I wouldn't exactly be too worried about oil prices being high.
You might be worried if high oil prices sets off major inflation that devalues the huge investment in US treasury bills, or results in a major depression and deflation that shrinks the world economy and sets off a rebellion in Saudi Arabia.
Posted by: JimPortlandOR | May 3, 2006 5:19:16 PM
My impression was that the Saudis were maxed out, are building new facilities that can add about ten per cent production in ten years. And that isthat. Oil demand, all else remaining equal, will increase 50% in about twenty years. We will not see gas below 3$ for at least three years. Bummer, personally and generally.
OTOH, all else will not remain equal. I guarantee it. Perhaps as soon as hurrican season.
Posted by: bob mcmanus | May 4, 2006 3:26:40 AM
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