This article originally published in Summer 2015 edition of B2B.
Saudi Arabia is changing the world economy with the continued pumping of oil as well as statements regarding reduced oil demand. Consumption has been going down since 2006, so there are other forces at work here. This Saudi production has pulled the price of oil to their targeted goal of less than $60 per barrel, a program that will remain the same with the new King Salman. The reasons why they are doing this are much more than the simplistic surface statements offered by media pundits and talking heads. Let’s examine a few here:
ISIS – The advancement of the Islamic State in areas with prolific oil supplies, and resulting black market sales to fund their operations, has a lot to do with the $60 target price. ISIS has to sell at a discounted spot market price and the lower overall price cuts deeply into their revenues. This benefits Saudi Arabia because it weakens an obvious military threat without direct combat.
Compensation – The lower energy price benefits the United States, which compensates for the renewed military presence in Iraq, a presence that will further degrade the ISIS threat.
Sanctions – Lowered oil prices offer another form of sanction against Russia, which depends on oil and natural gas sales for hard currency. This has been perceived as a threat by Russia, which may manifest some sort of retaliation.
Fracking – The lowered oil price has had an immediate impact on oil production permits where expensive fracking is required. As I write this, there has been a 40 percent reduction in permits. This reduces the notion that North America will be self-sufficient with oil. Though, I think this is temporary, as $60 is a price still profitable in many locations with high fracking use. Lower than $60 and we will see most domestic drilling stop until prices increase.
Speculator Devastation – Sadly, the trading in oil futures has been dominated by speculation with over 80 percent of the trades being by those who could never take delivery of the oil being traded. Historically, speculator involvement was no more than 30 percent. While this directly benefited oil-producing countries, the cost to energy consumers has resulted in a wealth transfer from the middle class and poor greater than most financial calamities.
Deleveraging – Some are indicating that the significant change in relative currency values is at the root of this commodity devaluation.
The 800 Pound Gorilla has a protector, and that is the United States. The price for U.S. taxpayers is much more than what we pay at the gas pump.
As with most everything in life, the sword cuts both ways. The horror that is ISIS and the threat they pose to the Middle East is resulting in lower energy costs for American consumers. We will see how this plays out over the next couple years, whether the alarm from the Middle East of another World War are a real concern, or not.
Bottom Line: Small businesses will get a break in transportation cost for the next couple years. Make the best of it, but keep an eye on each vehicle replacement with the most energy efficient option possible. This is because these discounted fuel prices won’t last long (The Saudi’s indicate five years). Think of it as a big sale, and use this as an opportunity to save money. But just know it’s not permanent.