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Why Oil Prices Plunged Today

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Oil Rises As Market Awaits Saudi Move Counter Glut

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Andy Tully

Andy Tully

Andy Tully is a veteran news reporter who is now the news editor for Oilprice.com

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Iran Leader Says US Not Only Target Of Suspected Saudi Oil Price War

To many observers, OPEC’s refusal to cut production and thus shore up oil prices was the beginning of a price war with the United States so that Saudi Arabia, the cartel’s most influential member, could regain the market share it had been losing during the recent American oil boom.

Now Iran’s president, Hassan Rouhani, is saying that Riyadh, through OPEC, is also using “treachery” to harm the economies of fellow oil-producing Muslim states in the Middle East.

“The fall of the oil prices is not just something ordinary and economical. This is not due to only global recession,” Rouhani told his cabinet on Wednesday. “The main reason for it is [a] political conspiracy by certain countries against the interest of the region and the Islamic world and it is only in the interest of some other countries.”

Rouhani added, “Iran and people of the region will not forget such conspiracies, or in other words, treachery against the interests of the Muslim world.”

Related: Oil Wars: Why OPEC Will Win

Saudi Arabia wasn't mentioned by name, but most observers say Riyadh was the focus of Rouhani's criticism.

In the weeks leading up to OPEC’s crucial meeting on Nov. 27, several members of the cartel, notably Iran and Venezuela, were urging Saudi Arabia to call for a lowering of production levels by at least 1 million barrels a day to balance a supply glut more equitably with lower demand. But Riyadh ignored their pleas, and OPEC kept its cap at 30 million barrels per day.

Since June, the average price of crude oil has fallen from about $115 barrel to under $70.

The next day, Iranian Oil Minister Bijan Namdar Zanageh said the Saudi motive was to keep global oil prices low in order to threaten the viability of the US boom in shale oil. Extracting oil from shale is more expensive than conventional methods, and can become unprofitable if the price of oil falls below $65 per barrel.

Saudi Arabia’s influence in the cartel is understandable because it produces fully one-third of OPEC’s total output, which itself has a 40 percent share in the global oil market. Riyadh itself, however, has said that any cut in OPEC production would harm its own market share, and has not specified any targets of its production and pricing strategy.

Related: Iraq’s Bright Oil Future Blocked By ISIS

Nevertheless, the Saudis have rejected pleas by OPEC members and even Russia, not a part of the cartel, to cut production.

It may make sense for Saudi Arabia to use the price of oil to regain the market share it’s lost in the energy-hungry United States, but it’s not as obvious why it would use oil as a weapon to harm its Muslim neighbors.

One theory is that Riyadh’s motive isn’t economic but political, with a bit of religion thrown in. It holds that Saudi Arabia, a Sunni Muslim country, hopes to weaken both Russia and Shi’a Muslim Iran, who support embattled Syrian President Bashar al-Assad, a longtime critic of Saudi Arabia. Further, this theory holds, al-Assad is a member of the Alawite sect of Shi’a Islam.

By Andy Tully of Oilprice.com

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  • el vego on December 16 2014 said:
    What a bag of wind. Ill informed at that. I don't like to sell my services cheap. But I will do it if I perceive a benefit. Maybe they should do it too instead of bitching. Oil was held in tight supply and sold at inflated prices for many years. Now, neither OPEC nor anyone else can control the supply, and because the Saudis wish to maintain their market share, they refuse to cut their production. Who can blame them? Russia, Venezuela and Iran previously contributed greatly to control the market through OPEC, and enjoyed (and counted on) the bloated prices. Now, the party is over. If it wasn't the Saudis, it would only be someone else, and the Saudis chose to maintain their production and reap the benefit of their very low costs of extraction to maintain market share.. If the Saudis had chosen to cut production, it might have helped (to prop up prices), but the benefit would have been very short lived, because there is a heck of a lot of oil out there, and others would have taken up the slack, and a large slice of the Saudi market as well. Even the USA is now looking to become an oil exporter, and Canada is very much in the game as are a number of others.

    The Saudis acted very wisely for themselves, and not against Islam, Russia, Iran, Assad or anyone else. The pronouncements coming from Iran, Venezuela, Russia and others in their position are to be expected, but they are without basis in fact. They are suffering greatly with the price drop, and have to put the blame on someone other than themselves.
  • Amin on December 17 2014 said:
    What I don't understand is why there can't be two tier oil prices? The Saudis and the Gulf countries cannot meet all the world's demand on their own, so let them sell their oil for free. The next tier of suppliers should demand more robust prices. It is like a split OPEC, with Saudis and their like selling it for free and the second group selling it for what they think is the right price. Instead of fighting your way to the bottom, create a second group of suppliers who will only sell at an agreed price. After that, the Saudis will come to their senses very soon.
  • Ozair on December 18 2014 said:
    The real beneficiary to this significant oil price drop is the poor ordinary citizen and the developing oil import based countries. The cost of living of their citizens has little improved by this drop and they have got the breathing space. the power and energy prices are getting down. they are stabilizing. so we all should celebrate this Saudi decision to let the oil price down by maintaining production at current level to benefit the pity under developed and developing countries.

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