Edging Closer To The End of OPEC, And The Saudi Arabian Kingdom – Thomas J. Lauria/HuffPo
Saudi Aramco, Saudi Arabia’s state-owned oil company has continued to aggressively pump oil at an unprecedented rate. In the process of maintaining market share, it has driven oil prices down to just about $30 per barrel. Clearly, the goal of the Saudi Kingdom is to snuff out emerging oil producers in the United States, where new technologies and oil discoveries have allowed private producers to add needed jobs while reducing long-standing dependency on foreign sources of oil.
But the Saudis, an extraordinarily large and strong member of OPEC, are acting in an irrational manner in the global market. In the process, it ultimately risks civil unrest and calls for democratization within the Kingdom. Essentially it risks the end of the Kingdom itself. It’s the law of unintended consequences.
With unilateral control over 11-12 million barrels of oil production per day, the Saudis are increasing the risk of political and social unrest in all nations that depend on oil — including Venezuela, Russia, and even Saudi Arabia itself. While the former two regimes are certainly no friends of the United States, the actions of the Saudi Kingdom have done no one any good — the least of which being Saudi Arabia.
With oil prices below about $55 per barrel, the Saudi Arabian economy simply can’t be funded. At these prices, the Saudis can’t fund their payrolls and social programs. While wearing a “poker face” in the international community, internally, the Saudis have resorted to some unusual measures: raising the price of gasoline by 50% and reducing social programs. They also have a very real possibility of initiating income and sales taxes. The government may even need to raise cash by launching an IPO of the state-owned oil company itself. While not unexpected, they’ve executed dissidents who threaten their sovereignty.
With a higher cost of living, reduced social programs, and the distinct possibility of initiating income taxes and other taxes which are routine in democracies, the Saudi people will start demanding more from their government. By driving down the global price of oil, the Kingdom is risking the future of its regime. They are cutting off their nose to spite their face.
In the wake of the 2011 Arab Spring, Saudi Arabia wisely sought to calm internal tensions by increasing its social programs to preempt civil unrest. They are now reversing those programs, and it’s a foolish move. If the ultimate goal is to preserve the Kingdom, maintaining market share in the global market for oil is nothing less than a foolish short-term objective.
Founded in 1960, the OPEC cartel began as a union of competing nations with a common desire to act as a collective influencer in the global market against non-OPEC members. It sought to find an optimum balance between production and market price — dividing production up amongst its members.
Sure, OPEC members would cheat on their quotas and it’s always been an awkward alliance with internal strife and vocal disagreement. But it’s hard, if not impossible, to make money with oil at just $30 per barrel, and tension within OPEC is reaching a boiling point. This low market price for oil in part reflects market fears of the pending entry of Iran into the international market.
With the most influential vote, Saudi Arabia has now thrown the economic interests of other OPEC member states under the bus and is acting in a seemingly unilateral manner. It’s actions risk forcing the end of the cartel.
We have no pity for the failed state of Venezuela, which is nothing short of desperate and is a nation increasingly ripe for a military coup amid its global isolation, failed government, and run-away inflation. The economic problems of Venezuela and Russia run deep, amid high levels of economic sanctions and corruption. Even with oil prices so low, they have no choice but to pump as much oil as they can.
The Saudis alone need to show more discipline in their production levels. Saudi Arabia is driving itself, and every oil producer, into the ground. If it doesn’t reverse its irrational actions soon, and tap back on production, incrementally lower oil prices will edge The House of Saud that much closer to its demise.
Like every country dependent on oil production, the Saudis only have so much time.