Political issues may be at play in the falling price of oil

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February 23, 2015

For Albertans, the huge drop in oil prices is having major repercussions. The provincial government says it faces a $7-billion annual deficit unless it cuts spending, and job layoffs are beginning to affect many people both inside and outside of the petroleum industry. The lower pump price of gasoline hardly begins to compensate for the negative effects of the collapse in prices.

Yet, too often the falling prices have been seen solely in terms of market economics. For some strange reason, too much oil is being produced globally and that is driving the per-barrel price downward. This certainly does not appear to be something the oil companies want; it is having a disastrous effect on their best-laid plans. But the market does what the market wills. Or, so some would have you believe.

Many analysts, however, argue that the cause of falling prices is purely political. They trace the collapse to a coincidence of political interests between the United States and Saudi Arabia, and point to a Sept. 11 meeting of U.S. Foreign Secretary John Kerry and King Abdullah, now deceased, in which the Saudis were said to have been persuaded to maintain production and sell below market price.

The alleged goal is to squeeze both Russia and Iran to bow to the combined interests of the U.S. and the Saudis. The Obama administration wants to stifle Iran's nuclear ambitions as well as pressure the Russians to weaken their support for Syrian President Bashar al-Assad and to back off their aggressive stance in eastern Ukraine.

The Saudis, meanwhile, have a passel of interests of their own. They would like to deter a planned gas pipeline from Iran through Iraq to Damascus, which may eventually be extended to the Mediterranean to exploit European markets. More generally, the Saudis want to maintain their economic dominance in the region, in particular, keeping Iran down on the farm.

The Saudis have used oil production and pricing as a diplomatic weapon in the past, most famously following the 1973 Yom Kippur War when they cranked up the price to punish the U.S. for its support of Israel.

The U.S., however, has been vulnerable to oil price shocks until its recent achievement of oil supply self-sufficiency. Now that the United States is the world's largest oil-producing nation, it too has the freedom and power to use oil - as opposed to military might - to achieve its strategic objectives.

One question is whether this conspiracy - if it exists - will achieve its objectives? Iran is already calling on the Saudis to reverse the oversupply of oil. The Russians, however, are a different matter. With large cash reserves, they may be able to outwait the Saudis and the Americans.

As for Alberta, don't think that our concerns matter to the very powerful. Your job, your tax bill and the services our government provides are of the least concern to those defending and enhancing their geopolitical interests.