No one expects Saudi Arabia to change its strategy of chasing market share.LUCY NICHOLSON/Reuters
From the "stop the bombing" protesters in London to the "no more fossil fuels" campaigners in Paris, the message seems to be the same: we wash our hands of the dirty, the dangerous and the unpleasant.
It's an attractive posture, adopted by many rich consumers, but it offers no solution if you happen to live in a war-ravaged region, ruled by tribal chiefs and gangsters and the only business in town is selling crude oil. It is probably no coincidence that many of the more unstable, ill-governed and economically challenged states are oil producers: think Iran, Iraq and Venezuela. The cheapness of oil is a gift to our wallets but it is also a dangerous mirage: It encourages us to pretend that these unruly and chaotic societies can be ignored, their economic power consigned to oblivion thanks to new technology.
Which brings us to OPEC; the oil exporter's club is meeting on Friday and most of the world couldn't care less. In real terms, the cost of oil is almost back to normal: between 1985 and 2005, the oil price, adjusted to U.S. inflation, hovered between $30 (U.S.) and $40 a barrel. Today, the world's storage tanks are spilling over and according to a report in the Financial Times, there are 100 million barrels of crude offshore, afloat in ships due to the lack of storage space on land.
Almost no one expects Saudi Arabia to change its strategy of chasing market share; the Kingdom has been pumping at full throttle, using cheap barrels to drive out higher-priced competition. Indeed, Saudi Aramco, the state oil company, is now aiming its guns at the No. 1 competitor, Russia, luring Northern European refiners away from Urals blend with tempting alternatives.
Saudi Arabia is responding to recent flows of Siberian oil into China and the response is an attack on Russia's turf. Some would argue it is also a retaliation against Russia's military support for the Syrian regime of Bashar Al-Assad. Whatever the motive, a European price war is imminent; Urals crude recently fell to a $3.70 discount to benchmark Brent, a three-year low. Oil price reporting agency Argus reckons the gap could widen to $5 next year.
These are dreadful tidings for Russia: oil and gas represent two-thirds of the country's exports and a third of Russian GDP. The Russian economy is expected to contract 4 per cent this year and a further plunge in the oil price could push the country into a financial crisis with rampant inflation.
Venezuela is already in economic ruin. Years of incompetent rule under Hugo Chavez has left the country unable to cope with a collapse in export revenue, food shortages, and the world's worst inflation at 160 per cent. Capital Economics reckons that the economy is shrinking by 10 per cent a year, a level which could lead to severe social unrest with gang violence already threatening Sunday's parliamentary elections.
Meanwhile, Iraq is being bailed out by the IMF. Despite soaring oil production, the budget has been wrecked by the falling oil price and the continuing war with ISIS. Iraq is desperate to keep oil output growing but needs foreign investment to raise the rig count, and that depends on an acceptable oil price and keeping ISIS out of the oil fields. The oil ministries of both Iraq and Saudi Arabia are acutely aware of the imminent threat of Iranian oil reaching European markets next year when sanctions are removed. Half a million extra barrels a day will need to find a home and there will also be competition for investment dollars.
There lies the risk and the opportunity: We could adopt the "protest" posture, wash our hands of the smell of nasty politics and watch the chaos unravel while quietly pocketing the cash dividend of cheap crude.
Or, we could recognize that the world still needs 90 million barrels of crude daily to keep the world fed, clothed and fuelled. Saudi Arabia has more than $600-billion in foreign reserves but the Kingdom is liquidating its deposits at a rate of knots to cope with the loss of oil revenue dollars, which make up 80 per cent of the government budget. All the oil exporters are strapped for investment cash and even the richest of the lot, Saudi Arabia, desperately needs investment to keep the oil flowing and the subsidies flowing to a dependent, unproductive population.
The solution is make our investment conditional on substantial economic and political reform.
The price for helping Iran, Iraq, Venezuela and the other oil exporters to make the transition to the non-fossil fuel world has to be open doors, transparent markets and political reform.
The temptation is great, in a country such as Canada, to watch from the sidelines as a few petro states utterly fail, and then enjoy the brief oil price bounce. However, we know that failed states will infect their neighbours and the virus travels across continents. The beginning of the end of oil is a big problem for Canada but the solution can only be to be among the world's most efficient oil producers. For the petro states, the problem is much greater – to become a sophisticated, modern, democratic economy. We cannot wash our hands of that problem.
Carl Mortished is a Canadian financial journalist based in London.