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Crude Warfare: An Oil Conspiracy

 3 min read / 

Since the strength of oil prices in the summer of 2014; crude oil has been tumbling week on week, closing the year at $53.64 per barrel. Low oil prices are great for high oil consumers such as the US, Japan and China as it can drive economic growth, but it can equally be very damaging to major oil exporters such as Russia, Iran and Venezuela. There is a combination of reasons for this decline in prices; the recent surge in the US shale oil industry, slowing demand from China and Germany and slowing gasoline consumption due to the increased fuel efficiency of cars. However, many conspiracy theorists have pitched alternative views to the recent price crash, including the President of Venezuela himself. A great conspiracy theory can align itself with all the evidence presentable.

Crude Warfare

The conspiracy is simple, there is an agreement between the US and Saudi Arabia to drive down oil prices. This way, the US can add to the pressure of the Russian trade sanctions and falling ruble by manipulating the value of oil. As tensions between the US and Russia flare up, Obama is doing all he can to destroy the Russian economy. This would also benefit Saudi Arabia by driving out competition from the Middle Eastern oil market, as Saudi Arabia have lower break-even costs than many Middle Eastern economies (see the table below). This was even pitched by the Venezuelan President Nicolas Maduro; “it’s a strategically planned war…destroy Russia…it‘s also aimed at Venezuela, to try and destroy our revolution and cause an economic collapse” and Russia‘s President Vladimir Putin agrees that it‘s an agreement between the US and Saudi Arabia.

OPEC “break-even“ prices in 2012. (Matthew Hulbert/European Energy Review)

But how exactly are they fixing the prices of a worldwide commodity? As all traded goods, prices are determined by supply and demand. The US is flooding the market with shale oil and dramatically reducing its oil imports to become ‘energy independent’ in the next two decades. To ensure that prices are not supported by a cut in production from Middle Eastern countries, Saudi Arabia agreed to keep production high.

How can low oil prices hurt Russia?

Russian oil exports account for around 45% of government revenue. Decreased oil price can significantly reduce Putin’s spending possibilities and curb his aggressive conduct seen recently. Furthermore, the fall in oil price has sent the ruble crashing as investors pull their money from the oil dependent country. In fact, the price of the ruble is falling so fast that the Russian Central Bank hiked interest rates up to 17%, which will have a significant impact on Russian economic growth. It is predicted that if oil prices remain below $60 per barrel, the Russian economy will shrink by around 5%.

The Truth?

Every conspiracy theory can quickly be taken apart, or an alternative, more rational view can be given. The US wants to become more energy dependent so has offered subsidies for shale production and Saudi Arabia is not willing to lower oil production as it remembers losing market share in the 1980s by trying (and failing) to support prices. Russia has, unfortunately, suffered from bad timing and smaller exporting countries will take the brunt of it. Both alternatives are a possibility.

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