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Oil, the Sheikhs and the Rest of the World

 3 min read / 

Oil, the Sheikhs and the rest of the world

Oil is not just fuel. It is a weapon, a strategic asset, a maker of fortune and a leading indicator of the economic and political situations around the globe. December 2014; oil price has hit a five-year low with the price being $67.30 for Brent crude oil per barrel on Monday the 8th of December having earlier hitting $66.70 in October 2009. Morgan Stanley predictions were that Brent Crude would average $70 per barrel in 2015, which is $28 lower than a previous forecast as well as hitting $88 per barrel in 2016. Analyst Adam Longson states that unless OPEC producers intervene – by cutting down production, market risk will remain ‘unbalanced.’ The cartel‘s biggest member, Saudi Arabia, refuses to accept calls following last month‘s OPEC meeting to cut production amid the free fall of prices.

Why is that happening?

This is because the Saudis and their Gulf allies decided that they would not sacrifice their own market share, in order to restore the price of oil. Since they hold a third of OPEC‘s production, they could easily rein it in, however have refused to, primarily for geopolitical reasons. They will not give benefits to countries they oppose, such as Russia, Iran, Latin America and other African countries.  Furthermore, a foreign diplomat based in Saudi Arabia, claims that it does not help increase prices by cutting production as it wants to help its major customers, India and China. Russia on the other hand, accuses Saudi Arabia of manipulating oil prices. Mikhail Leontyev adds that this is a political manipulation, which could end badly, having Saudi officials admitting that they are comfortable with lower prices.

The Russian government warns that the economy would fall into recession due to oil price declines and continuing sanctions against it, in response to its role in eastern Ukraine. For this reason, it is believed that Russia is going to increase interest rates to 12%, in order to prevent an economic downturn. This will happen in addition to cutbacks in government spending, following the turbulence caused in Russian stock markets. These actions are in the interest of both Saudi Arabia and its long-time strategic partner, the United States.  Given the current economic and political environment around the world, the strategic alliance of Saudi Arabia and the United States might be rather ambiguous.

Obama‘s engagement with Iran over Iranian nuclear capabilities are of great concern to the Saudis, as they consider Iran to be a mortal threat. The U.S is considering complying with the Iranian desires in exchange for more cooperation against the Islamic State. Saudi might be tempted to respond with a coalition with China if it feels ‘dumped‘ by the U.S. If this happens, persuading other Arab Gulf states, the implications for America and Europe could be extremely serious.

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