Saudi Arabia’s Attempt to Kill Off U.S. Fracking Could Kill Off Some Unsavory Regimes Too

Over the Thanksgiving holiday, the Organization
of Petroleum Exporting Countries (OPEC) decided not to cut back on
oil production, thus letting crude prices continue to fall. As a
result of the U.S. the shale oil boom and weaker global economic
growth, oil prices have dropped by nearly 40 percent this year.
Earlier today, the West Texas Intermediate fell briefly below $65
per barrel.

U.S. oil production has risen from about 5 million barrels per
day in 2005 to nearly 8 million today. More supply combined with
faltering demand has predictably resulted in lower prices. Saudi
Arabia produces oil much more cheaply than do American oil
companies that use the higher cost fracking to coax crude out of
the ground. The Saudis are attempting to push the price oil below
the cost of fracking, and thus drive U.S. domestic oil producers
out of the market. (Lower oil prices are intended to bankrupt
Canadian oil sands producers too.)

However, another side effect of low petroleum prices is the
possible destabilization of petro-states like Russia, Venezuela,
and Iran. In an article that suggests that the price of oil could
fall as low as $40 per barrel, Bloomberg News rounds up
the the effects of low prices on various
unsavory regimes:

Oil and gas provide 68 percent of Russia’s exports and 50
percent of its federal budget.
Russia has already lost almost $90 billion of its currency reserves this year, equal to 4.5 percent
of its economy, as it tried to prevent the ruble from tumbling
after Western countries imposed sanctions to punish Russian
meddling in Ukraine. The ruble is down 35 percent against the
dollar since June…

Even before the price tumble, Iran’s oil exports were already
crumbling because of sanctions imposed over its nuclear program.
Production is at a 20-year low, exports have fallen by half since
early 2012 to 1 million barrels a day, and the rial has plummeted
80 percent on the black market, says the IMF.

Lower oil may increase the pain on Iran’s population, though it
may be insufficient to push its leaders to accept an end to the
nuclear program, which they insist is peaceful. …

Venezuelan Rioting: The country was paralyzed by deadly riots
earlier this year after police repressed protests about spiraling
inflation, shortages of consumer goods
and worsening crime.

“The dire state of the economy is likely to trigger renewed
social unrest, while it seems that the government is running out of
hard currency,” Capital
Economics, a London research firm, wrote in a Nov. 28
report.

Declining oil may force the government to take steps to avoid a
default including devaluing the currency, cutting imports, raising
domestic energy prices and cutting subsidies shipments to poorer
countries in the region, according to Francisco
Rodriguez, an economist at Bank of America Merrill Lynch.

“Though all these entail difficult choices, default is not an
appealing alternative,” he said. “Were Venezuela to default,
bondholders would almost surely move to attach the country’s
refineries and oil shipments abroad.”

The current situation in the oil markets looks like yet another
boom-bust-boom-bust cycle in which low prices lead to low
exploration, production, and technology investments that, in turn,
leads to high prices and higher levels of technology investments,
again resulting in more production and lower prices, and so
forth.

In the meantime, enjoy the cheaper fuel and relish the fiscal
pain of global bad actors.