Archive for December 2014

Observations of Saudi Arabia’s Price War on Oil Producing and Consuming Counties and the Repeating of History

December 17, 2014

In the tangled web of globalization and politics there is a striking convergence of several topics: the falling price of oil, the Russians in Ukraine, the Syrian Civil War, and military dimensions of uranium production in Iran. While dangerous and naïve to presume that these complexities and nuances can be simplified to short explanations and answers, there are themes that can be distilled.

The Saudis (and others in the Arab world) would like to see the fall of both the Bashar Hafez al-Assad regime in Syria and the containment, reduction of Iranian influence in the Middle East. From an international perspective the Iranian, Syrian and Russian governments share a complex solidarity. Intriguingly three of these economies are heavily based upon oil production. The Saudi’s are seemingly conducting economic war to intentionally enact a multi-faceted strategy focused on domestic security and economic prosperity by creating favorable regional stability.

By maintaining excess oil supply the Saudis are overtly working to force the price below the fixed costs of the shale oil producers. The overt end objective is to either (1) degrade the global shale oil production capacity by making shale oil uneconomical or (2) force firms into insolvency thus eliminating this competing sub-industry. Further for conventional oil producers–such as OPEC members and Russia–it is also forcing the price of oil to unprofitable levels for. This is an excellent example of Darwinian principals applied to commerce; this is economic war.

The question is whether both segments, the conventional oil producers and the shale oil producers, will be caught in the economic purgatory of negligible profit and/or an unrelenting (subsidized) contest of wills as parties produce below their variable costs. My sense is governments with economies dependent on oil production will capitulate or fail before commercial interests.

The covert—though transparent yet deniable—part of the strategy is to influence behavior changes for governments, specifically Iran and Russia. These economies are meaningfully dependent upon conventional oil production which is suffering the same economic losses as shale oil producers. By direct extension the national budgets are dependent on these ineffectively diversified economies. Sun Tzu in his legendary Art of War would describe this as attacking the opponent’s strategy (Iran and Syria) and disrupting his alliances (Russia and Iran) by causing attention to be focused on the domestic unrest and turbulence caused by the falling oil prices it helped orchestrate. As economic difficulties increase social unrest, authoritarian governments must increase focus and resources on the primarily objective of maintaining governmental and military control within its national borders. The reality of finite resources predictably accomplishes this at the expense of a country’s international initiatives. A reduction in Russian and Iran backing of President Bashar Hafez al-Assad in Syria would increase the probability of a Saudi-friendly government in that key Middle Eastern country. These actions combine to increased regional stability.

At this point, Saudi Arabia deems this level and method of destructive economic activities to be in its best interests. The gambit appears to be the short-term economic losses will be outweighed by both (1) increased security and (2) long-term profitability due to temporary or permanent reductions in global conventional and shale oil production capacity.

In their aims the Saudis’ find a willing ally: the United States. The Americans are willing to provide additional distractions by focusing on the Russian military incursion into Ukraine. The resulting economic sanctions are savaging the Russian economy, macro-economic policy and national budgets. The UN and EU backed economic sanctions on Iran and the resulting P5 +1 negotiations with Iran are choking off needed (and decreasing) oil revenues while creating inflation.  (The P5 +1 is comprised of the five permanent members of the UN Security Council—China, France, Russia, the United Kingdom and the United States—plus Germany.) Further by providing non-lethal aid to Syrian rebels this proxy effort both opens another vector. These efforts are in the strategic interests of both the United States and the Saudis as they seek the avenues to most effectively achieve the desired ends.

Mohamad Bazzi has an analysis on the Saudi’s game of blink here that opens the consequences of Saudi actions.

So what are the economic damages caused to the United States due to the falling oil prices? The Saudi’s creation of an uneconomical business environment for US shale oil producers may lead to consolidation or reduced output from this completing resource; however, the general trend is undeniable. As the finite supply of commercially-viable conventional oil continues to diminish, freemarket forces are increasingly incentivized to find alternatives as the recoverable conventional oil supply appears to exhaust itself over the next half century. The expansion into shale oil production is an inevitable result of these freemarket forces. These forces will take the form of new technology or methods for producing the same resource or will be an alternative product.

There is a noticeable void in the global conversation about the Saudi strategy and oil consumers: China.

China has the world’s second largest economy. During the current period of development and expansion, the economy is tremendously dependent on raw materials, energy, human labor, food, and capital. It has taken concrete steps to secure its economic future by aggressively asserting contested claims to territorial waters to secure needed resources.  Further it is forging closer economic with Brazil, Russia, India, Iran and Australia to avoid the resource starving the United Stated and the Allies applied to Japan in World War II. Additionally these claims help create a geographic buffer zone, also considered vital to China’s interests.  In the P5+1 negotiation with Iran China seeks regional stability and limiting Western encirclement of its borders.

For a country that values face and harmony, this creates a conundrum. The drop in the oil prices is creating favorable negotiating positions with its suppliers (e.g. Iran, Russian, India, other OPEC countries) and creating economic stability. However, a by-product is permitting the expansion and solidification of Western and American influence in the Middle East. Historically China, like Russia, views this as a destabilizing threat to Communist Party’s monopolistic governing power.

Current day proclamations by Russian President Vladimir Putin about the re-emergence of a Cold War may be far more true that initially realized. There are ramifications beyond heightened Western-Russian military tensions with purported NATO airspace incursions by Russian aircraft. While the scenarios are not identical, there are themes from 1989 (Germany and China) and 1991 (Soviet Union) that are echoing across today. The method and the venue have changed, but these deeper fissions and philosophical differences are being fought with no less fever today than over the last 100 years across the Middle East, Asia, the Atlantic and the Pacific.

Napkin Notes: What Are the Strategic Interests of the United States”

December 11, 2014

I have heard the phase “in the strategic (national) interests of the United States” from elected officials, military personnel, and politicians for some time now.  It bothers me principally because I cannot readily articulate them cleanly, clearly.  Sometimes it appears to be the escapism language used to avoid direct answers; however, I believe there is a kernel of truth here.  For as a country we do have overriding themes that form our core security, economic, social, governmental interests.  That begins an interesting question:

“What are the strategic interests of the United States?”

Napkin Notes

December 11, 2014

A new segment of Common Clarity is the inclusion of Napkin Notes. These musing are the start of an idea or a question. They that may be more or less half formed but they have a common theme: the enticing intellectual loose string just waiting to be pulled.

Such thoughts get scribbled on the margins of documents, scraps of paper, sticky notes, backs of business cards, napkins, etc. Maybe its genesis is in a single person’s mind, a focused brainstorming session or just random evening chatter among friends. In today’s increasingly technologically reliant world, these ideas may be tapped into the notes application on a smartphone, PDA or an email to one’s self or posted somewhere on social media.

Whatever the method it is conveyed, there is a common theme. It is a question or idea worth pursuing even if that conclusion yields a duded, dead-end.