Oil Wars Redux

In the 1970s, OPEC raised the price of oil in retaliation for US support to Israel during the 1973 Yom Kippur War. Now, the Arab countries are using the oil weapon on each other, and instead of raising prices, the key is dropping them to cut off revenues.

Crude oil fell to a 19-month low as Saudi Arabia, OPEC’s biggest producer, said it will increase production capacity.

Saudi Arabia has 3 million daily barrels of spare capacity and will push ahead with projects to expand output, Oil Minister Ali al-Naimi said today. Prices plunged yesterday after al-Naimi said he saw no need for an emergency OPEC meeting to consider further cuts in output. Prices have plunged 17 percent this year on speculation OPEC members won’t comply with production cuts…

“The Saudis probably want lower prices for a combination of reasons,'’ said Nauman Barakat, senior vice president of global energy futures at Macquarie Futures USA Inc. in New York. “This could benefit them both politically and economically. This may be a signal for Iran to stop meddling in Iraq and at the same time stanch the move to alternative fuels such as ethanol.'’

Well, this will put a damper in alternative fuels research, which gets additional support when price levels stayed above $60-65 per barrel. Now, with the prices sliding, will manufacturers and researchers continue their research or put it on the back burner? I certainly hope that they continue research, because reducing dependency on the oil thugocracies (and the biggest exporters of oil are nearly all thugocracies - Venezuela, Iran, Saudi Arabia, Sudan) will enhance US national security.

However, the short term prospects are lower costs for transporting goods, lower gas prices as the new prices circulate through the market, and it will boost the airline industry that has been beset by rising jet fuel costs.

Saudi Arabia doesn't have a military to compete against the Iranians, so they're using the best available weapon - the production of oil above the levels set by OPEC. Flood the market with oil and Iran can't get as much for its oil on the international markets, so they have to either produce more oil to match the revenue targets, or cut their production to equalize the market - either way, the Iranians are left with fewer options. This is a good thing.