Why the world should back the Saudi-Russian oil plan

Friday 19/02/2016

Efforts by Saudi Arabia and Russia, joined by Qatar and Venezuela, to put a floor under plunging global oil prices are to be warmly welcomed. There can be no doubt that Riyadh and Moscow are in earnest about the effort and their influence can be clearly seen in bringing other countries onboard.
The agreement is by no means a done deal: Russia’s Energy Ministry cautioned that it remains dependent on other major produc­ers, notably Iran and Iraq, joining in as well.
Some short-sighted US interests may oppose the deal or try and take advantage to dump the grow­ing US surplus onto world mar­kets. They should think again.
From a broader US perspec­tive, stabilising global oil prices is absolutely crucial to preventing the US domestic oil industry from entering its greatest crisis in 86 years, since the depths of the great depression.
The extraordinarily irresponsible US policy of maintaining virtually zero prime interest rates for so long meant that, when the fracking revolution boomed, far too much money was borrowed and invested in the fracking sector across the heartland of America. As a result, thousands of producers faced ruin when oil prices dropped to less than the mid-$40s per barrel.
Far worse, the collapse of those companies exposed the worth­lessness of the junk bonds that financed them, threatening Wall Street with its greatest peril since the September 2008 meltdown.
Even if oil prices stabilise far below the $45 per barrel make-or-break rate for so many US domestic producers, sane financial and en­ergy interests in the United States should do their utmost to ensure that the Saudi-Russian deal holds
Ironically, the greatest threat to this deal is the country that both Russia and the United States have indulged and embowered system­atically over the past year — Iran.
Thanks to US Secretary of State John Kerry’s extraordinarily wit­less P5+1 nuclear agreement with Iran last July, between $50 billion to $150 billion in Iranian frozen assets is being freed. Kerry claims the figure is “only” $50 billion — though economic brilliance has never been evident in his skill set.
Even if the lower figure turns out to be correct, it gives Tehran the financial cushion to drive oil prices down as far as it likes to maximise short-term market share — a policy that could prove ruinous for Saudi Arabia and the Russians alike.
The Iraqi government is likely to be far more responsive to the wishes of the ayatollahs than to those of the Saudis, the Americans or even the Russians — a reflec­tion of the gross incompetence Washington has shown in manag­ing relations with the state system it created in Baghdad.
As Bloomberg noted February 16th, supply far outstrips demand and record oil stockpiles continue to grow around the world. That means global oil prices could even fall to less than $20 a barrel before the rout is over, Goldman Sachs warned.
This global oil glut is very bad news for the United States but it is even worse news for Russia.
The willingness of the Russians to talk seriously with Riyadh to try to resolve the crisis is a refreshing ray of realism and hope. The Rus­sian oil oligarchs and diplomats most involved should note the reckless willingness of the Iranians to stab them in the back by boost­ing production at such a crucial time.
Tehran plans to boost output and exports by 1 million barrels a day in 2016, thanks to the ending of international sanctions in Janu­ary, another of Kerry’s signature achievements.
The international community should hope Moscow and Riyadh, working together, can rein in the Iranians. As Qatar’s wise Energy Minister Mohammed bin Saleh al- Sada said, according to a Bloomb­erg report, low oil prices have not been positive for the world.