Low Oil Prices and Dangerous Games

by Lear Capital EditorialAugust 11, 2016

So why ARE gas prices so low lately? Well, in short, Saudi Arabia has been flooding the market with record breaking output and has refused to cut production to let the price recover. Other OPEC partners have asked many times for the Saudis to cool it and let prices catch up, but they refuse. Why? Because the Saudis love Americans and want us to be happy? Of course! They enjoy knowing that road trips and long commutes are less painful to our wallets thanks to their extended oil glut, right?

Not buying it? There are a few other explanations that might be more plausible.

One – The Long Game - Saudi Arabia is waging a war of attrition with other oil producers in order to maintain global dominance of the energy markets in the long term. This has devastated Venezuela, of course, whose centrally managed socialist economy has long been massively overdependent on oil revenues. Venezuela, once one of the happiest and richest nations in South America, now has shortages of everything, including food. Children are starving, riots and unrest are overtaking the country. Inflation is over 400%. It’s devastating. Nigeria is also suffering tremendously, and Kuwait, Ecuador and others are becoming increasingly desperate.

The US shale oil industry has seen a few bankruptcies of the most overleveraged producers, but others have found ways to cut expenses and stay profitable. So if Saudi Arabia was targeting US oil production in particular, it is not going well for them. Most US producers can be profitable at $50 a barrel whereas most of the regimes in OPEC need $100/barrel to fund themselves.

Two – The Short Game - Perhaps the House of Saud is bracing for an overthrow. What if they are pumping those oil fields for all they are worth, while they still can? This article details the economic equation the Saudis could be using to price in an overthrow sometime in the next decade. Of course, if this is correct and they continue to keep the oil price depressed, they will take several other regimes down with them. Venezuela can't hold out much longer, Nigeria is right behind them. It's a dangerous game of economic chicken if that is what Saudi Arabia is up to.

OR maybe they really do think they can withstand the short term pain in order to wash out some competition? If they can, what will they do with near-monopoly control?

Either theory points to massive instability in the energy markets within the next decade. 

We all know how reactive the economy can be to rising fuel costs. An oil shock could be just the pin the stock market bubble has been waiting for. If another oil shock happens, gold and precious metals will quickly rise out of reach for a lot of desperate people. Hedge your portfolio NOW while you see the writing on the wall. 

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