We have a rare sighting of the sensible (but ahistorical!) Tom Friedman in today's NY Times. His theme - declining oil prices are partly due to a global economic slowdown but may be getting a push from a Saudi-US partnership intended to weaken Russia and Iran. One can only hope!
A Pump War?
Is it just my imagination or is there a global oil war underway pitting the United States and Saudi Arabia on one side against Russia and Iran on the other? One can’t say for sure whether the American-Saudi oil alliance is deliberate or a coincidence of interests, but, if it is explicit, then clearly we’re trying to do to President Vladimir Putin of Russia and Iran’s supreme leader, Ayatollah Ali Khamenei, exactly what the Americans and Saudis did to the last leaders of the Soviet Union: pump them to death — bankrupt them by bringing down the price of oil to levels below what both Moscow and Tehran need to finance their budgets.
Think about this: four oil producers — Libya, Iraq, Nigeria and Syria — are in turmoil today, and Iran is hobbled by sanctions. Ten years ago, such news would have sent oil prices soaring. But today, the opposite is happening. Global crude oil prices have been falling for weeks, now resting around $88 — after a long stretch at $105 to $110 a barrel.
I question the inclusion of Syria, whose small production plunged back in 2011. Still, point taken.
Sadly, even the sensible Tom Friedman is uncomfortable joining those of us here in reality. He provides an interesting bit of history seemingly blended with imagination:
The Russians have noticed. How could they not? They’ve seen this play before. The Russian newspaper Pravda published an article on April 3 with the headline, “Obama Wants Saudi Arabia to Destroy Russian Economy.” It said: “There is a precedent [for] such joint action that caused the collapse of the U.S.S.R. In 1985, the Kingdom dramatically increased oil production from 2 million to 10 million barrels per day, dropping the price from $32 to $10 per barrel. [The] U.S.S.R. began selling some batches at an even lower price, about $6 per barrel. Saudi Arabia [did not lose] anything, because when prices fell by 3.5 times [Saudi] production increased fivefold. The planned economy of the Soviet Union was not able to cope with falling export revenues, and this was one of the reasons for the collapse of the U.S.S.R.”
Indeed, the late Yegor Gaidar, who between 1991 and 1994 was Russia’s acting prime minister, observed in a Nov. 13, 2006, speech that: “The timeline of the collapse of the Soviet Union can be traced to Sept. 13, 1985. On this date, Sheikh Ahmed Zaki Yamani, the minister of oil of Saudi Arabia, declared that the monarchy had decided to alter its oil policy radically. The Saudis stopped protecting oil prices. ... During the next six months, oil production in Saudi Arabia increased fourfold, while oil prices collapsed. ... The Soviet Union lost approximately $20 billion per year, money without which the country simply could not survive.”
Obama getting all Reaganesque on Putin? Say it ain't so!
And actually, it may not be. PolitiFact looked at this Reagan/Saudi/Russia oil concept when it was mentioned by Reagan's son last March. They were unconvinced.
It seems unlikely that Friedman's numbers about oil prices and Saudi production are correct. Politifact includes a DoE chart of annual oil production by the Saudis and Russia from 1980 to 1988 (but with no annual markers, so guess away!). Saudi production seems to rise from about 4 million to about 5.5 million barrels per day; the time frame is murky, but there is no way to come up with 2 million or 10 million in a 1985-86 time period. Over a full year, anyway - I suppose it is possible that for a few months Saudi Arabia may have produced oil at a rate of 10 million barrels per year with the idea of prodding/terrifying their cartel brethren into agreeing on shared cuts in production. Remember, this was back when the rest of OPEC was cheating on their allotments by over-producing and the Saudis were graciously giving them slack by cutting their own production. From the Times, Jan 24 1986:
By more than doubling its daily oil production since last August, Saudi Arabia, the kingpin of the Organization of Petroleum Exporting Countries that is seeking to regain its control over the marketplace, has flooded an already glutted world petroleum market, sending prices into a tailspin.
...
The Saudi Arabian strategy, according to oil analysts, is straightforward. By setting off a scary price slide, Saudi Arabia seeks to force other producers, especially those outside OPEC, to change course and cooperate in limiting production levels to stabilize prices.
As to prices, there was a brief dip in West Texas Intermediate to, hmm, $11. But was this really a Reagan strategy? That is far from clear, as Politifact notes. Beyond that, contemporaneous press coverage indicates that the collapse in oil prices was viewed as a problem for the US. Here's why:
All this, however, is byplay and sheds no light on the serious policy question: Does $10-a-barrel oil serve America's interests? The gut answer - that no price can be too low as long as it reflects costs -is the right one. The complication is that very low prices today may lead to high prices tomorrow. And the real challenge for Washington is to devise policies that preserve the benefits of bargain-price oil, yet protect against future energy shortage.
The immediate reason oil prices have collapsed is Saudi Arabia's decision to pump more oil. But the underlying cause was greed on the part of OPEC cartel members. In the short run, neither the supply of oil nor demand is very responsive to price. That's why it was possible to raise the price to $40 a barrel in 1980, and make it stick. But once the world had time to adjust, and conserve, the supply of $40 oil vastly exceeded demand. Why shouldn't America now sit back and enjoy our turn of the worm? Because, oil producers and bankers say, look at the unemployment rate in Texas and the bank loan default rate in New York. But such problems hardly justify encouraging higher world prices and thus transferring billions to Arab potentates and oil company stockholders. There are ways to protect the innocent and the needy for a fraction of the cost of a general price increase.
A better reason for worrying about low prices is, as President Reagan observed, the threat of future shortages. Economists at Morgan Guaranty estimate that if future prices average $16 to $18 a barrel, the current gap between world production capacity and demand will close within a decade. By 1996, America could be as vulnerable to OPEC as it was in 1974 and 1979.
Reagan and Vice-President Bush expressed their concerns that the US oil industry would be crushed in the short term by market manipulation. As to a connection with sticking it to Russia, well, that was unmentioned.
HMMM: Maybe Friedman is half-right, or at least, not all wrong; this is from the Times, Sept 24 1985:
Under OPEC's production limits, Saudi Arabia is allowed to produce 4.35 million barrels of oil daily out of the total OPEC limit of 16 million. But Saudi Arabia has been keeping production lower to make up for overproduction by OPEC colleagues.
A drop in demand, the cheating by other OPEC members and stepped-up production of non-OPEC oil countries resulted in Saudi production's briefly plunging below 2 million barrels a day this year. Recently it has risen to about 3 million barrels a day.
And the story linked above mentioned $10/bbl oil, the DoE chart notwithstanding.
PolitiFact did all this research too. Their summary:
The pattern of production and prices do not fit neatly with {the young] Reagan’s statement. We have no public documents to confirm that Reagan asked the Saudis to use oil as an economic weapon against the USSR.
On the other hand, we have an extensive public record that Saudi Arabia was fighting with its OPEC partners and had warned them for years that it would raise production to make them pay a price for cheating on their quotas. We also see that Saudi Arabia charted its own course in setting oil prices and the consensus view among oil experts is OPEC, not Reagan, shaped their production decisions.
Finally, we have Bush calling on the Saudis to help send prices back up. This is exactly counter to the Reagan strategy in the statement.
There might be an element of truth in the claim, but the public record strongly points the other way. We rate the statement Mostly False.
Interesting, because the Soviet connection was certainly discussed. Here is William Safire, from March 31 1986, speculating as to Saudi motives:
America's geopoliticians preen at the loss in hard currency to the Soviet Union, largest exporter of oil, and the hawks in Washington delight at the anger building in the Warsaw Pact as the Russians force their European clients to pay double the world price.
Of course, and Friedman notwithstanding, "result" and "intention" are not synonyms. As to Reagan engineering the Saudi-instigated oil plunge, I would lean more towards a lemons-lemonade explanation.