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Saudi Arabia, Shale & Iran: Everything You Need To Know About The Oil Crisis - Forbes Page 1 of 14
Saudi Arabia, Shale &

Iran: Everything You
Need To Know About
The Oil Crisis
JAN 26, 2016 @ 12:03 PM 47,772 VIEWS
Sara Zervos
CONTRIBUTOR
I am a global economist and investor
specializing in emerging markets.
FOLLOW ON FORBES (13)
Opinions expressed by Forbes Contributors are their own.
FULL BIO
In just 15 trading days, oil prices have

managed to plunge another 20%, after a
fall of 29% in 2015 and 44% in 2014.
While markets took these drops in stride
in the past few years, something seems
different about the volatile plunge so far
in 2016.
Why are oil prices so low? And why are

the worlds asset markets so worked up
about it?

http://www.forbes.com/sites/sarazervos/2016/01/26/saudi-arabia-shale-iran-everything-yo... 17.04.2016
Oil prices are low because both demand

and supply forces are conspiring to
make it so. Why markets are terrified is
another story.
MIDLAND, TX (Photo by Spencer Platt/Getty Images)
First, the demand for oil is highly

correlated to economic activity, which
currently is looking rather weak in
cyclical terms. In good times, consumers
typically have growing income and thus
have a higher demand for goods.
Companies, ever eager to supply these
goods, have to run factories longer or
faster, and demand more energy to do
so. More goods get produced, more get
transported, and more people drive to
buy them or to deliver them. In fact,
according to the U.S. Energy
Information Administration about 75%
of the petroleum used in the USA in
2014 was for gas, heating oil, diesel, and
jet fuel.
The top 5 oil-consuming countries in the

world (at least in the last few years) are
the U.S., China, Japan, India, and
Russia. Combining all the member

countries in Europe would bring this

region high in the ranks. None of these
have shown stellar economic growth in
the past few years. In fact, many
emerging markets such as Russia are
suffering significant recessions. The
U.S., while not in a recession, appears to
be in the midst of a soft patch. Japan
and Europe still have weak economies,
and policymakers are trying with little
success to boost growth. Investors are
focusing their fears on China, the #2
consumer of oil in the world as the
countrys economic growth rate
continues to inch lower, and for once, its
government apparently isnt able to turn
around the decline.
As such, the global demand for oil is just

not very strong. Low demand brings low
prices.
However, the real story behind the

plunge in oil prices lies in supply. The
United States shale gas revolution has
turned out to be a permanent game
changer for world oil supply. In fact, in
2014 the International Energy Agency
reported that the U.S. had become the
largest oil and natural gas producer,
surpassing both Russia and Saudi
Arabia. This addition to the global oil
market was enough to induce oil prices
to fall from their highs above $100 per
barrel to levels in the $70s.
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WTI Oil Price
Source: Bloomberg
Typically when prices fall, OPEC comes

to the rescue. OPEC, the Organization of
Petroleum Exporting Countries, has
historically controlled the majority of
the oils supply, and tended to increase
production when prices were too high
and cut production with prices fell too
much. The November 2014 OPEC
meeting delivered a significant shock to
the world; instead of cutting production
to prop up prices, Saudi Arabia in

particular showed it was prepared to

keep pumping and even lose money, in
order to try to force the new higher cost
producers out of the market. Over the
course of 2015, rather than getting
forced out, U.S. shale producers
innovated and cut costs, and survived
even as prices fell to $50 a barrel.
Meanwhile, over the course of 2015,

non-OPEC oil producers kept their
pumps on at full steam as well. Most of
these countries fiscal balances were
under severe financial strain. As
government budgets had been relying on
significantly higher oil prices, politicians
were short on money and yet still reliant
on oil revenues. They had to maximize
oil production in order to get money in
the coffers.
These issues were dominant drivers of

supply from 2014-2015. However, as
2015 came to a close, yet another oil
producer was about to enter the scene:
Iran. The elimination of Irans sanctions
means that the country will once again
export to the worlds markets. Irans
government has stated intentions to
produce 500,000 barrels a day, which in
a market that is already oversupplied by
over 1 million barrels per day, is enough
to cause further disruption. Iran
desperately needs the oil revenues to
buy crucially needed imports; the
country has every incentive to maximize
all exports of oil it can.

Finally, the last nail in the coffin of oil

prices is the growing likelihood that the
world runs out of space near-term to
hold all the oil being produced, a
phenomena called tank tops. In my
December Forbes article, I showed data
indicating world storage was filling up,
and only the U.S. had much spare
capacity. With continued global excess
supply, this spare storage could likely
get full in the first half of the year.
In sum, oil is getting pumped out of the

ground at maximum output, by a whole
host of new producers, and there are not
many places to put it since demand is
relatively weak. In the latest energy
outlook produced by the U.S. Energy
Information Administration, the
oversupply will continue for all of 2016
(see chart above). As a basic rule of
economics, the only way to clear this
surplus from the system is for prices to
become very cheap and clear excess
supply. With very low prices, consumers
will demand more, and/or producers
will get priced out of the market and
production will fall. The price volatility

we have recently witnessed as oil shoots

up and down by 5-7% daily, from $26-31
per barrel, suggests that we are getting
close to that clearing price.
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The Real Reasons

Saudi Arabia Won't
Support Oil Prices
Above $40
APR 16, 2016 @ 11:08 AM 59,718 VIEWS
Panos Mourdoukoutas
CONTRIBUTOR
I cover global markets, business and
investment strategy
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Opinions expressed by Forbes Contributors are their own.
FULL BIO
Saudi Arabia had a clear and loud

message to oil markets ahead of the
upcoming Doha meeting: the Kingdom
rules out any production cuts. This
means that Saudi Arabia wont support
the recent run up of oil prices above $40
at this point.

Why? Because markets are volatile

thats the official reason. Whatever that
means. Perhaps, Saudi Arabia leaders
fear that production cuts arent
enforceable. But the same is true for
production freezes the Kingdom has
been promoting.
The real reasons?
I have no insight into the Kingdoms

political machine, but I can summarize
different theories presented here by the
scores of commentators to my previous
pieces on this subject.
The first theory is that Saudi Arabia

wants to keep prices below $40, in the
short run, to crush American frackers
and in the long run, regain leadership of
the oil market.In fact Ali al-Naimi, Saudi
Arabias petroleum minister, has
told American frackers publicly that they
will be crushed by the market
because they dont have the cost
structure to survive the on-going price
war.
The second theory is that Saudi Arabia is

in an all-out economic war to undermine
the American economy.
The plan is to crush the US economy,

says one commentator.They have made
the economy dependent on the low oil
prices and held them there for years to
allow the economy to become
entrenched upon needing these prices.

Saudi Arabia, Shale & Iran: Everything You Need To Know About The Oil Crisis - For... Page 10 of 14
Now the second phase of the plan shall

soon come. Rapid reduction in output.
Driving the price up much faster than
the US fracking and oil industry can
reestablish home land supply. This will
crush every aspect of the US economy. .
.The USA is a sitting DUCK. But before
they pull the trigger, they are going to tie
up cash and funding through lending,
which will further prevent the oil
industry from reestablishing US
production and output.
The trouble with both theories is that

Saudi Arabia and America have been
long time economic and political allies.
Why would Saudi Arabia risk these
relations by driving American frackers
out of business, or by declaring an all-
out economic war against the US?
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Will Iran Ever Get

What It's Asking For?
That lays the foundation for the third

theory: Saudi Arabia and America have
teamed up together to drive oil prices
lower to undermine ISIS and the
Russians.
Saudis increased oil production to

damage Russias economy, the REAL
target; they DID IT in ASSOCIATION
with their protector, the USA, writes
another commentator.In exchange for
the loss, the USA compensates Saudi
Arabia with weapons, and military
protection against IranRussia will
soon give up, cooling things down in
Ukraine, and reaching an agreement
with USA. This is the corrected story.
The Saudis dont care about frackers at

this point, agrees another
commentator.What they do care about
is Russia and Iran being able to fund
destabilizing groups that threaten their
regime. Keeping oil down helps the US
and somewhat prevents Russia and Iran
from funding these groups to the point
they can win. The Saudi Royals dont
want to give up power just yet. And the
only way to do that at the moment is to
keep oil low.
Whats happening right now is to

artificially pump oil into the market to
depress the prices such that the ISIS and
Putin will run out of funds for their
adventures, adds a commentator. Its
not a coincidence that the oil price
started tanking when Putin invaded
Ukraine.
But this strategy wont work, according

to a fifth commentator, who says Saudi
Arabia accepted USA plan to use oil

price as a tool to crush Russian

economy. But the plan will backfire on
Saudi Arabia. Russia is far less
vulnerable to low oil price than Saudi
Arabia. Russian oil exports contribute
40% to the Russian budget, but for the
Saudis its more like 95 %. The Russian
oil industry is doing good, and actual
output of 10.9 million b/d is the biggest
since the Soviet era.
While it is unclear which theory best

explains Saudi Arabias reluctance to
support an oil price above $40, one
thing is clear: volatility in the oil market
will continue, making it harder for
traders and investors to place their bets
on either side of the market.
Index/ETF One-Year
Performance
Market Vector Oil Services -19.12%

(NYSE:OIH)
Ipath S&P GSCI Crude Oil -49.05

(NYSE:OIL)
United States Oil Fund -42.4

(NYSE:USO)
Source: Finance.yahoo.com
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Saudi Arabia, Shale & Iran: Everything You Need To Know About The Oil Crisis - Forbes Page 1 of 14

Saudi Arabia, Shale &

Opinions expressed by Forbes Contributors are their own.

In just 15 trading days, oil prices have

Why are oil prices so low? And why are

Oil prices are low because both demand

MIDLAND, TX (Photo by Spencer Platt/Getty Images)

First, the demand for oil is highly

The top 5 oil-consuming countries in the

countries in Europe would bring this

As such, the global demand for oil is just

However, the real story behind the

Booms, Busts And Billionaires:

WTI Oil Price

Typically when prices fall, OPEC comes

particular showed it was prepared to

Meanwhile, over the course of 2015,

These issues were dominant drivers of

Finally, the last nail in the coffin of oil

In sum, oil is getting pumped out of the

we have recently witnessed as oil shoots

Please see my website

3 Comment on this story

Report Corrections Reprints &

Best Credit Cards of 2016

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The Real Reasons

Opinions expressed by Forbes Contributors are their own.

Saudi Arabia had a clear and loud

Why? Because markets are volatile

The real reasons?

I have no insight into the Kingdoms

The first theory is that Saudi Arabia

The second theory is that Saudi Arabia is

The plan is to crush the US economy,

Now the second phase of the plan shall

The trouble with both theories is that

Will Iran Ever Get

That lays the foundation for the third

Saudis increased oil production to

The Saudis dont care about frackers at

Whats happening right now is to

But this strategy wont work, according

price as a tool to crush Russian

While it is unclear which theory best

Market Vector Oil Services -19.12%

Ipath S&P GSCI Crude Oil -49.05

United States Oil Fund -42.4

10 Comment on this story

Report Corrections Reprints &

OIL FOR HEAVY OIL

OIL TRADE 10 OIL

From the Web Ads by Revcontent

Revcontent Revcontent Looks 900% Growth Puts Heavy Partners

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