Saudi Oil Masterstroke

Last week Saudi Arabia blocked a proposal by the other OPEC members to curtail oil production, sending oil prices plummeting around the world.

Claims are oil prices could fall even as low as $50 a barrel or even below that.

This is very, very bad news for much of the oil extraction sector in North America and also for various LNG schemes now being considered there and has Western governments in a state of panic.

The point is even at $70 a barrel (i) fracking oil operations become unprofitable, (ii) the only thing Canada’s tar sand oil industry can do is to commit mass suicide, (iii) Mexican gulf offshore rigs are likewise an exercise in futility.

Thus, you can argue it took Saudi Arabia one veto to put the entire North American energy industry in jeopardy.

To make things worse Saudi Arabia has over $700 billion in cash reserves and can sustain low oil prices for years if not decades — the equivalent of a control shot to the head of North America’s indigenous oil industry — to make sure it never rears its (fracking ugly) head ever again.

[Whether Saudi Arabia is prepared to go that far (or whether it will be allowed to) is another matter and beside the point.]

Also, oil multinationals such as BP or Shell are the biggest sources of tax revenues in quite a number of Western nations, certainly in Britain, and are major employers to boot. But now, with their profits decimated, the economy of, say, Britain will lose billions, potentially exacerbating their already overwhelming debt problems and causing all sorts of economic and social mayhem.

In fact, along with the United States and Canada, Britain is likely to be the hardest hit by the oil price collapse — its North Sea oil industry, the biggest source of revenue, will be devastated.

Either of the two things will happen now.

Either there will be a concerted effort to drive oil prices much higher (using all means available) — at least to $100 per barrel — that’s where Canada’s tar sands become mildly profitable;

Or we will witness a crisis in the United States, Britain, other Western nations (which are emerging freaking fracking oil and/or gas producers) and maybe in much of the world the likes of which we have never seen — with energy companies and banks and financial institutions exposed to them collapsing in numbers with millions thrown out of jobs and left with no sources of income.

The 2008 crisis will look tame in comparison.

Make your pick… pick your poison.

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