6 February 2016

One night in his tent in Tripoli, Libya, Col. Muammar Khadafi told me, “the Saudis are a very rich family hiding behind high walls, terrified their neighbors will come and steal their wealth.”

He was right. The covetous neighbor most feared by the Saudis are Iran, followed by Egypt, Turkey and, more distantly, Israel. Iraq also used to be on the list until it was destroyed by the United States in 2003.

One must keep Saudi Arabia’s fear factor in mind to understand the oil wars that are now shaking the world’s economy to its foundations.

The Saudi royal family decided to kill two competitive birds with one stone – Iran and surging US shale oil producers – by kicking off a price war to run them out of business. Saudi Arabia is one of the world’s lowest cost oil producers. The Saudis also hoped to punish Russia for backing Syria’s government.

Price wars are the last recourse of all bad businessmen.

The problem with this ham-handed strategy is that your competitors will hang on desperately and cut prices to survive, even if it means running big losses. Price wars hurt all concerned. They dislocate production, markets, future investments and capital spending.

The result of Saudi Arabia’s oil price war has been to drive the once “black gold” down to around $32 a barrel from a high of $105 in 2015. Other Gulf producers joined Saudi Arabia in slashing prices. We have gone from panic over “peak oil” (worldwide shortages) to panic that we are drowning in oil.

So far, the Saudi oil war has indeed badly damaged the US shale and regular oil industry but has not put them out of business. However, oil industry dividends are being cut way back or eliminated. Blundering by the US, Canadian and Japanese central bankers has made things far worse.

Other major oil producers like Russia, Iran, Algeria, Malaysia, Kazakhstan and Indonesia have also been badly hurt but are hanging on. The oil war has seriously damaged the economy of the European Union. Japan should have been boosted by low oil prices but is also suffering relentless industrial decline, as witness by the humiliating sale of Sharp Electronics to China’s Foxconn.

Oil has become tightly correlated to North America’s stock markets, meaning that they rise and fall with the price of oil. Low oil prices may have helped a few industries like airlines, but they have created a worldwide recession. Canada, a dire example, has been battered by low oil prices and faces a bleak future unless resources rise sharply in price.

Efforts by OPEC and other oil producers to agree to cut back production and thus foster a price rise have so far failed due to fears that nations who reduce exports will see their former markets taken by cheating competitors. In economics, it’s known as ‘beggar they neighbors.’ The Saudis and Gulf producers keep blocking a decrease in oil production.

Now, the desert oil producers are deeply worried that Iran, freed from US economic prison, will soon begin exporting at least 500,000 bbls a day of oil. Iraqis oil production is finally returning to pre-US invasion levels. Oil prices could drop even further unless a deal is reached.

But Saudi Arabia is so petrified of Iran it is very reluctant to make a deal that will help grow the Islamic Republic’s economy – and hence even limited military power. So what’s to be done?

Some critics are saying that a group of obscenely rich Bedouins should not be allowed to hold the world economy to ransom. The western powers should press the Saudis to cut production or risk seeing vast Saudi investments in the US and Europe frozen – just as was done with Iran. The Saudis should also be told to stop their bloody war against Yemen that has killed thousands, cease their human rights abuses, and cease funding dangerous Islamic extremist movements, including ISIS and Syrian revolutionaries.

Why has this not been done? Because too many American and British politicians are on the Saudi payroll, and too much of Britain’s and America’s arms producers are dependent on Saudi business. The Saudis’ heads have swelled with arrogance while their dim-witted oil policies threaten the global economy.

The Saudis and OPEC must be offered a deal by the great powers that they can’t refuse. Otherwise, the Saudis may remain a bigger threat than ISIS.

Copyright Eric S. Margolis

This post is in: Mideast, Oil, Saudi Arabia


  1. I am sorry to disagree but the shale story is one big bubble. If we look at the SEC filings for the pure shale producers we see negative cash flows even when prices were over $100 a barrel. Given the heterogeneous nature of shale formations, the rapid depletion rates, and very small core areas where production is very profitable, we are looking at a small amount of economic production that is dwarfed by the credit induced levels of uneconomic production that we see today.

    I do not wish to bore you but let me get this bit out of the way. If we look at the latest report by the State of North Dakota, we see that in November 2015 there were 10,314 operating wells producing 109 barrels per day of oil. In November 2012, there were 4,918 operating wells producing 136 barrels per day. Notice all those new wells? They are the ones that give you the greatest production. Even doubling the number was not to offset the production declines. The peak for aggregate Bakken production was July 2015 even though the number of wells had increased by 270 from July 2015 to November 2015.

    The bottom line is that the shale story was a credit induced bubble that has created billions in negative cash flows and destroyed a huge amount of capital by diverting investment into unproductive areas. In 2012, WTI averaged $94.05 per barrel while Brent was near $111. Yet, a supposedly great producer like Continental managed to report negative cash flow of $1.86 billion. If the supposedly ‘best’ producer in the shale space could not generate a positive cash flow when prices are $94 what do you think is happening at $30?

    I agree about the stupidity of the Saudis but I disagree about what happens when they regain their sanity. The bottom line is that shale is one of the biggest scams in financial history because of what the story did to support a currency that should have been much weaker than it is. If he survives that long, when the curtains are pulled back, we could see Putin as the last man standing and no plan B for the energy sector.

    Please note that the CEOs of the shale companies have been very honest. Every presentation that I have heard has been very clear about the funding gaps that needed to be closed by new borrowing, selling assets, or issuing new shares. They were very clear that shale was not a profitable business and that their reported earnings depended on certain assumptions about depreciation and ultimate recoveries. Now that reality has intervened you may wish to rethink a few things when making projections about the future.

  2. America went to war with the middle east to jack up the price of oil and the Saudis flood the world with oil to bring it back down. What will happen in twenty years when the Saudi’s oil runs out?

  3. Another fine article by Eric.
    Reading this got me to thinking,what if the world decided to boycott Saudi oil and buy from other nations?
    Oil is the backbone of Saudi Arabia’s economy,without it they would be a pathetic 3rd world backwater.
    By boycotting Saudi oil it would force their hand,then perhaps the U.S and other G20 nations could exert pressure on Saudi Arabia to mend their ways and play ball.

  4. Good article! there’s an old saying that “power corrupts and absolute power corrupts absolutely” I think that this adage came from the middle ages when the church was the greedy bad guy – and now its the Saudi’s

  5. When I checked for a connection between the Saudis and the Rothschilds, I got such a flood of information, that it is going to take too long to read everything, that may be true and separate the grain from the chaff. This whole oil business is so complex, that it is impossible for one person to understand it all. One thing I am sure of though and that is, that the masses are being naively led down the path to their total enslavement, a kind of bondage the world has never known.

  6. I’m no fan of the Saudis but something doesn’t add up here. I keep reading pieces where they are being blamed (usually by the US) for the world’s oil glut and are scapegoated for not cutting their production to bring oil prices back up.

    Some facts:
    Technological advances like fracking have resulted in the US now being the world’s number one producer of oil.
    United States passed over Saudi Arabia about two years ago.

    According to the U.S. Energy Information Administration, which tracks global energy production and consumption statistics, the United States has produced more oil than Saudi Arabia since the fourth quarter of 2012. American oil production surpassed Russia in 2011.

    Here’s a link to a chart showing the trend from the Energy Information Administration:


    US oil production is rising steeply since 2012. Saudi produces less than the US and the line representing their production has remained fairly level over the same time period. Not rising. Russian levels are lower than the other two and are very slightly rising.

    In the third quarter of 2014 — the most recent available data — the United States produced 14.2 million barrels of oil per day; Saudi Arabia produced 11.7 million per day; and Russia produced 10.5 million per day. Together, that’s about 40 percent of total global production.

    This production growth has contributed to the United States’ ability to produce more oil than it imports for the first time in about 20 years.

    The Energy Information Administration expects American production to continue to grow in 2015, despite recent lower crude oil prices.

    So why is everybody, including Eric pointing fingers at the Saudis as being the bad guys here? What am I missing?

  7. John Meyer says:


    The Saudis have kept their production more or less stable over the past 5 years. The increase in oil production has come from North America to the tune of around an extra 5 or 6 million barrel per day.

    80% of this is from fracking in the USA and the rest from increased production from Canada’s oil sands.

    The fracking increase is due to stupid money created by quantitative easing and/or the normal Wall Street fraud. Very few fracking oil companies were profitable at $100 per barrel and almost none are at current prices but it makes a good base for a ponzi scheme.

    The Saudis are not responsible for this.

    John Meyer

  8. Excellent article, as always. I was particularly intrigued by the explanation for western nations not doing something to force Saudi Arabia to reduce its oil production. Canada, too, is tied in to the Saudis through a deal to sell armoured vehicles to the Saudi military by Genreral Dynamics from its London, Ontario plant. But there are other important reasons beyond those mentioned in the article, including the big Saudi investments in North American real estate and the Saudi Arabian government’s significant holdings of US and Canadian government treasury bills and bonds.

  9. Thumper123 says:

    One should also note another very credible scenario to explain the low oil prices that are devastating the world economy: Obama colluded with the Saudis to bring down the prices so as to stick it to the Russians.

  10. Mike Smith says:

    Isolate Saudi Arabia, Canada in particular should stop trade with them completely much less sell them arms. Make it clear to them either they deal fairly with us, or we will deal with the next regime to take power there.

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