The Bow

It seems that the sleeping giant may have awoken. Saudi Arabia, seeing that the United States has surpassed it in oil production (see: Bloomberg News Story) has thrown down the gauntlet. The world is now awash in oil … with the result that crude oil prices are nearing four-year lows. Normally, Saudi Arabia would cut production in order to stabilize the price of crude on world markets. But this time Riyadh has decided to teach the United States and Canada a lesson. The Saudi’s are increasing their production to nearly 10 million barrels a day in order to hold onto market share.  

But the added benefit to the Saudi’s is that those considering investing in fracking for oil in the America will now think twice about sinking any new wells … given the prospect of even lower prices for crude … see: Live Trading News Story (a very revealing discussion.) This is because it obviously costs more to frack in the U.S. and Canadian shale than to drill in Saudi Arabia’s sandy lower quadrant … even after adding back the transportation costs.

Speaking of transportation costs … it also costs a whole lot more to ship Canadian oil to the refineries in Louisiana by tanker-train than it would by pipeline ... and it is more dangerous. So, in a very real way, the Obama administration is abetting this Saudi oil-war strategy by its refusal to allow the Keystone XL pipeline to go forward. 

Maybe this is why President Obama bowed to King Abdullah of Saudi Arabia some five years ago?

Afterward: Normally, since oil is traded in dollars, the price of oil is driven down by a strong dollar. But I'm wondering if the current situation might be the reverse ... because of these Saudi actions, the falling price of oil might be a big contributing factor to the strengthening dollar?