To the casual observer Saudi Arabia and Russia, two of the top three producers of oil in the world, have been having a spat about what to do about low oil prices. (See here and here.) Each has accused the other of bad faith and counterproductive behavior. But is that merely what the two oil powers want you to believe?
We’ve been here before. Throughout most of 2016 Saudi Arabia and Russia put on a two-person show for the entire world, pretending time after time to move close to an agreement to lower production in order to prop up oil prices, only to back away or delay at the last minute. The two kept this up for most of 2016. They incited periodic spikes in the oil price without ever having to cut one barrel of production, spikes that kept prices higher for weeks until they drifted back down to levels that reflected reality.
But I believe the most important thing they were trying to achieve then was to create an atmosphere of continuing uncertainty. That uncertainty was supposed to scare investors and lenders away from U.S. shale oil producers who were still hurting from an oil price collapse that began at the end of 2014. Saudi Arabia and Russia wanted to prevent those producers from resurrecting U.S. production and undermining oil prices again. Simply stated, Saudi Arabia and Russia wanted the shale oil industry to go bust in a way that would prevent a recovery for many years.
But investors and lenders could not be frightened away, and they resumed financing shale oil operations in the United States.
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