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knb comments on Open thread, Jan. 18 - Jan. 24, 2016 - Less Wrong Discussion
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Oil prices have recently fallen to near record lows. What are the risks and benefits?
Risks:
Benefits:
Debatable:
Any important dynamics I'm missing?
We can expect lower food prices. High food prices have been an important political stressor in developing nations.
Only two nuances:
- Venezuela is / will very shortly also experience political instability;
- Iran has just seen heavy international sanctions lifted, so while its oil will be valued less than it could have been, it will still provide a push to the economy.
Finally my readings of Stratfor Wikileak documents about Venezuala are topical!
Saudi Arabia flooded the market in order to reduce the price, in order to combat the benefit to Iran of the raising of sanctions.
Their oil production didn't rise that much. They didn't really flood the market. They mainly decided not to cut their production.
And there is a good reason for this decision. Saudi Arabia tried cutting production in the '80s to lift prices, and it was disastrous for them. Here's a blog post with nice graphs showing what happened ...
Understanding Saudi Oil Policy: The Lessons of ‘79
That's one argument. Another common argument is that they want to increase their market share and kill the US tight oil industry.
That's a strange move. Right now the last thing oil producers need is even lower prices.
You're assuming they are maximizing money. That is not so.
Consider that Saudi Arabia and Iran are on the opposing side of Islam sects, so the reason was to stump the sudden economic growth of their enemy.
Yes, it's centuries that people kill each over who was the correct successor of Muhammad, his cousin or his friend. Welcome to planet Earth...
I get that. But by cutting their own lifeblood? On what basis do Saudi strategists estimate that the damage to the Saudi economy will be small enough compared to the damage to the Iranian one?