Vol. 80/No. 36 September 26, 2016
Capitalism, not Saudi conspiracy, behind
oil price drop
The Militant received the following letter from a reader in the Middle East.
The article “Migrant workers in Saudi Arabia face mass layoffs” by Seth Galinsky, which appeared in the Aug. 22, 2016, issue of the Militant, provided a useful picture of the situation confronting immigrant workers in the oil-rich countries of the Middle East. The article contains the following sentence, however, which deals with a very important subject that needs some elaboration:
“After the drop in oil prices from more than $100 a barrel in July 2014 to less than $45 a barrel today, the Saudi monarchy continued to maintain high production levels at a loss, determined to deal blows to competition from the increased flow of U.S. oil produced by fracking and from expanded production in Russia.”
I waited for two weeks to see if any reader would raise an objection to the above statement. There was none.
A barrel of oil has a “rock bottom price.” That price is determined by how much labor, energy (again labor), and capital (accumulated labor) is used to produce a barrel of oil. Every dollar above that price is the result of supply and demand; it’s profit.
The condition of the oil well (accessibility, pressure, and composition) determines how much labor is needed to explore the well and how much labor is needed to produce oil products such as gasoline, and these factors determine that price, “the rock bottom price.”
For Iran, that price is about $9 to $10 per barrel of oil, and it’s close for Saudi Arabia. The well is pressurized naturally by its own associated gas, and all that is needed is to drill a hole in the reservoir, which can be several thousand meters below ground. Then all that is required is to break the pressure from about 5,000 psi [pounds per square inch] to about 2,000 psi, which is usually needed for separation facilities.
So, if Saudi oil can be sold above $10 to $15 per barrel, it will not be “at a loss” but “at less profit.”
Saudi Arabia was not “determined to deal blows to competition from the increased flow of U.S. oil produced by fracking and from expanded production in Russia.” It was just determined to keep the head of its capitalist ruling class and the privileged princes above water.
But for fracking or shale oil, that rock bottom price is above $40 per barrel. This is because the oil is locked within sedimentary rock called shale, which must be fractured by high-pressure water blasts. This process needs much more labor and energy, thus the “rock bottom” price is higher.
During 2013 and most of 2014, the demand for oil slowed down, while production kept going up; the price didn’t fall and therefore a bubble formed. When that bubble burst in late 2014, the market price of oil fell from over a $100 to $30 per barrel due to a reduction in investment and consumption all over the world, especially in China. That price plunge dealt a blow to the production of oil by means of fracking. Under capitalism, shale oil production is not “economically feasible” when the oil price falls below $40 per barrel.
Saudi Arabia produces a small portion of the world’s consumption of oil. So its increase of oil production by 1 or 2 million barrels cannot have caused all the problems the world is facing as the result of the collapse of thousands of projects, and layoffs in this industry that are unprecedented in decades — losses that are caused by a reduction of some $3.2 trillion in oil revenues per year.
It is the world capitalist crisis and slowdown that are dealing blows to U.S. and Russian oil production, not Saudi Arabia.
Editor’s note
We thank our reader for this important correction, he’s dead right. As he points out, our inaccurate description of how oil prices and production levels are determined obscured the scope and consequences of the world capitalist crisis. Readers will appreciate his clear, concrete explanation of how workers’ labor, transforming nature, is the source of all wealth.
The paragraph cited also feeds into a false notion widely promoted within the petty-bourgeois left, in Latin America and among apologists for the capitalist government in Moscow. That is that the collapse in oil prices is the result of a Saudi or U.S.-Saudi conspiracy aimed against rival governments that are heavily dependent on oil revenues. So the correction is essential politically as well.
An Aug. 29 article from the Russian news service RT, for example, states, “In an attempt to corner the global market and oust high-cost oil producers like US shale, Saudi-dominated OPEC introduced predatory prices for its oil, pushing crude from $114 a barrel in the summer of 2014 to the current $50.”
“Global oil prices are being manipulated [by Riyadh] at the behest of the U.S. not only to overthrow the government of Syria or to pressure Iran, but to strike at Russia itself,” asserted Ulson Gunnar last year in the Moscow-based website New Eastern Outlook.
And in a December 2014 speech, Venezuelan President Nicolás Maduro denounced what he called a U.S.-organized “oil war.” It’s objective, he said, was “to destroy Russia,” and it “also aimed at Venezuela, to try and destroy our revolution and cause an economic collapse.”
It’s an obligation for class-conscious workers in the U.S. to stand with our brothers and sisters in Venezuela against U.S. imperialism, as we oppose Washington’s wars across the globe.
But saying the economic crises that the capitalist system inevitably produces, such as the collapse in oil prices, are a conspiracy by Washington, or Riyadh, amounts to justifying adaptation to one set of capitalist rulers over another.
These arguments obfuscate the need for workers to chart an independent course toward taking power out of the hands of the capitalist rulers, based on proletarian internationalism, in every country around the world.
Related articles:
As capitalist trade slows, bosses step up attacks on working class
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