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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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