The Saudis tried to shock and awe the oil market but you have to believe that the market will start asking, what are you going to do for me in the future? Ali Naimi, the man I named the Fed Chairman of oil back in the early nineties, boasted to the market that they could increase their already near 30-year high production by a whopping 25%. They impressed the market with these claims that the market could be flooded with oil at any time from old fields and new, and they claim that their oil storage is overflowing. They have tankers ready to go just for the asking.
While the Saudi promise is impressive, it looks like the market may already be looking beyond it. Not only will we potentially see just how much oil the Saudis can produce, we will see if the so called central bank of oil can calm a market that looks more and more like it is preparing for war or at the very least a major headache as the European oil embargo goes into effect.
Ali Naimi said that the Saudis can produce about 12.5 million barrels a day and that he is more worried about the oil price impact on the economy than he is about a conflict with Iran. In fact Mr. Naimi actually said, ”If you believe Hormuz will be closed, I will sell you the Empire State or the Egyptian pyramids.” So now I guess he is in real estate.
Naimi can say all he wants, that the reason he is pumping more oil is that he is worried about the economy, but many are speculating there are more perhaps sinister reasons for his production promises.
Some are speculating that the Saudi’s are desperate to keep Obama in office. The reason is that they believe that president Obama’s anti-oil and pro-green energy policy will keep the Saudis in their prized role as the world's swing producer. They speculate that if the United States starts developing their own energy sources the Saudis won’t matter as much. Imagine their dismay if they held an OPEC meeting and no one showed up.
Or maybe we should take him at his word. Maybe he is really worried about the economy. Maybe he is taking to heart the warning by Christine Lagarde, the head of the International Monetary Fund, who said that prices could spike by 20% to 30% if Iran's crude exports fall sharply, as it would take some time for other oil exporters to adjust global supplies and stabilize prices. That, she warned, could have serious consequences for the global economy! Perhaps she is worried that the Straits of Hormuz could be closed as well. Hey Christine, are you in the market to buy a bridge or a pyramid? Ali has one he wants to sell you.
Oh there is no doubt that Mr. Naimi and some of his other OPEC conspirators have bad dreams about the price collapse of 2008 yet in reality, I believe he is more worried about Iran. In 2008 the Saudis failed to understand the gravity of the situation and cut production as prices fell. Instead they should have kept on pumping to stimulate the economy and pump up demand. By unwittingly removing supply it did little to stop the price drop but perhaps accelerated it. In that deflationary environment you had to force oil low enough to stimulate demand. OPEC was only saved when Ben Bernanke went to quantitative easing which helped stabilize oil.
While there may be some truth to Ali’s worries about an oil bubble and the promise of US oil production, the real issue I think is that the Saudis are providing oil coverage before the outbreak of war.
There is more and more circumstantial evidence that the market is preparing for war. Take for example an Executive Order signed by the President called the National Defense Resource Preparedness which will give the White House the power to take over private enterprise in the event of war. The White House says according to the order, “The domestic industrial and technological base is the foundation for national defense preparedness. The authorities provided in the Act shall be used to strengthen this base and to ensure it is capable of responding to the national defense needs of the United States. Executive departments and agencies responsible for plans and programs relating to national defense should be prepared, in the event of a potential threat to the security of the United States, to take actions necessary to ensure the availability of adequate resources and production capability, including services and critical technology for national defense requirements.”
The White house says that it will take appropriate action to ensure that critical components, critical technology items, essential materials, and industrial resources are available from reliable sources when needed to meet defense requirements during peacetime, graduated mobilization and national emergency. Appropriate action may include restricting contract solicitations to reliable sources, restricting contract solicitations to domestic sources (pursuant to statutory authority), stockpiling critical components, and developing substitutes for critical components or critical technology items.
They also announced on Tuesday that it would exempt 10 European countries and Japan from penalties for doing business with Iran's central bank, because those countries are making significant progress toward weaning themselves off of Iranian oil according to FP or Foreign Policy. "I am pleased to announce that an initial group of eleven countries has significantly reduced their volume of crude oil purchases from Iran -- Belgium, the Czech Republic, France, Germany, Greece, Italy, Japan, the Netherlands, Poland, Spain, and the United Kingdom. As a result, I will report to the Congress that sanctions pursuant to Section 1245 of the National Defense Authorization Act for 2012 (NDAA) will not apply to the financial institutions based in these countries, for a renewable period of 180 days," Secretary of State Hillary Clinton said in a Tuesday statement. "The actions taken by these countries were not easy. They had to rethink their energy needs at a critical time for the world economy and quickly begin to find alternatives to Iranian oil, which many had been reliant on for their energy needs."
Last week the UK leaked a story that there was an agreement for the US and the UK to release oil from their reserves. Is this more evidence perhaps that we are preparing for something big? There was a Bloomberg report that Israel is growing more confident that they can pull off a successful strike on the Iranian atomic sites! I wonder where they are getting the bunker buster?