Insight: The Saudi-Conspiracy

As the oil price (WTI) fell down from $103.66 in June 2014 to $86.83 today, you may start to wonder why this is happening and whether this is a good thing. For consumers this is indeed a good thing in the short-run. Gas prices will fall, which means that consumers will have more money to spend on other products, which is in turn helping the economy. The long-term effects however, may be different. Oil is largely produced by Middle-Eastern countries, which gives them power over the oil market and they would like to retain their market power. Recently, the USA is spoiling the fun for Middle-Eastern countries by drilling more and more shale gas, causing the oil price to drop due to excess supply. Consequently, the oil barons in Saudi Arabia see their profits decline as their margins drop. Then why don't they take action and drive up the oil price? The answer is hidden in the drilling costs. The USA have a significantly higher cost of drilling oil than the Middle-Eastern countries. Since the oil price in the past year has been growing steadily (until the collapse of the oil price), it only became feasible for the USA to start drilling now that their margins where high enough. This is also causing the current fall in the oil price because there is more supply in the oil market. The danger for the USA is now that the oil price may fall to hard, which makes drilling shale gas in the USA unfeasible once more. This is where the Saudi-Conspiracy comes into the picture. The Middle-Eastern oil barons do not feel threatened by the low oil price, because they are slowly forcing the USA to sell shale gas under its cost price, while the oil barons are still selling oil above its cost price and thus forcing the USA out of the oil market. Causing future oil prices to be at a structural higher level and this harms consumers all over the world in the future. Of course as often with conspiracy theories, we do not know the real motives of the major players. Maybe time will tell...