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What is dangerous for Saudi Arabia, expensive oil

SAUDI ARABIA (OBSERVATORY) –┬áSaudi Arabia, according to rumors, wants oil at $ 100 per barrel. If prices rise so high, analysts are sure, then almost certainly there will be a new collapse in the global hydrocarbon market.

The Saudis need more budget revenues and higher oil prices to raise the Aramco public offering (IPO) valuation of the public offering. This myopic strategy can create problems not only for the kingdom, but also for oil prices, and ultimately to preserve the demand for “black gold”.

Over the past decade, oil prices have repeatedly exceeded the bar of $ 100 per barrel, but each time they stayed in this zone for not very long. In 2008, when oil reached almost $ 150, very soon followed the financial crisis and a deep recession in the US. Then in the period from 2011 to 2014. oil rose again above $ 100, and the American slate crashed the market with a wave of new supplies.

If Saudi Arabia aims to once again raise prices to a three-digit level (though, as long as it’s only rumors), then all the conditions for the next collapse will arise.

First, oil prices are rising partly because of high demand, and not only because of OPEC’s decision to cut production of hydrocarbons. Oil at $ 100 will actually be twice as high as the price that has been in the past few years, which will quickly slow the current high rate of growth in demand.

$ 100 per barrel will have a negative impact on economic growth. Economic recovery after the financial crisis of 2008 is now almost ten years, which is much more than the average recovery cycle. History shows that at some point in the near future we are in for a recession. The surge in energy prices around the world could bring this moment closer.

“Oil prices are high, because the dollar is weak,” said Daniel Lakallele, chief economist at Tressis Gestion. In his view, too long a deficit in the market can lead to an artificial increase in prices.

“This is a big problem: oil prices do not create a crisis, a sharp and unexpected spike in oil prices creates a crisis,” concluded Lakalle.

Secondly, oil at $ 100 will lead to an increase in drilling, which is likely to provoke an even more powerful wave of new shale supplies. A few years of three-digit oil prices led to a doubling of shale production in the US, which eventually led to the collapse of the market in 2014. A surge in oil prices could lead to a similar situation.

This is worrying because the US shale sector is already developing much faster than before the collapse of 2014.
In any case, Saudi Arabia risks sowing seeds of another crisis in the oil market, capable of inflicting a huge blow to its own interests.

“Saudi Arabia can push prices up to $ 100 if it keeps supply restrictions,” believes Commerzbank analyst Carsten Fritsch, “but this will have to be paid for in the long term, as it will cause a wave of additional shale oil and oil from other sources.”

A greater threat than a new proposal in the long term is the peak demand. There is no shortage of forecasts about when the peak of demand will come, but everyone agrees that it will necessarily happen.

Electric vehicles still have a small market share, but this segment in March in the US had the best month of sales in the history. If the prices for batteries continue to decrease, the cost of electric vehicles will be equal to the cost of cars with an internal combustion engine by 2024.

However, if oil prices soar, consumers will switch to electric vehicles much faster.

In other words, in an effort to increase profits in this and the next years, Saudi Arabia can not only provoke the next decline, but also cause structural (ie permanent) damage to oil demand, which ultimately will put existential questions about the viability of the Saudi economy in its current form.