Correspondent B.D. recently posited a factor that has been largely overlooked in the geopolitical / fate-of-the-petrodollar discussions:
Perhaps the core dynamic is a technical one of diminished oil production. Here is Bart's commentary:
Let's start with what's well-established about Saudi oil production:
1. The days of sticking a straw in the sand and oil gushing out are long gone. Oil production now depends on costly technologies such as pressurizing the wells with seawater, CO2, etc.
2. The soaring population of Saudi Arabia is dramatically increasing domestic consumption of the Kingdom's oil, reducing the amount of oil available for export.
3. The industry is skeptical of official Saudi estimates of proven reserves and production capacity.
1. As B.D. posited, Saudi production is already flat-out, and there is no million-barrel-per-day slack that can be brought online to depress global prices, crushing competitors and maintaining control of crude prices. In other words, the Saudis no longer have the technical / production capability needed to control global oil pricing-- a power that they've enjoyed since 1973.
2. Saudi production is declining due to technical/real-world factors (depletion of super-major fields, etc.) that cannot be overcome at a financial cost that make sense at $50/barrel oil.
3. The possibility of a global recession unfolding in 2018 is rising. In a global recession, oil demand will fall, crushing the marginal pricing power of exporters.
4. The Saudi royal family and the Kingdom's vast state welfare system is no longer sustainable should oil fall into the $30-$35/barrel range due to a collapse of global demand.
5. The only way out is to grab the power now that will be needed to slash domestic welfare and domestic consumption of oil/gas, i.e. the power to overcome resistance within the royal family to severe reductions in royal/central state budgets.
Every oil exporter makes brave statements about being just fine with $25/barrel oil, but the reality is every major oil exporter is dependent on oil revenues of a scale that can only be generated at $50/barral and up.
effectively reducing their influence over prices, as U.S. producers are to some degree the marginal swing producers.
The cost of discovering, extracting, refining and transporting new oil have increased dramatically.
But as B.D. observed (and analyst Gail Tverberg has explained in great detail), oil-consuming economies will be pushed into stagnation/recession by significantly higher oil prices.
As a global recession looms ever closer, every oil exporter edges closer to the event horizon of financial, social, and political disorder and upheaval. Venezuela is just the first domino that's toppling. The Saudi leadership is trying to avoid being in the line of oil exporting dominoes that will fall in the 2018 global recession.