Maybe that's how it went. Oil had long been structurally weak. It stood at $100 because the spot market, that of physical transactions for immediate delivery, was still in equilibrium. There was, and still is, no significant amount of unsold supply. That is, there was no abnormal accumulation of crude oil in the warehouses of Singapore, Rotterdam or Houston. What was there, and now there is somewhat less, was an exceptionally large amount of oil that was predicted to arrive over the next few months and years. American and Canadian shale oil is constantly accelerating, Kurdistan has become master of its resources, Libya is starting to produce again, Iraq floating on crude oil (despite ISIS, which in any case finances itself with oil from the areas controls and therefore produces as much as it can). Slightly further afield, deep-water oil and gas from the Gulf of Guinea and off Brazil and the East African coast, a very large potential production. And then Mexico which is reopening to private individuals and is ready to increase its production. And Argentina. And Iran is one step away from lifting sanctions.
And, in the background, the Russian Arctic and Greenland. And in addition the growing competition from coal, so abundant that many countries, America among them, are boycotting its growth in every way. That of natural gas, increasingly available not only in the United States but also in Russia and Australia. That of renewables, ideologically out of fashion but still expanding. And even that of nine-lives nuclear power, which is undergoing a sensational revival in Japan and is booming in China, India and Saudi Arabia itself. Peak Oil theorists, who had their last moment of glory in 2008, were right in the year in their prediction of a looming and fatal energy crisis for our civilization. They were probably in the wrong century. Not to mention the question. Still growing in emerging countries, of course, but stabilized and in structural decline in Europe and America. Better to act now, Saudi Arabia must have thought. Better to slam the price down now, before it's too late. Better to convince everyone that a large part of the investments planned in energy for the next few years will prove unsuccessful or in any case uneconomical. Cut your schedules while you can. Liquidate your companies that extract gas or oil, return the capital to shareholders or go into other businesses. This shock, initially greeted with disbelief and condescension by many producers, had to be violent and will have to be prolonged to be convincing.
As long as there is, as there still is, the idea that crude oil prices will recover soon, no one will cancel their plans (and the price recovery will only be temporary). There were also strategic considerations of a geopolitical nature that accelerated the Saudi decision. The house of Saud is aware of its fragility and lives in constant fear of being ousted from power by a Nasserist, Qaidist or military linked to the Muslim Brotherhood or ISIS. He also fears Iranian-incited revolts of his Shia citizens. The Yemeni chaos is, moreover, a constant warning for Riyadh. The idea of an America that is too self-sufficient in energy and therefore increasingly indifferent to the fate of the Middle East (and ever closer to Iran) precisely at a time when ISIS is consolidating its power and planning to expand it southward is even more worrying than the structural weakness of crude oil. Seen from the White House, the Saudi panic and the collapse in crude oil were seen as an opportunity to be exploited. On the one hand, the possibility of inflicting a very hard blow on Russia, of keeping Ukraine definitively, of eliminating Chavismo from Venezuela and Latin America, of further softening Iran, of confirming itself as a hyperpower, of ending the Obama presidency with the petrol at half price and a recovery in consumption and confidence.
On the other hand, as a price to pay, a slowdown in the expansion of unconventional oil and gas extraction (and another blow to coal) in the United States. A slowdown that affects only republican states and benefits, with cheap heating oil, above all democratic states. However, this slowdown does not compromise the unstoppable expansion of the American energy sector. Russia is the great victim of what is happening. America, in recent days, has toyed with the idea of blowing up Putin and returning Russia to Yeltsin's time, when she was harmless and bankrupt. Putin has acted rationally, stepping back significantly but drawing a line not to be crossed. Quietly he froze the military situation in Ukraine and pushed back the pro-Russian forces. On the most important level, the political one, he has tried to present Russia not as an antagonist of the West but as a mediator. We don't want, Lavrov told Kerry, to necessarily be an ally of Syria, Iran, Hizbullah and Venezuela, we just want to be a mediator between them and the United States.
We also propose ourselves in this role in Ukraine and, after the Crimea, we do not want to annex anything. We only ask that NATO not enter the country and some autonomy for the Russian speakers. Magically the Western pressure stopped. The campaign about the imminent Russian default and the desperate and counterproductive defense of the ruble has ceased. Putin licks his wounds but is still standing. For the West, pushing Russia over the edge would have meant a blowback shock wave of real Russian default and European recession. Even worse, Putin could have been replaced by a nationalist or a military man ready to show off his nuclear arsenal in desperation. A quiet Christmas, therefore, with the further comfort, for the markets, of a funny and tangled statement from the FOMC which tries hard not to say anything new but does so in a kind and thoughtful tone. We'll keep our hands free, that's the point, but know that we're always with you. We were beginning to worry about Greece, but the arrival of the Russian crisis reduced, in the eyes of the markets, the predicted flop of Samaras in the first vote for the president of the republic. For now, it's party time. December 29, the day of the last and decisive Greek vote, seems far away.
Europe is taking the field with great heaviness to scare the Greek voters. We will not give you any discounts, we will let your banks fail, you will lose your deposits as happened in Cyprus. And you will also be isolated, no one will cry for you, Italy and France will not agree with Tsipras. Europe has given up on being loved and is aiming to be feared, which often works better. On European Qe, Weidmann's opposition is getting more and more angry and bordering on hysteria. You shouldn't be taken literally, but you make it more probable, in January, that a Qe composed of corporate bonds will postpone the part on government bonds to March. 2015 promises to be eventful, but not so much as to further spoil the year-end atmosphere.
