A top Saudi official said Sunday that Thomas Friedman and other conspiracy theorists are to blame for the crash in oil prices.
Rather than an oversupply and weak demand causing an imbalance in global oil markets, Ibrahim Al-Muhanna, the adviser to Saudi Arabia’s petroleum minister, said that excessive speculation drove the oil bust.
“The recent price fall was due largely to expectation and perception about future supply and demand … and the ever-present — and incorrect — belief in conspiracy theories,” Al-Muhanna said at the Institute of International Finance Spring Membership Meeting on Sunday.
Al-Muhanna admitted that supplies were building over the course of 2014, but said that demand “remained strong” and that the price fall was unjustified given market fundamentals. After prices started to fall, the media and market analysts drove the narrative to unfounded levels.
In fact, Al-Muhanna said, in October, when Saudi Arabia adjusted its price for oil heading for Asia — a conventional practice that occurs every month — Western media began talking up Saudi Arabia’s “price war,” and he even singled out Friedman, a New York Times columnist.
He said: “Then an article by Thomas Friedman suggested Saudi Arabia’s policy — in coordination with the Obama administration — was aimed at hurting Russia by lowering the oil price. This idea was a rehash of assumptions that first reasoned the oil fall of the 1980s. All complete fantasy.”
Rather than a plot between the Saudi and U.S. governments, Saudi Arabia merely made a rational business decision. He said that officials from Saudi Arabia and Venezuela met with Mexico and Russia, which are not members of the oil cartel. They discussed the possibility of coordinating production cuts to keep prices from falling further.
After Russia and Mexico balked at cutting their output levels, the oil cartel decided it could not move forward unilaterally with production cuts, presumably over fear of losing out on market share. As he tells it, OPEC had no other choice.
Al-Muhanna said the media’s portrayal of OPEC’s decision to leave its production quota unchanged was spun out of control: “The conspiracy theory shifted completely. From being against Russia and/or Iran, to being all about hurting U.S. shale oil production. And others said OPEC was dead! It was like staring into a mirage. It was all nonsense but it does have an impact on the direction of the oil price.”
The Saudi adviser even said that oil prices stabilized in January and February because “conspiracy theories lost their allure.”
Friedman aside, Al-Muhanna has a point when it comes to irrational movements in the oil price. He cited the “herd mentality” that takes hold during price swings. Just as U.S. rig counts began to decline precipitously in December and January, the markets turned bullish and piled into crude oil on the belief that U.S. shale production was facing impending decline.
Now that fears are taking hold within the industry that storage capacity is running short, investors are pulling out of crude, sparking a renewed fall in prices. Net-long positions in oil dropped by 2.5% for the week ended March 10, the lowest level in more than two years.
Needless to say, oil markets are extremely volatile right now. The CBOE Crude Oil Volatility Index — a barometer of oil price volatility — has hit four-year highs in recent months. The price tends to swing on every new indicator that gets published, with the ultimate trajectory of oil prices for the future none the clearer.
For its part, OPEC sees U.S. shale contracting much quicker than it previously projected, with production peaking later this year.
In any event, Al-Muhanna remains confident over the long-term. Swelling global population and ongoing economic growth — particularly in developing countries — will mean stable and strong demand for oil for decades to come. And that means oil prices will rise. Unless, that is, conspiracy theorists spark more instability.
Originally written for OilPrice.com, a website that focuses on news and analysis on the topics of alternative energy, geopolitics, and oil and gas. OilPrice.com is written for an educated audience that includes investors, fund managers, resource bankers, traders, and energy market professionals around the world.