The invisible third-leg of The Great Saudi Oil Strategy

Over the past two months all media mixes had at least one discussion or debate on oil strategy by the Middle East kingdom. Mostly all the discussions arrived at one conclusion, the Saudis want to drive other producers out by making them bankrupt.

Is it the true strategy? May be yes may be no or may be yes and no.

But for sure, apart from what the young prince in control, is telling the world, there should be much more which the prince is not disclosing to the world.

National strategies are also like that of big corporations. When Google told the world that they are going to contribute to world by taking internet to the remotest part of the world through the floating balloons, this looked like a charitable act. A little while later we realized what must be happening and this is now a major marketing strategy component for corporations http://goo.gl/g6YIjQ . And when Zuckerberg said he is going to read at least two books in a month, we again clapped ‘Wow what a missionary act’. But what Zuckerberg was doing is an integral part of the endorsement strategies across the businesses. http://goo.gl/QpLkwr . So the moral of the story is what you see is not what you see and what you hear is not what you hear.

99% of the time what we see are symptoms of strategy but not the real strategy. This always lies in the background.

There are three legs to the Saudi strategy. But for the world only two are visible and not the third one. Because they aren’t speaking about the third one. Why are they not speaking about the third one? Because the first two are beneficial to the world and the third one is most effective but detrimental to the rest of the world.

We are fairly clear about the first two. Ie diversifying of the Saudi economy (http://goo.gl/h4ayGS) and then flooding the market with oil to drive out competition. Both of these have favorable effect to rest of the world. In the first case this results in more jobs for the skilled workers. And in the second case this result in cheap oil as input to rest of world economy.

But apart from these, it appears there is another tactics to increase the price in the long term. Close to half a decade of high prices resulted in world using technology to reduce or increase efficiency of oil. Vehicles turned more fuel efficient and gas guzzling models like hummer had to be mothballed. But now there is a reversal in trend because of sustained cheap oil prices.

In fact what Saudi is doing is using the commodity for creating demand across the world. Oil is replacing coal in energy plants, sedans are getting replaced by SUV’s, more and more vehicles are coming on road every day. In short, more oil is getting consumed in the world on a day to day basis. Or they are bloating the per capita consumption of oil across the world.

Those who track the energy economics know, periodically there happens an event which brings hiccup in the oil supply. In seventies there was the Iranian oil embargo, and then came the Iran-Iraq war, Iraq invasion of Kuwait, Disturbance in Libya etc. And this is when the Saudis will choke the supply. Having used to consuming certain quantity, it is not possible to drastically reduce the consumption. For example, a newly safety conscious Chinese business man will not easily forego his SUV even if he has to pay more to the fuel price. This is when the Saudis will extract their premium.

Saudis know oil as a commodity always has its upcycle and down cycle. But what they are trying to do by bloating the consumption is to shorten the down cycle.