I do not understand why the Saudis, even if they despair of action by Obama to interdict Iran's getting the bomb, would believe that this policy of crashing the world oil price will effect that end. The regime in Iran is so committed to its policy of getting the bomb that will endure grave economic hardship to acquire it. Probably nothing short of crashing the regime will succeed and there is little evidence that crashing the price of oil will crash the Iran regime. That moment passed at the beginning of the Obama regime when he failed to speak out on behalf of of the people in the streets and support the overthrow of that regime.
If the Saudis are not trying to prevent Iran from getting the bomb, what are they up to? I believe they looked at the world oil market and concluded that a new technology was fundamentally transforming the market in a way that constituted a mortal threat to the existence of The House of Saud. Without their income from oil there is no Saudi Arabia as we know it today. But horizontal drilling and fracking and to a lesser degree alternative energy sources have presented a real threat to oil market and prices at a level which will sustain Saudi Arabia. The threat is not so much today, although that is real, but the trajectory of massive increases in the quantity of oil worldwide (not to mention gas) paints a graph which is destructive to Saudi Arabia.
So new technology combined with a worldwide slowdown in demand caused by slow growth forcing the Saudis to peer into the future. They conclude as this analyst says, let us demonstrate that there is great risk in capital expensive extraction methods like fracking and in unrealistic alternative energy sources by bankrupting those high cost producers. The Saudis conclude: Let us change the angle of the trajectory on the graph. Let us change this angle by reducing the price of oil to a level which hurts us but does not bankrupt us because we are the world's lowest cost producer of the sweetest crude but which will discourage the very rapid application around the world of fracking. We can gain time. We can hope that increased economic demand will increase the price of oil. So long as the high cost producers are mortally wounded and we are only marginally affected, we are better off.
If the Saudis conclude that teaching the fracking market a lesson is worth the price their policy makes sense. And it makes sense to them if they believe that the lag in ramping up production by fracking and horizontal drilling, hugely expensive and capital-intensive, caused by this depression in the price of oil will be of sufficient length in time to be worthwhile. The oil patch will have to regroup, especially in the fracking space, and convince capital markets that this time will be different, this time the Saudi's will not bankrupt them. Investors will have to believe that the growth in oil prices and the long term stability of those prices warrant the risk. Under this scenario, the Saudi's buhimy a lot of time.
