Answer to a Question
Question:
Oil prices have continued to fall, with the price per barrel dropping below $40. Saudi Arabia, as the largest producer among OPEC countries, has not reduced production to stabilize prices, which was evident in the OPEC meeting on December 4, 2015. Similarly, the United States increased its production instead of reducing it to counter the price drop... What are the reasons for the drop in oil prices? May Allah reward you with goodness.
Answer:
To clarify the picture, it is necessary to re-examine oil prices over the past year in conjunction with political events and various changing influences, so we can understand the reasons for the rise and fall of oil prices within short periods:
During the reign of Abdullah bin Abdulaziz and shortly before his death, oil prices dropped sharply. This was understood as an attempt by Britain, through its agent Abdullah bin Abdulaziz, to strike at American interests regarding US shale oil production (as mentioned in the Q&A on January 7, 2015). Oil prices remained low until the death of Abdullah bin Abdulaziz and the accession of America's agent, Salman bin Abdulaziz, to power on January 23, 2015. Despite the Saudi Oil Minister's announcement that Saudi Arabia would not change its oil policy, the reality was that oil prices began to rise gradually with Salman's accession until they exceeded the $60 margin in May. This was expected, as stated in the Q&A on January 25, 2015, which said: "This will result in a decrease in tension between America and Saudi Arabia, and this may affect the limitation of the continued decline in oil prices because the previous king and the British behind him wanted to fail America's benefit from shale oil by lowering oil prices."
At the end of June, oil prices began to decline gradually until they reached approximately the $40 margin in mid-August. This period of decline coincided with the conclusion of the nuclear agreement with Iran. It appears that America sought to lower the price of oil during the negotiation period to assist its agents in Iran in making the necessary concessions for the agreement. This is because the drop in oil prices places pressure on the Iranian economy, providing a public justification for these concessions in light of the economic hardship that the people in Iran were already suffering from. Then, oil prices rose slightly until the end of September, touching $50.
With the beginning of October 2015, oil prices returned to a rapid decline until they touched $34 on December 18, 2015. This sharp drop in oil prices has different reasons than the previous ones, and the explanation is as follows:
When the financial crisis occurred in America in 2008, America adopted a policy of Quantitative Easing since then to exit the financial crisis that devastated it. It began pumping massive amounts of dollars to save the financial system and weakened the dollar, adhering to that policy. However, since the middle of last year, America noticed the emergence of a matter that affected that Quantitative Easing policy, which is:
- The countries of the world were harmed by this policy, especially China, as devaluing the dollar affects its huge dollar reserves. Because of this, calls began to emerge to abandon the dollar and reshape a new financial system. This call appeared strongly in Europe through the words of the French Finance Minister, Michel Sapin, as reported in the Financial Times on July 6, 2014, under the title: (France hits out at dollar dominance).
It quoted Sapin as saying: "We [Europeans] sell to each other in dollars, for example, when we sell planes. Is that necessary? I don't think so. I think a rebalancing is possible and necessary, not just regarding the euro but also for other currencies of emerging countries, which represent more and more of world trade... He told the newspaper that he would raise the need for an alternative to the dollar with his fellow eurozone finance ministers when they meet in Brussels on Monday, though he declined to go into detail about what practical steps might emerge." China followed Europe; during an interview with the Xinhua news agency, Kostin, the head of VTB Bank, Russia's second-largest lender, said: "The global financial system is still dominated by the US dollar and needs a more diverse mechanism in order to reduce dependence on a single currency. Kostin said that China, as the second-largest economy in the world, can cooperate with several countries to build a new system, adding that Russia would support China playing a leading role in the international financial arena." (People's Daily Online, November 10, 2014).
Although this reason was sufficient for America to abandon the policy of devaluing the dollar, it continued to persist in the same policy, i.e., devaluing the dollar, and was keen to raise the price of oil because raising it leads to a decrease in the value of the dollar, as is known. Thus, it continues to eliminate the effects of the financial crisis that have not yet been erased. At the same time, increasing the price of oil makes shale oil production feasible. This is why Kerry’s visit to Saudi Arabia on September 11, 2014, and his meeting with King Abdullah focused on reducing production to increase the price of oil, as we explained in our answer dated January 7, 2015.
- However, America noticed in the recent months of this year that this trend toward moving away from the dollar has taken a practical turn by moving away from the dollar as a reserve and buying gold with it. China has replaced its dollars with gold, as it has a dollar surplus of nearly four trillion. "The Chinese central bank adds between 14 and 19 tons of gold to its reserves monthly" (Reuters, December 1, 2015). Unofficial information reported by some Russian newspapers indicates that China seeks to increase its central bank gold reserves to reach 10,000 tons in future periods to overtake the United States, which ranks first with 8,000 tons of gold; China now possesses about 1,700 tons of gold reserves. Russia is also buying gold and currently possesses 1,275 tons, having purchased 67 tons of gold during the second half of 2015... This matter sounded the alarm for the dollar. This poses a great danger to America because the dollar is one of the most important pillars of its global hegemony. America is concerned that the dollar remains the currency in which oil is priced and the currency for financial settlements, because whoever owns the dollar influences oil prices and world trade.
Thus, America adopted a policy that leads to an increase in the value of the dollar—meaning a decrease in the price of oil—through several measures:
a. Adopting a policy of increasing oil production by all available means, including:
- America and Canada increased their oil production from about 10.3 million barrels per day in 2005 to about 18 million barrels per day this year.
- America's agents in OPEC, especially Saudi Arabia, Iran, and Iraq, increased their oil production:
- As for Saudi Arabia, Al Jazeera Net reported on October 10, 2015: "The Kingdom of Saudi Arabia informed OPEC that it increased its oil production in September by 100,000 barrels per day." (Al-Araby Al-Jadeed, December 14, 2015). Its production this year reached about 10.1 million barrels per day.
- As for Iran, Reuters quoted an oil source on Monday, who is familiar with the tanker loading schedule in the OPEC member state, saying: "Iran is on track to export 1.26 million barrels per day of crude this month. This preliminary figure is nearly a quarter higher than its levels just two months ago." (Al-Araby Al-Jadeed, December 14, 2015). Some specialists expected it to export more than that: "Lifting economic sanctions and allowing Iran to export its oil—Iran currently produces around 3.7 million barrels per day, while its exports reach about 1.7 million barrels per day—will be added to global production, as Iran can increase its production by around 600,000 barrels per day by the end of 2015, noting that estimates of the supply surplus range between 1.5 to 2 million barrels per day." (Al-Sabah Al-Jadeed website, December 9, 2015).
- As for Iraq, Fayyad Hassan Nima, Undersecretary of the Ministry of Oil for Extraction Affairs, said: "Production from the Rumaila oil field has reached about 1.35 million barrels per day, adding that the ministry seeks to raise the field's production to 2.1 million barrels per day. He added that the field's production currently represents 40 percent of Iraqi oil production... Reuters quoted traders saying that Iraq allocated 3.017 million barrels per day of Basra crude for export in September, up from 2.52 million barrels per day in the previous month." (Al-Sabah Al-Jadeed, August 15, 2015).
- Lifting the ban on exporting American oil abroad: "The US House of Representatives approved a new measure to lift the 40-year ban on crude oil exports... and US President Barack Obama signed the bill on Friday to become law." (BBC, December 19, 2015)... America handled the issue of shale oil so that it would not stand in the way of its new policy of raising the value of the dollar and lowering the price of oil. A number of companies investing in this sector left, and a large number of wells where the cost of extraction exceeds the price of oil stopped. Only companies capable of withstanding the drop in prices and technologically capable of using scientific methods to reduce production costs remained, then doubled their production capacity so that the level of US shale oil production remained within acceptable limits, which had a significant impact on exports after the ban was lifted... A report by the US Energy Agency, as reported on the Market Realist website, stated: "US crude oil production for the week ending December 11 is almost constant..." It reached about 9.17 million barrels per day this month. This is because the cost of extracting American shale oil has decreased and the productivity of the wells that continued to produce has increased despite the closure of unfeasible wells... Eric Lee, a commodities strategist at Citigroup, said: "In Bakken, North Dakota, the break-even cost fell to $20 in some counties, and the State Department of Mineral Resources stated last month that producing a barrel of oil is still profitable at $24 in Dunn County, down from $29 last October." (Tom DiChristopher on CNBC, August 20, 2015).
Thus, America and its agents contributed to increasing production in a way that created a glut, as some reports indicated that "there is now an oil surplus in the markets estimated at about 4-5 million barrels per day" (quoted from the Alpha Beta website, December 15, 2015). In addition, global oil consumption, which is the main driver of demand, witnessed a noticeable decline, as IMF forecasts indicate a decrease in global GDP growth from 3.4% to 3.3%, amid the slowdown in industrial economies in Europe and Japan, and the decline in growth in emerging economies, particularly China, the world's second-largest consumer of oil, in light of the turmoil its financial markets are witnessing due to the devaluation of its currency, the yuan. Market perceptions resulted in a decline in demand for oil in this pivotal country. Thus, the large oil surplus was accompanied by a strong contraction in demand, and all of this led to a sharp drop in oil prices, which in turn led to an increase in the value of the dollar.
b. Then there is another matter, which is raising the usurious interest rate. Although US economic data do not indicate a real recovery of the US economy, the US Federal Reserve announced on December 16, 2015, an increase in the interest rate by a quarter of a point. The Chair of the US Federal Reserve, Janet Yellen, had announced on December 3, 2015, according to the *Financial Times*: "Yellen says a strong dollar means that the increase in the interest rate will be gradual." For information, usurious interest in America had been reduced to almost zero, specifically to the level of 0.25%, because of the global financial crisis that erupted in America in 2008.
According to the capitalist economy, if usurious interest remains low, it indicates that the crisis is still ongoing, that the economy has not recovered, and that there is stagnation, which dampens market activity in terms of buying, selling, investment, and employment, because capitalists rely on usurious interest to reap profits. Raising the usurious interest rate increases the profits of banks and companies and encourages people to put their money in banks to be invested, i.e., to achieve profits, and thus suggests that the American economy has largely overcome the repercussions of the global financial crisis.
Immediately after the announcement of the increase in the usurious interest rate, oil prices fell by 3%. Increasing usurious interest strengthens confidence in the American economy and gives the impression that it has overcome the repercussions of the financial crisis to increase its global political influence. American stock prices on Wall Street jumped by 1.28% immediately after the announcement of the usurious interest rate hike by the US Central Bank. Likewise, the S&P index by 1.45% and the Nasdaq index by 1.52%...
Consequently, the appropriate conditions were achieved for America to raise the value of the dollar and increase the usurious interest rate... Knowing that raising interest rates increases the cost of holding gold due to the rise in the dollar's value, it leads to a decrease in the price of gold, thereby harming countries seeking to rely on gold reserves instead of the dollar. America wants to maintain the dollar as a global currency for transactions and as a cash reserve for countries as an alternative to gold. It makes dealing in gold unprofitable and makes holding it as a reserve unfeasible. It does not want to return to the gold standard, nor does it want the world to return to this system, which would cause major damage to it. This is because, with its paper currency—which is not worth the ink it is printed with—it buys the world's wealth, finances its war machine and armies abroad, and buys loyalties and states by providing them with so-called "aid." It strikes the economies of other countries and makes its economy the dominant one through the hegemony of the dollar over all countries, international financial institutions, and financial markets.
Thus, we can say that the most likely reason for lowering oil prices relates to America's domestic and foreign policy, which aims to:
a. Raising the value of the usurious interest rate internally, which has become an almost existential issue for it, to demonstrate that it—America—has rid itself of the repercussions of the financial crisis and that its economy is strong, thereby increasing confidence in it and increasing its political influence over countries.
b. Strengthening confidence in the dollar, standing in the face of competition against it, maintaining the scope of dollar transactions, keeping it as the cash reserve for countries in the world, sustaining the link of their currencies to it, and striking the reliance on gold as an alternative reserve to the dollar. This is especially aimed at China and Russia, as they are moving toward getting rid of dollar hegemony and making their cash reserves rely more heavily on gold.
Thus, America controls the international economic situation, especially influential commodities such as oil, and all of this is because its currency, the dollar, is the measure in the buying and selling of this commodity... Allowing transactions to be conducted in dollars and making it the determinant of the prices of oil, other minerals, and all important commodities is evidence of international dependency on America, directly or indirectly. Prices fall and rise according to its dollar and the usurious interest decided by its central bank. Consequently, if the American economy catches a cold, it infects all the world's economies. The duty is to abandon linking local currencies to the dollar and to stop making it the cash reserve for states. Instead, we must rely on gold and, alongside it, silver, making them the currencies for circulation, purchasing goods and products, estimating wages, and making them the cash reserve. This great step can only be taken by the Islamic Khilafah State, for which Allah has legislated gold and silver as currency and nothing else. At that point, the dollar will return to being a piece of paper as it was in its origin and essence.
إِنَّهُمْ يَرَوْنَهُ بَعِيدًا * وَنَرَاهُ قَرِيبًا
"Indeed, they see it as distant, but We see it as near." (QS Al-Ma'arij [70]: 6-7)