OPEC turning on the oil taps about more than just market share

OPEC's masterminding of the world oil market is leaving Canada to wonder where exactly our reeling energy industry fits within the scheme of the cartel's strategic thinking.

By leaving its production targets unchanged at its semi-annual meeting in Vienna this week, the Organization of the Petroleum Exporting Countries is sticking with a measure that will continue to bleed competitors around the world.

In Canada, the fallout of the oil shock is already something of a national preoccupation. The idea, then, that our oil industry, at least in the mind of OPEC kingpin Saudi Arabia, is just some happy collateral damage likely won't do much for any lingering traces of our bygone global inferiority complex.   

Here is a situation in which the Saudis, with one single chess move, are able to achieve multiple objectives— OPEC watcher Atif Kubursi

"Obviously, we weren't the main target, but anything that slows overall growth of non-OPEC production is good in the eyes of the Saudis," said Vincent Lauerman, the director of energy and the environment at the Conference Board of Canada. "Taking us down a couple notches certainly supports their end goal."

The rationale that OPEC's move away from production quotas last November, which cratered global oil prices, was a cannon shot in the battle for market share is certainly valid.

Many birds with one stone

That said, squeezing the competition by keeping the oil market oversupplied is only one of the kingdom's many objectives. For the Saudis — whose wants can be taken as synonymous with those of OPEC despite the fractious nature of its various factions — the real elegance of this latest oil price war is how it serves so many of its purposes with a single stroke.

Politically, the Saudis would like to contain Iran's growing sphere of influence in the Middle East. The military action in Yemen is only the latest manifestation of the tension between the two countries.

"The enmities between Iran and Saudi Arabia have never been more intense or more dangerous than they are today," said longtime OPEC watcher Atif Kubursi, a professor emeritus at McMaster University.

The benefits of being the world's lowest-cost oil producer, as well as having hundreds of billions tucked away in a massive war chest, allow the Saudis to weather low oil prices with an eye towards longer-term goals.

Iran is the opposite. It wants to get the highest price possible for its barrels without worrying about future demand.

A lower oil price may sting the Saudis, but it's a gut punch to Iran, and diminishes Iranian sway in nearby Syria, Lebanon and Iraq. Influence in those countries, where Saudi investors have big interests in the financial and real estate sectors, matters to the kingdom. And none of that even touches on the millennia-old religious conflict between Sunni and Shia that divides the two countries.

Chess versus checkers

Handily for the Saudis, lower oil prices not only help them contain Iran, but also side-swipe competition elsewhere in the world. High prices allow more producers to ramp up output in expensive plays, whether it's U.S. shale oil or Canada's oilsands.

The Saudis know that neither is going away, but if lower prices delay or stop development of those sources and others around the world, then it's a win. In Canada, the tactic's success becomes more evident each time another oilsands project gets shelved.

"The Saudis really are in the most fortuitous situation where the intersection of so many considerations have really lined up," said Kubursi.

Indeed, the OPEC-engineered price drop is the most recent example of how the Saudis, when it comes to oil matters, are playing chess while the rest of the world is stuck on checkers.

A publicly traded company, even global oil majors such as Exxon or Royal Dutch Shell, has to worry about share prices, quarterly earnings, and staying onside with their bankers. Not so for Saudi Arabia.

A world of hybrid cars, alternative fuel sources and Tesla Gigafactories is not in the best interests of a country that wants to ensure its oil reserves, the world's largest, are still producing decades from now.

Rising crude prices encourage substitute forms of energy. In the long run, that's bad for oil demand, which is bad for Saudi reserves. If fetching a lower price per barrel helps maintain the world's appetite for oil, then it's a trade the Saudis are willing to make.

Canada's oil industry doesn't have to be a priority, but if low prices end up doling out some pain here, then so much the better as far as OPEC is concerned.

"People talk about market share, people talk about attempting to undermine Iran or reduce the power of Russia. Another time, it's the U.S. and Canada attempting to increase production," said Kubursi. "Here is a situation in which the Saudis, with one single chess move, are able to achieve multiple objectives."