Q&A: The Sharp Fall in Oil Prices - Sheikh Ata Abu Al-Rashtah

Question:

The oil prices have continued to drop to the point where the price of a barrel has fallen below $40. Saudi has not reduced production in order for the prices to stabilize in the case since it is the biggest producer amongst the OPEC states. That was apparent in the OPEC meeting held on 04/12/2015. Similarly, America has increased its production instead of reducing it in order to confront the decreasing prices… So what are the reasons for the fall in the prices of oil.

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Answer:

In order to make the picture clear it is necessary to review the oil prices throughout the last year in line with the timing of political events and a number of influencing and changing realities, so that we are capable of examining the causes of the increase of oil and its decrease within close periods of time:

1 – During the rule of Abdullah Bin Abdul Aziz and a short time before his death the prices of oil fell sharply and this was understood to represent a British attempt through its agent Abdullah Bin Abdul Aziz to strike at the American interests in relation to the America production of Shale (As was mentioned in the Answer to Question issued on 07/01/2015). The price of petrol remained low until the death of Abdullah Bin Abdul Aziz and accession of the American agent Salman Bin Abdul Aziz to the rule on 23/01/2015. In spite of the announcement made by the Saudi Minister of Oil in respect to Saudi not changing its oil policy, the reality is that the price of oil began to gradually rise with the accession of Salman to the rule until it had surpassed the margins of $60 by the month of May. This is what had been expected in line with what had been mentioned in the answer to question of 25/01/2015 in which it was mentioned: “As a consequence of that, there will be a reduction of tension between the United States and Saudi Arabia, and this affects the reduction of the continuing decline in oil prices. This is because the former king, backed by the British wanted to reduce oil prices to derail America from benefiting from the oil shale”.

2 – At the end of June the price of oil began to gradually drop until it reached by mid-August around the margins of $40. This period in which the fall took place was in line with the timing of the conclusion of the Iranian nuclear deal and it appears that America made effort to decrease the oil price during the negotiations period to aid its agents in Iran to be able to make the required concessions needed to conclude the deal. That is because the reduced oil price puts pressure upon the Iranian economy which then provides the popular justification to make concessions under the shadow of economic constraints that the people were originally suffering from. Then following that the prices of oil began to rise again slightly until the end of September at the time of which it hit $50.

3 – At the beginning of October 2015, the prices of oil began to fall again rapidly until they hit $34 on 18/12/2015… This sharp fall in oil prices pose different reasons to those that existed previously and the elaboration of that is as follows:

At the time of the occurrence of the American financial crisis in 2008, America adopted a policy of quantitative easing from that time in order to escape from the financial crisis that had struck it severely. So it began to pump huge quantities of Dollars in order to save the financial system and it weakened the dollar whilst it still remains committed to that. However, since the beginning of last year America noticed the presence of a matter that had an impact upon its quantitative easing (policy) and this matter is:

– The world nations were harmed by this policy and China in particular as the decreased (value) of the Dollar had impacted its huge Dollar reserves… As a result of that, calls began to appear to abandon the Dollar and to reframe a new monetary system. This call appeared strongly within Europe touted by the French Foreign Minister Michel Sapin in accordance to what was quoted in the Financial Times on 07/07/2015 under the heading: ‘France hits out at the dollar’s dominance’.

It was mentioned that Sapin said: “We the Europeans are making exchange amongst ourselves with Dollars like for example when we sell aircraft. Is this necessary? I don’t believe so. I believe restoring balance is possible and necessary. Not just in respect to what relates to the Euro but also in respect to the other currencies of the rising states and which represent more and more of global trade….” And he said to the newspaper that he will instigate the need for an alternative for the Dollar with his colleagues, the Ministers of Finance of the Euro Zone, when they meet in Brussels on Monday. This is despite his refusal to delve into details about these currency steps that could appear). And China followed France so during an interview with Xinhua news agency, Kostin, the President of VTB Bank, the second biggest Russian bank for loans, said: “The global financial system is still subservient to the dominance of the American dollar and it requires a mechanism that is more varied in order to reduce the dependence upon one single currency.” And Kostin said that it is possible for China, in its consideration as the second largest economy in the world, to cooperate with a number of other states in order to build a new system and he added that Russia will support China’s undertaking a leadership role in the global financial arena. (The People’s Online Daily Newspaper, 01/11/2015).

Even though this is a sufficient enough reason for America to abandon the policy of devaluing the dollar it nevertheless remained arrogantly upon the same policy i.e. devaluing the dollar. Therefore, it was diligent in respect to raising the price of petrol because its rise will lead to the devaluing of the dollar as is well known. From there it continues to deal with the effects of the financial crisis that have not been erased until now. This is whilst at the same time it works to increase the price of petrol so as to make the production of shale oil worthwhile due to the rise of the price of petrol. It was for this reason that Kerry visited Saudi on 11/09/2014 and for his meeting with Abdullah whilst focusing upon decreasing production in order to increase the price of petrol as we have previously explained in our answer dated 07/01/2015.

– Despite that America has noticed in the latter months of this current year that this direction towards distancing from the dollar has begun to become a practical course. This has been by keeping away from the dollar as reserves and purchasing gold with it. China has undertaken the exchange of what it had in dollars with gold in the case where it had possessed an abundance in Dollars that amounted to close to 4 trillion. “The Chinese Central Bank is adding to its reserves on a monthly basis between 14 and 19 tonnes of Gold” (Reuters, 1/12/2015). This is also in the case where unofficial information as reported by some Russian newspapers have indicated that China is seeking to increase its reserves of Gold in the Central Bank to reach in the coming period 10 thousand tonnes in order to supersede the US which is currently in first place possessing 8 thousand tonnes. China currently has come to possess approximately 1700 tonnes of gold reserves. Similarly, Russia has been buying gold and currently Russia owns 1275 tonnes, in the case where it bought 67 tonnes in the second half of 2015… This matter represents the sounding of alarm bells in respect to the dollar and represents a great danger to America. That is because the dollar represents one of the most important pillars and supports for its dominance over the world. It is therefore important to America for the dollar to remain the currency by which petrol is priced and the currency of financial settlements. That is because whoever owns the dollar has influence over the prices of petrol and global trade.

4 – Like this, America has adopted a policy that leads to the raising of the price of the dollar or reducing the price of oil by a number of processes:

a – Adopting the policy of increasing oil production by all means possible which include: