Oil Games

The Saudis who have made no secret their fear of a rising Persian power in the middle east today rejected calls to cut output amid sinking oil prices.

Crude for February delivery was down 40 cents at $50.83 a barrel in electronic trade. On Tuesday, the contract tumbled 3.4% after Saudi Oil Minister Ali al-Naimi said there is no need for the Organization of the Petroleum Exporting Countries to cut production further, rejecting calls from membersVenezuela and Iran.

It is interesting that such calls came from Venezuala and Iran who have both been the subject of recent stories on their declining infrastructure in being able to produce Oil.

They (Iran) need to invest $2.5bn (£1.28bn) a year just to stand still and they're not doing it because it's politically easier to spend the money on social welfare and the army than to wait four to six years for a return on investment... They've been running down the industry like this for 20 years.

The Saudis have a distinct advantage over Iran and Venezuala in being able to massively ramp up their production. Thus, from the Saudi point of view, $20 per barrel of oil is much better than $60 oil in the short term because the Saudis can more than make up for the profit loss in extra production. In contrast, Iran and Venezuala cannot increase their production and their production capacity will continue to decline even further without future investment. Moreover, the less money Iran has, the less they will be able to invest in future production - accelerating the decline in future production. Similarly, the less money Iran and Venezuala have in the future, the less impact they will have on the world stage in terms of military influence - that is good for Saudi Arabia and for us as well. Look for the price of oil to continue to decline over the next year.