Crude oil production currently far exceeds global demand due to the market war being waged by America and the Gulf states. Stocks are full, prices are plummeting... and crisis is imminent.

College posters are brimming with debates about the development of the price of oil. Controversies are numerous. But no one contests the main evidence: iron, copper, pepper, rubber, cotton, coal, ocean freight, nickel, trash... primary materials serve as a direct reflection of the world economy. At $37 per barrel, as of Jan. 1, 2016, the price of oil illustrates this dictum perfectly.

Of course, this reflection includes the oil of motorists who are delighted to be able to fill their tanks with cheap gas or diesel. Households’ purchasing power is increasing, while the trade balances of non-producing countries are recovering. Furthermore, airlines are counting on improved financial reliability. And this is all for a good reason: the price per barrel has fallen so low at the start of this year that it is now below the low point of 2008, a few months after the subprime financial bubble exploded in the United States.

Among the reasons for this big slide is the Chinese ogre, whose appetite for primary materials in general, and oil in particular, is not at the level it was when its economy was growing at a rate of 9 or 10 percent per year. This decreased economic cruising speed, which dropped below 7 percent in 2015, partially explains why most specialized institutions believe that we are experiencing global oil overproduction, at almost 2 million barrels. And in the game of supply and demand, excess supply will not miss the chance to play the role of a restorative force that drags prices down.

It is therefore China’s fault, as it has less of a need for fuel to power its factories. But China isn’t the only party to blame. It is also the fault of unconventional oil types produced in North America: shale oil in the U.S. and oil sands in Canada. Washington, which threw itself into prospecting and producing shale oil, is the world’s leading producer of all types of oil. But at less than $40 a barrel, its strategy is no longer a winning one. At this price, American shale oil wells are turning off the faucets, while the banks that financed these projects are registering losses due to the unreliability of what should be a winning formula for oil.

Evil Eye

But to understand the reasons behind these oil well closures across the Atlantic, you need to look to the Organization of the Petroleum Exporting Countries. For several years, its members have had a very negative view of the U.S.’s increasing power. Their response? Do nothing. Or more specifically, do not under any circumstances adjust their oil supply according to global demand. This calculated inertia is hampering the U.S.’s strategy. Saudi Arabia is without a doubt the ringleader of this undeclared war. Therefore, OPEC abstained from stating a figure for maximum production during its most recent meetings. This was a first, and it merely served to bring the price of black gold down a bit further, with the financial markets increasingly convinced that Saudi Arabia was not ready to adjust its supply.

Of course, the oil monarchy has enough to do. Its territory is still full of oil, and the cost of extracting it is doubtless one of the lowest in the world. But its strategy could turn out to be risky. The price of crude oil, from which the kingdom earns more than 90 percent of its public revenue, has dropped by more than 60 percent since mid-2014, falling to $37 per barrel, the lowest level in 11 years. The result? This year, Saudi Arabia registered a record budget deficit of 89.2 billion euros – 15 percent of its gross domestic product. The kingdom, which produces 10.4 million barrels every day, drew on its currency reserves and issued treasury bonds to finance its deficit. At the end of October, these reserves shrank to $644 billion, compared to $732 billion at the end of 2014.

That year, the country already had a budget deficit of $17.5 billion, the second highest since 2002. The International Monetary Fund had therefore advised it – as well as other oil-producing Gulf states – to reduce its spending, cut subsidies and diversify its economy. This risked provoking genuine social disorder in the countries where social spending is relatively high.

At the moment, the Saudi kingdom is staying its course despite everything. The same cannot be said of others. This is certainly the case with Venezuela, whose economic and social market depends so much on oil (which accounts for more than 80 percent of its exports) that it is close to bankruptcy. The same goes for Ecuador and, to a lesser extent, Brazil. Russia, whose hydrocarbons make up 70 percent of exports and a good quarter of its GDP, has also been forced to tighten its belt.

Giant Chessboard

And this isn’t taking Iran into account, which at least for the moment is an unknown entity with regard to the price of black oil. The Islamic republic should very soon find itself on the giant chessboard of the global oil market. It’s just a matter of time. Its full and complete return will come, while the world will be able to count a surplus of around a million barrels per day. Not to mention raising prices, or reversing morale on the trading floor.

For the traders, the risks – which feed the craziest speculations – don’t stop growing. The latest warning came a week ago with news of a strong rise in American oil stocks: 500 million barrels, which collectively is a drop in the ocean of the 3 billion reserve barrels held by the Organization for Economic Cooperation and Development member states. Such is the pace of globalization.

*Editor’s note: The Organization for Economic Cooperation and Development is an international organization comprising 34 countries.