|From: Lovely Package|
The two men were reacting to recent turmoil in the oil markets. A few weeks prior, at an OPEC meeting in Doha, the Saudis had announced they would resist an Iran-led majority vote to increase petroleum prices by 15 percent. (The shah needed the boost to pay for billions in new spending commitments.) King Khalid bin Abdulaziz Al Saud argued that a price hike wasn’t justified when Western economies were still mired in a recession — but he was also eager to place economic constraints on Iran at a time when the shah was ordering nuclear power plants and projecting influence throughout the Middle East.
So the Saudis 'flooded the markets,' ramping up oil production from 8 million to 11.8 million barrels per day and slashing crude prices. Unable to compete, Iran was quickly driven from the market: The country’s oil production plunged 38 percent in a month. Billions of dollars in anticipated oil revenues vanished, and Iran was forced to abandon its five-year budget estimates.
A damaging ripple effect persisted: Over the summer of 1977, industrial manufacturing in Iran fell by 50 percent. Inflation ran between 30 and 40 percent. The government made deep cuts to domestic spending to balance the books, but austerity only made matters worse when thousands of young, unskilled men lost their jobs. Before long, economic distress had eroded middle-class support for the shah’s monarchy — which collapsed two years later in the Iranian Revolution.”
— the New Shelton wet/dry
“[…] If OPEC has really lost control of the market, how was it able to engineer the fall that has taken prices down by 45 per cent since the early summer? The fall was no accident. OPEC, that is, Saudi Arabia, decided it would not support the price by reducing its own output. Its goal was to buy market share by choking off expensive, non-OPEC production in the United States, Canada, Russia, offshore Brazil and elsewhere. The strategy may work, since the best cure for low prices is low prices just as the high prices in 2007 and 2008 were unsustainable. How long it will take is an open question.
The problem with the Saudis’ low-price strategy is that it hurts OPEC, too. Its 12 member states are not created equal. The ones in the Gulf – Saudi Arabia, Kuwait, Qatar and the United Arab Emirates – probably have the financial muscle to endure low prices for some time, perhaps a few years. Not so the weak OPEC members – Venezuela, Nigeria, Libya and perhaps Iran. The world of $60-(U.S.)-a-barrel oil is pushing them toward the fiscal cliff. If OPEC falls apart, it won’t be because it has lost control of a market swimming in American oil; it will be because the low-price policy is sabotaging the economy and finances of a few of its own members. OPEC is becoming a cannibal family, one that eats its own.”
— Eric Reguly, The Globe and Mail
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