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Beyond Oil And Gold Prices

Published on 24 October 2014, by M. Tomazy.
Local Editor | 

Is It A U.S.-Saudi Plan To Punish Oil-Rich Russia And Iran?

Gold prices are high these days, while oil prices are witnessing an accelerated dropping.
Chart: Gold prices in the last 30 days (source:
With the U.S. on track to become the world’s largest oil producer by next year, it’s become popular in Washington and on Wall Street to call America the new Saudi Arabia. Yet the real Saudi Arabia hasn’t relinquished its role as the producer with the most influence over oil prices. Its reserves of 266 billion barrels, ability to pump as many as 12.5 million barrels a day, and, most important, its low cost of extracting crude still make it a formidable rival to the U.S., whose shale wells are hard to exploit. Saudi Arabia is the only one in the position of putting more oil on the market when they want to and cutting production when they want to. Last month, despite a global glut developing largely because of China’s slowdown and the rapid increase in U.S. production, the Saudis boosted production half a percent, to 9.6 million barrels a day, lifting OPEC’s combined production to an 11-month high of almost 31 million barrels a day. Then, the first of this month Saudi Arabia lowered prices by increasing the discount it offered its major Asian customers. The kingdom might just as easily have cut production to defend higher prices.”
Chart: Oil prices in the last 30 days 
“Gold prices hit a fresh four-week high Tuesday, as investors rushed into the metal amid gloomy economic data and turbulent stock markets in Europe and Asia.

Gold for December delivery, the most actively traded contract, closed up $4.30, or 0.3%, at $1234.30 a troy ounce in the Comex division of the New York Mercantile Exchange. Earlier in the session, prices hit $1238.60, their highest level since Sept. 17.

“However, in terms of crude oil production, Russia is still the world’s leader with 10.1 million barrels per day, with Saudi Arabia coming in second with 9.7 million barrels per day. The IEA says the US could catch up with Saudi Arabia and Russia in crude production by the end of the decade, but still hasn't broken the 9 million barrel per day benchmark.

Production in Russia has fallen in recent months, and could be hit further in the wake of sanctions, which will deprive Russian companies of EU and US partners in Arctic, deep-sea, and shale projects. A quarter of Russia's total oil production depends on shale.

The sanctions will also create problems for Western companies like ExxonMobil, BP, Shell and others, who have joint ventures worth billions of dollars in Russia.”

Matt O'Brien says on elevated Gold prices: “Let's put it all together. The best we can say is that something happened, and now the economy needs bubbles or negative real rates to get people to invest enough. It'd be nice if we could be more specific than that, but we can't really. What we can say, though, is this is a problem that might not go away anytime soon. Household deleveraging and low population growth should keep pushing rates down for awhile.

Now let's back up. Why are negative real rates such a bugaboo? Well, because the Federal Reserve might not be able to give them to us. The Fed can't cut rates below zero and it won't let inflation go above 2 percent, so the lowest real rates can go is -2 percent. But if the economy needs lower ones than that — say -7 percent, like it did during the crisis — it will just collapse”.