Just like a company, a country does not want its competitive advantage to diminish as it protects its financial viability and economic future.
But this is exactly what's happening with Saudi Arabia and other Middle Eastern oil exporting nations.
Let me explain.
Decades of Oil Pricing Power The competitive advantage for Saudi Arabia has always been its pricing power with crude oil. Plain and simple: Saudi Arabia could always produce oil cheaper than anyone else.
How cheaply can Saudi Arabia produce oil? When asked in December 2008 by "60 Minutes" correspondent Lesley Stahl how much this cost Saudi Arabia, Oil Minister Ali al-Naimi replied, "Probably less than $2 to produce a barrel."
Pricing power such as this is the most imposing economic moat that exists. It can drive competitors out of business or even deter them from entering the market.
Tremendous power goes along with pricing control, be it a company or a country or a cartel such as OPEC (Organization of Petroleum Exporting Countries).
As demonstrated first in October 1972 in the first Arab oil embargo, and then with the second in 1979, Middle Eastern petroleum exporting nations could send the United States and the world into a deep recession by acting to increase oil prices.
Indeed, just the rumor of conflict in the Middle East can send oil prices skyward, as happened last year with Iran and its threats to close the Strait of Hormuz to oil tankers.
Ironically, it has been regional conflict that has resulted in Saudi Arabia and other Middle Eastern nations abdicating their pricing power and losing their economic moat.
Due to the Arab Spring and revolts in Middle Eastern countries such as Egypt, Libya and now Syria, Saudi Arabia and others have implemented a wide series of expansive domestic spending programs.
These programs are designed to placate their people and prevent an Arab Spring-type uprising.
"The Saudis need to spend more money to keep their citizens quiet and prevent protests," Carsten Fritsch, oil analyst at Commerzbank, told the Financial Times.
Initiatives such as these are very expensive and explode in cost over time. In fact, in a FT article this year, Saudi Oil Minister Ali al-Naimi stated that to fund these programs, Saudi Arabia would have to keep oil prices around $100 a barrel.
That's a problem seeing as oil keeps slipping farther away from the triple digits.
According to a June 25 Reuters report, Saudi Arabia has built up a revenue surplus to withstand lower oil prices. The country plans to maintain its oil output numbers despite the lower crude prices.
But Russia and Iran may be in more trouble. Reuters reported both Moscow and Tehran need crude at $115 a barrel to meet budget requirements.
"Russia's economy is vulnerable to a sharp drop in oil prices," U.S. oil analyst Phil Verleger told Reuters. "The Saudis may be able to exploit that vulnerability by keeping production at 10 million barrels per day."
These countries face another threat to high oil prices and pricing power: fracking.
How Fracking Challenges High Crude Oil Prices As a result of fracking, North America is now the biggest oil producing region in the world. Ironically, if oil prices had not been so high, fracking would not be economically feasible.
Due to fracking, the cost of natural gas has fallen so much that it is now replacing oil in a number of uses.
This is easily seen in the price trajectories for the main exchange-traded funds for oil, United States Oil (NYSE: USO), and natural gas, United States Natural Gas (NYSE: UNG).
Now trading around $29.50, United States Oil is down more than 20% for 2012.
Over the same period, United States Natural Gas has fallen more than 30% to around $18 a share.
The Saudi stock market, the Tadawul All Share Index (SASEIDX), has also declined to year lows in recent trading.
Fracking has opened up both new and existing fields for greater production of oil and natural gas, both in the United States and abroad. This will only increase tremendously as the technology becomes more effective and efficient.
The changing energy environment will limit the control Saudi Arabia and other Middle Eastern countries have over crude oil prices, forever altering the region's revenue stream.
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Tags: crude oil prices, fracking, Natural Gas, oil embargo, Oil Prices, OPEC, saudi oil