Last summer oil prices climbed to $110 per barrel amid an escalating insurgency in Iraq by a group called ISIS (Islamic State of Iraq and Syria).  “Everybody knew” oil prices would remain elevated during the crisis even if there were no disruptions of supplies. Sometimes conventional wisdom can be wrong.

Now, the price of oil has plummeted and the conventional explanation is that the decline is because of increasing U.S. oil production, slowing global growth, and the resulting imbalance between supply and demand.

Sometimes one needs to look through conventional wisdom, connect the dots, and consider alternative explanations.  Saudi Arabia, which controls roughly 73 percent of the world’s proven oil reserves

[through its leadership position in OPEC], and is the epicenter of Islam, alone has the power to control the price of oil. In the face of plunging oil prices, the Saudi kingdom made a recent bold decision to decline cutting back its production to help stabilize prices.  Why would the Saudis choose to inflict pain on their own country?

Governments typically make big bets either when they are overly confident or increasingly worried. Foreign Affairs calls the Kingdom’s new oil strategy its boldest initiative since 1945.  ISIS is one reason for Saudi Arabia to be worried, although pure economic logic may well drive Saudi behavior.  As its competitors struggle to keep production going, Riyadh is likely to increase its global market share.  Keeping prices in the $50-60 range for a year or two would have major repercussions for energy investments elsewhere. [Free registration required]. Click here to read

Saudi Arabia Can Crush ISIS. ISIS’s core objective is to restore an Islamic empire led by a supreme leader.  Since Saudi Arabia is the epicenter of Islam, the road to an empire runs through the Saudi kingdom. ISIS needs valuable economic, financial and energy assets to become financially self-sufficient.  ISIS poses a unique threat:  It is a bloodthirsty movement that can find disaffected young men and women and recruit them from among the world’s 1.3 billion Sunnis, according to an opinion piece in The New York Times.

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The collapse of oil prices has done significant financial damage to ISIS.  The low oil price by itself will not eliminate the ISIS terrorist threat, but it has weakened their ability to buy weapons and support their rage. A stream of oil revenue is a critical life-line of support; low prices can keep the ISIS threat from growing.

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