There is only one thing in this world that can link a possible terror attack on the Sochi Olympics, the Syrian civil war, and subverting a potential economic boom in Israel: oil. It has made unlikely bedfellows, driven various back-door political deals, and even been the spark that set off global conflicts. This time, it is being used as a tool to get two of the world's largest producers -- Saudi Arabia and Russia -- to play together, putting next month's Winter Games in the crossfire. Let's take a look at what has transpired and the valuable lesson that you and I can take from these events.
"That's a nice-looking Olympics you got there. It would be a shame if anything happened to it."
According to an August 2013 article from The Telegraph that reads like a James Bond script, Saudi Arabia had closed door negotiations with the top officials in Russia last summer. Much of the meeting was related to the Syrian civil war and the two nations' support for different factions in the battle to oust the Assad regime. What transpired was a long back and forth involving several different aspects of Saudi-Russian relations, ranging from Israel and Cyprus' large natural gas fields, Russia's military base in Syria, Saudi Arabia holding back oil production to support higher prices, and the continued violence related to the Arab Spring in various countries around the Middle East.
Of all those hot topics, though, there was one that really should have everyone sitting at the edge of their seats. In a line that seems to be pulled right out of The Godfather, Saudi Arabia's intelligence chief suggested that his nation had the capability to prevent any terrorist attacks on the Olympics -- if it were to get what it wants. The following is a statement from Saudi Prince Bandar bin Sultan to Russian President Vladimir Putin, as reported by al-Monitor:
I can give you a guarantee to protect the Winter Olympics in the city of Sochi on the Black Sea next year. The Chechen groups that threaten the security of the games are controlled by us, and they will not move in the Syrian territory's direction without coordinating with us.
There have been significant fears about Chechen terrorist attacks on the Winter Olympics, which are scheduled to begin Feb. 7. Those concerns were exacerbated by two suicide bombings in the city of Volgograd at the end of 2013. Putin reportedly offered no indication that he was open to the Saudi offer.
There is no direct link between Saudi Arabia and the two recent terrorist attacks, nor is this article any implication that Saudi Arabia is responsible in any way. However, the attacks, the elevated security warnings in Sochi, and Riyadh's reported statement itself are troubling, and they could seriously affect Saudi Arabia and by default the world of oil.
How can Saudi Arabia have so much influence over Russia and other nations around the world? Unlike almost every other oil-producing nation, Saudi Arabia has some spare production capacity it can use to influence the price of oil. As much oil as Russia produces, it does not have this ability. Also, the Russian government collects more than 50% of its revenue from oil and gas royalties. If Saudi Arabia were to really open the pumps, it could cause the price of oil to plummet and strain the already stretched thin Russian federal budget.
What a Fool Believes
It may seem strange seeing this article on a website dedicated to investing, but events like this show that we cannot treat oil and gas like any other commodity that simply gets traded based on the merits of supply and demand. As Pulitzer Prize winner Daniel Yergin once noted, "The major obstacle to the development of new supplies [of oil] is not geology but what happens above ground: international affairs, politics, investment and technology." Not only do countries such as Russia and Saudi Arabia produce immense amounts of oil and gas, they both produce it through oil companies owned by the state, which means this output can be used as a vehicle for political power.
This can make investing in the energy sector extremely challenging. Even large players like ExxonMobil (XOM +1.00%) have little control over the price of oil, and in some ways they are simple bystanders that take the price they can get based on the market laid out by the likes of Saudi Aramco and Gazprom. The boom in American shale oil and gas is helping to subvert some of this influence and in some ways isolate many domestic producers from these sorts of events. As long as OPEC and Russia account for more than 45% of oil produced around the world, though, it is a reality we will have to face.
