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Oil's Supply Glut Could Worsen

August 24, 2015

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Oil prices have already suffered a stunning decline. They're down nearly 60% and trading at levels unseen since early 2009. It's been a blessing to American drivers. The average price of gasoline is now $2.66 a gallon, down from $3.45 a year ago, according to AAA.

The big problem is the world still has more oil than it needs, especially given China's economic slowdown. The American energy boom that began last decade created a supply glut. OPEC, led by Saudi Arabia, has been unwilling to balance the market by cutting production.

The oversupply problem may very well be amplified by the Iran nuclear deal. If the historic agreement goes forward, sanctions relief will allow Iran to drastically increase output. That could trigger a reaction from the Saudis, Iran's longtime rival in the region.

"The Saudis' best weapon is the lowest oil price at maximum volume. They have enough financial reserves to have staying power for years," Kotok.

On the other hand, Iran has far less financial flexibility and it needs higher prices to turn a profit.

"With a low price, the Saudis are denying their enemy across the Persian Gulf money. That's an oil war," Kotok argued.