Fracking is winning

"No one can set the price of oil. It's up to Allah," said Saudi Arabian Oil Minister Ali al-Naimi in May. But less devout people believe that Saudi Arabia has been trying very hard to set the price of oil - and to set it low. Moreover, it has been remarkably successful, because last week the price of oil was in the mid $40s per barrel, down from just over $100 last May. But Riyadh is not achieving its objective.

Saudi Arabia, like any oil producer, likes a high price for its oil, but since it is very rich and has huge reserves it thinks long-term. Watching American oil production almost double in the past seven years, mainly thanks to the rapid rise of fracking, the Saudis could see that they risked losing their role as the "swing producer" who can raise or lower the oil price just by cutting or increasing its own production.

The only way Saudi Arabia could keep that role was to drive the American frackers out of business. Production costs are secret in the oil world, but the Saudis assumed that the injection of water, sand and chemicals into shale rock at high pressure makes hydraulic fracturing - fracking - very expensive.

So the Saudi strategy is to keep its own production high in order to push the price of oil down. If the price stays low enough for long enough, high-cost producers like the frackers will have to close down. Then, once the competition had been eliminated, Saudi Arabia jacks the price back up by cutting its own production, and the glory days return.

In the meantime Saudi Arabia is losing income too, of course, and oil revenues account for 90 percent of the national budget. It can live on savings for a while, but it needs a fairly quick win.

It would be politically unwise to cut the lavish government...