What the US should do to fight this 'oil war'

Saudi Arabia, and its fellow members of OPEC, may have just launched an oil war.

At the conclusion of its December conference, held in Vienna on Thanksgiving Day, OPEC, led by Saudi Arabia, decided not to cut oil production to halt the better than 30-percent drop in the price of crude oil this year.

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For American consumers of energy products, that may very well be the best news of 2014. But the Saudis don't appear to be letting oil prices drop out of the goodness of their hearts. Increasingly, energy experts are saying that the Saudis are using a menacing little maneuver to manipulate the price of crude back up by punishing companies — and countries — mainly the U.S. and its energy industry, by driving prices so low that the recent increases in domestic oil production will be scaled back dramatically as fracking becomes a money-losing endeavor for both marginal and major oil producers in the U.S.

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Unlike Russia, or other OPEC members, Saudi Arabia is said to have enough spare change that it can fund its government for several years to come, and, thus, can suffer plunging prices better than other producers.

It appears that Saudi Arabia is ripping out a play from its 1986 strategy book when it flooded the energy market with crude oil in an effort to punish cartel members who were not abiding by their agreed-upon quotas and as a result, grabbing market share from Saudi Arabia.

Back in the 1980s, the Saudis were the so-called "swing producers" of OPEC, raising and lowering their output to maintain stable to higher prices on the world oil market. That, of course, came after the world suffered two oil shocks, one in 1973, as the result of Arab oil embargo, and again in 1979, during the Iranian Revolution. During that period, the price of crude gushed from about $2 a barrel to an all-time high of $35.

As higher prices begat more production, OPEC, and major U.S. oil companies, were enjoying record profits, while cartel members exceeded their output limits to bring in ever more revenue. By 1986, the Saudis had had enough and drove oil to $10 a barrel and brought other oil producing nations to heel.

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The U.S. "oil patch" that, in those days, included almost all of Oklahoma and Texas, and large swaths of California, buckled under the weight of the crash in crude oil prices. Marginal wells were capped, not to be resurrected again. Enormous amounts of oil production capacity was shuttered in the U.S., forcing many oil companies to go dry and fall into bankruptcy.

It would appear that the Saudis are at it again, trying to firmly control the production, and sale, of crude oil around the world.

This renewed threat from OPEC, and more specifically Saudi Arabia, demands the energy policy equivalent of a military response!!!

While my suggestions will no doubt be offensive to environmentalists, progressives, or anyone who finds "big oil" to be an evil industry, the fracking revolution must be protected at all costs, even if it means subsidizing the industry with tax credits that allow the drilling to go on at below-market prices.

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While the cost of fracking oil and gas can vary from $50 a barrel to $80 a barrel, the Saudis are intent on looking for the prices that will force U.S. energy production to collapse.

While we wait for alternative forms of energy, from wind to solar, to Lockheed Martin's plans for distributed cold fusion power plants across the nation, the battle must be joined now.

The U.S. has lost too many economic wars over the last 50 years, allowing foreign producers to "dump" cheap goods onto world markets to make U.S. energy companies, textile-makers and auto-manufacturers suffer near-death experiences.

The U.S. is on the edge of energy freedom … freedom from nations who use oil money to finance aggression, like Russia … to finance terror, like many in the Middle East, most recently the Islamic State and freedom from indebtedness that may one day become quite burdensome, if not cataclysmic.

If this is the war to end all oil wars, the U.S. should use every means at its disposal to win.

Commentary by Ron Insana, a CNBC and MSNBC contributor and the author of four books on Wall Street. He also editor of "Insana's Market Intellgence," available at Marketfy.com. He delivers a daily podcast, "Insana Insights," and a long-form weekly version, both available on iTunes and at roninsana.com. Follow him on Twitter @rinsana.

Disclosure: Ron Insana doesn't trade any of the commodities mentioned in this article.