Saudi Arabia’s Oil Politics on Syria

Exclusive: Typically when crude oil prices plummet, Saudi Arabia cuts back production to stop and reverse the fall, but this time that hasn’t happened, raising questions about why. Is the reason business or geopolitics, possibly a way to punish Russia and Iran over Syria, asks Andrés Cala.

By Andrés Cala

Saudi Arabia is keeping its oil taps wide open even as a glut tumbles world prices to the low $80s per barrel, the lowest level in four years and well below the level that Saudi Arabia must maintain to avoid running a fiscal deficit. But the big question is why? Is the motive just business or is it geopolitics, i.e., punishing oil producers Iran and Russia over Syria?

The mainstream explanation for the Saudi behavior is that it’s acting to defend its market share in an increasingly oversupplied oil market, which is awash with robust U.S. production while demand growth from China and Europe has stalled. The conventional thinking goes: If Saudi Arabia cut exports, prices would rise but other suppliers might snatch away its clients. So the Saudis would rather weather the storm of lower prices and hold onto its clients until the market balances itself.

Other analysts have suggested that Saudi Arabia is undertaking an indirect assault on the U.S. production of so-called “tight oil,” which is more expensive to extract from shale than pumping light crude from Saudi oil reserves. The lower the world’s oil prices, the less viable these more costly oil extractions become.

But business concerns may not be the main driver of this Saudi oil policy. Instead, the Saudis may be flexing their muscular dominance of the world’s oil markets to advance geopolitical interests, from helping the energy-dependent military government of Egypt a Saudi ally to undermining the adversarial regimes in Syria and Iran as well as Russia, which has emerged as a key ally for those two embattled governments.

While falling oil prices certainly do hurt Saudi Arabia, the Saudis with their vast financial reserves are well-positioned to withstand the economic pain. That is less the case with Russia and Iran, both heavily invested in the defense of Bashar al-Assad’s Syrian regime. In other words, the Saudis may see the precipitous drop in oil prices as a weapon in the broader regional Shiite-Sunni proxy war, with Saudi Arabia leading the Sunni side versus Shiite-ruled Iran.

The depressed oil prices also dovetail with the Obama administration’s geopolitical interests by putting the squeeze on Russia and Iran as the West seeks to consolidate its control over Ukraine and tries to force Iran to capitulate in talks over its nuclear program.

But the Saudi geopolitical calculation to sustain record production above 9.5 million barrels per day is probably most directed at Syria where the Saudis have financed the Sunni-led campaign to overthrow Assad, who largely represents Alawite, Shiite, Christian and other minorities. By toppling Assad and replacing him with a Sunni-dominated government, Saudi Arabia would deal a severe blow to Iran and the region’s Shiites.

Thus, Saudi Arabia is willing to resist pressure from its partners in the Organization of Petroleum Exporting Countries in order to advance what the Saudis see as their broader regional interests. For Riyadh, the self-inflicted economic pain is acceptable as long as it contributes to the broader imperative of inflicting pain on Assad and his backers.

The Geostrategic Imperative

For years Saudi Arabia’s Sunni monarchy has maneuvered, at times with allies such as Turkey and at times alone, to replace Syria’s Assad who comes from the Alawite community, a spinoff of Shiite Islam. Israel also shares the goal of ousting Assad, hoping to shatter “the Shiite crescent” reaching from Tehran through Damascus to Beirut. [See Consortiumnews.com’s “Israel Sides with Syrian Jihadists.”]

But Saudi Arabia’s Syrian-regime-change policy stumbled when President Barack Obama refused to go to war against Assad last year and Syria’s Iranian-backed forces began regaining lost ground against the Sunni rebels. Russia, too, came to Assad’s defense for its own strategic interests. Russia publicly admonished Saudi Arabia and Qatar for unscrupulously turning Syria into a terrorist haven that threatened global security, particularly the emergence of al-Qaeda’s Nusra Front and the even more brutal Islamic State.

As these Sunni extremists took over the anti-Assad rebellion, Saudi Arabia found itself in the de facto position of aiding and abetting these terrorist elements, which control large swaths of Syria and after an Islamic State offensive a significant part of Iraq. Then, the Islamic State’s strategy of using brutality, including mass executions and beheadings, to intimidate its enemies shocked the world and created political pressure on Obama to intervene against these extremists.

Saudi Arabia’s monarchy also sensed a growing danger to its stability if the Islamic State’s “caliphate” continued to expand. The Royal Family understands that the Islamic State is popular among some of Saudi Arabia’s conservative Sunni Salafites who might join the Islamic State in turning their guns on the monarchy with the goal of seizing the country’s extraordinary oil wealth. The Islamic State is already active on the Saudi borders with Iraq and Yemen.

So, recognizing these risks and responding to U.S. pressure, the Saudis agreed to join the U.S.-led coalition mounting airstrikes against Islamic State positions in Iraq and Syria. But Saudi Arabia has not entirely abandoned its hopes of dislodging Assad and thus it demanded assurances from Secretary of State John Kerry during a September visit that Assad would not be allowed to stay in power, according to a report in the Wall Street Journal.

Saudi Arabia’s use of oil as a weapon supports the longer-range goal of ousting Assad by raising the costs on Iran and Russia for backing him.

Global Impact of Lower Prices

There are, of course, other risks for Saudi Arabia from its acceptance of lower oil prices. For one, the lost income undercuts the monarchy’s ability to co-opt its population by providing financial and other benefits. The oil money has shielded the country so far from the extreme political instability undercutting its neighbors, both enemies and allies.

According to the International Monetary Fund, Saudi Arabia risked running a fiscal deficit as early as 2015, a warning that preceded the recent drop in oil prices. Saudi public spending soared 50 percent between 2010 and 2013 as stimulus for an already hyper-inflated welfare state that is trying to fend off its own Arab Spring. The government is building infrastructure, improving services and increasing handouts. Spending is forecast to continue increasing through 2018.

The IMF said Saudi Arabia’s government spending might exceed its income almost entirely from oil revenue in 2015. This public deficit could increase to 7.4 percent of gross domestic product by 2019. The break-even oil price required to balance the state budget is $91 for 2015, but the price is currently lower than that.

Still, the price tumble is disproportionally more damaging to Russia and Iran. Russia, already coping with Western sanctions over Ukraine, is heavily dependent on its oil revenue and President Vladimir Putin is well aware of the destabilization of Russia that falling energy prices can inflict. That said, Russia is a lot better prepared than it was in the 1980s and 1990s and thus is in a position to endure for some time.

Iran will suffer, too, but probably not enough to make it flinch in its various confrontations with the United States and the West. Iran’s economy is weak, especially under sanctions over its nuclear program and from the costs of several proxy wars in the region that are draining its budget. But Iran has historically weathered economic hardship and has recently demonstrated its resilience when it comes to priorities, such as defending its Shiite allies in Syria and Iraq.

On the other hand, the Saudis know Western allies will appreciate the decision to keep prices low and thus give oil-importing countries a financial break. When the U.S. consumers save on oil imports, which still represent about a third of the net oil that America uses, that means they have more money in their pockets for other purchases.

The Saudis also knew that the typical market reaction to instability in the oil-rich Middle East is for prices to soar, possibly to $150 a barrel, which would have had a depressing effect on Western economies and added to the political pressures across the developed world. By flooding the world markets with oil now, however, the opposite occurred, with prices sharply declining.

Another geopolitical gain for Saudi Arabia from the lower oil prices is the relief provided to Egypt’s economy where the Saudis have already lavished billions of dollars in aid on the military regime that overthrew the elected Muslim Brotherhood government of Mohamed Morsi. Though the Muslim Brotherhood is also Sunni, its ideology of Muslim populism represents what the Royal Family views as an existential threat.

The Muslim Brotherhood has strong supporters, including Qatar, so shielding the Egyptian military regime economically is vital to the Saudis. Lower oil prices, more than direct Saudi aid to the government, brings relief to average Egyptians and thus reduces the likelihood of a popular uprising against the military regime.

But Saudi Arabia can’t sustain the lower prices indefinitely. OPEC meets in December and could cut nominal production goals, although Saudi Arabia is the ultimate decider. Since the beginning of the world economic crisis in 2008, Saudi Arabia has positioned itself as a central bank of sorts in global oil markets. It is the only country capable of pumping more oil or less to influence supply and demand to a significant degree.

The Kingdom also has built hard currency reserves that give it ample time, years even, to survive lower oil prices. But it’s not about surviving, but expanding, and thus the likely window of low oil prices will probably close some time in the first half of 2015.

Saudi Arabia knows there is no reason to panic because its 2014 budget is safe, and the country could easily survive with prices around $85 in the first half of 2015, as long as prices rise to around $95 in the second half.

Ultimately, Saudi timing on oil prices is anybody’s guess. It likely will be determined by how the Syrian war evolves and the post-election political circumstances in the United States. In the meantime, the world will continue guessing about how much self-inflicted financial pain the Saudi monarchy is ready to accept in its efforts to inflict more pain on Syria’s allies.

Andrés Cala is an award-winning Colombian journalist, columnist and analyst specializing in geopolitics and energy. He is the lead author of America’s Blind Spot: Chávez, Energy, and US Security.