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.
![U.S. Secretary of State John Kerry delivers a greeting from President Barack Obama during a meeting with King Abdullah of Saudi Arabia in Riyadh on November 4, 2013. [State Department photo/ Public Domain]](https://consortiumnews.com/wp-content/uploads/2013/11/kerry-abdullah.jpg)
U.S. Secretary of State John Kerry delivers a greeting from President Barack Obama during a meeting with King Abdullah of Saudi Arabia in Riyadh on November 4, 2013. [State Department photo/ Public Domain]
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.
By now even the New York Times is openly talking about the secret Obama Administration strategy of trying to bankrupt Russia by using its oil-bloated Bedouin bosom buddy, Saudi Arabia, to collapse the world price of oil. However, it’s beginning to look like the neo-conservative Russia-haters and Cold war wanna-be hawks around Barack Obama may have just shot themselves in their oily foot. […] their oil price strategy is basically stupid. Stupid, as all consequences have not been taken into account. Take now the impact on US oil production as prices plummet.
The collapse in US oil prices since September may very soon collapse the US shale oil bubble and tear away the illusion that the United States will surpass Saudi Arabia and Russia as the world’s largest oil producer. That illusion, fostered by faked resource estimates issued by the US Department of Energy, has been a lynchpin of Obama geopolitical strategy.
Now the financial Ponzi scheme behind the increase of US domestic oil output the past several years is about to evaporate in a cloud of fictitious smoke. The basic economics of shale oil production are being ravaged by the 23% oil price drop since John Kerry and Saudi King Abdullah had their secret meeting near the Red Sea in early September to agree on the Saudi oil price war against Russia.
Has Washington Just Shot Itself in the Oily Foot?
By William Engdahl
http://journal-neo.org/2014/11/06/has-washington-just-shot-itself-in-the-oily-foot/
saudi arabai is a colony of england and it does nothing unless ordered by england where all the plots for wars againstr nonanglo nations are created. so the real villain is not saudi but england which pulls all the strings of saudi nomads.
Oil is a minor tool in this geopolitical game, compared to the monarchy survival of the gulf region.
The Sunni- Shia divide is far serious than the oil politics,
Saudi Arabia is the the hub and the birth of Islam, from Islamic perspective regardless of Shia-Sunni belief the royal families including Morocco and Jordan kings are all illegitimate rulers and claims to be descendant of the prophet Mohamed (pbuh)
it makes sense to USA to downgrade Russia control over EU dependency and this is where Syria has a central part, the fall of Assad will benefit the Gulf on many ways, the survival of the monarchies and the pressure on Russia oil supplies
saudis nomads were brought by the eenglish pirates as stooge to keep the saudi oils under british control.
saudis are not legitimate custodian of mecca and certainly not the originator of islam which was Prophet Mohhamed saheb.
Two years ago, in hushed tones at first, then ever louder, the financial world began discussing that which shall never be discussed in polite company – the end of the system that according to many has framed and facilitated the US Dollar’s reserve currency status: the Petrodollar, or the world in which oil export countries would recycle the dollars they received in exchange for their oil exports, by purchasing more USD-denominated assets, boosting the financial strength of the reserve currency, leading to even higher asset prices and even more USD-denominated purchases, and so forth, in a virtuous (especially if one held US-denominated assets and printed US currency) loop.
The main thrust for this shift away from the USD, if primarily in the non-mainstream media, was that with Russia and China, as well as the rest of the BRIC nations, increasingly seeking to distance themselves from the US-led, “developed world” status quo spearheaded by the IMF, global trade would increasingly take place through bilateral arrangements which bypass the (Petro)dollar entirely. And sure enough, this has certainly been taking place, as first Russia and China, together with Iran, and ever more developing nations, have transacted among each other, bypassing the USD entirely, instead engaging in bilateral trade arrangements, leading to, among other thing, such discussions as, in today’s FT, why China’s Renminbi offshore market has gone from nothing to billions in a short space of time.
And yet, few would have believed that the Petrodollar did indeed quietly die, although ironically, without much input from either Russia or China, and paradoxically, mostly as a result of the actions of none other than the Fed itself, with its strong dollar policy, and to a lesser extent Saudi Arabia too, which by glutting the world with crude, first intended to crush Putin, and subsequently, to take out the US crude cost-curve, may have Plaxico’ed both itself, and its closest Petrodollar trading partner, the US of A.
http://www.zerohedge.com/news/2014-11-03/how-petrodollar-quietly-died-and-nobody-noticed
The Saudis: horse, cart, horse’s ass?
there may not have been a direct deal; more like Washington and Riyadh working in tandem towards common objectives: regime change in Syria in the long term, and undermining both Iran and Russia in the short term.
As for that crucial Pipelineistan gambit central to the Syrian riddle – a gas pipeline running from Qatar to regime-changed Syria, instead of Iran-Iraq-Syria – that’s not exactly a Saudi, but a rival Qatari priority.
What Kerry did give was the Master’s Voice seal of approval to the Saudi strategy of low oil prices, thinking short-term about US oil consumers at the pump, and medium-term on putting pressure on the revenues of both Iran and Russia. Yet he obviously played down the blow to the US shale gas industry.
The Saudis, for their part, have other key considerations, not least how to recover their market share across Asia – where their biggest customers are located. They are losing market share because of discounted crude sold by both Iran and Iraq. Thus, both must be “punished”, on top of the House of Saud’s pathological aversion to all things Shi’ite.
As for the big picture in Syria, Obama’s capo for dealing with The Caliph, General John Allen, laid down the law to Saudi newspaper Asharq Al-Awasat. He said, “[T]here is not going to be a military solution here [in Syria]”. And he also said, “The intent is not to create a field force to liberate Damascus.”
Short translation: those old goons of the previously “winning against Assad” Free Syrian Army (FSA) are now six feet under. And the new FSA goons to be trained in – of all places – Saudi Arabia are not exactly being regarded as holy saviors. For all practical purposes, the medium-term scenario spells out more US bombing (of infrastructure belonging to the Syrian nation); no regime change in Damascus; and The Caliph steadily consolidating his wins.
The Caliph fit to join OPEC
By Pepe Escobar
http://www.atimes.com/atimes/Middle_East/MID-01-311014.html
I believe the author has overlooked one of the targets of the Saudi oil price manipulations.
Saudi Arabia wants to use lower oil prices to pressure Russia to change its stance on Syria, to antagonize Iran, and to force US shale gas out of the market, roving correspondent for the Asia Times Pepe Escobar told RT.
http://rt.com/op-edge/197440-oil-prices-saudi-arabia-policy/
As the article says, Russia sells a lot of natural gas, and is partly immune. Iran is already hunkered down from sanctions, and won’t be hurt as much as expected. And Syria is too important to both countries to abandon now. At any rate, I’d be surprised if China doesn’t pick up any temporary slack in the resources being sent to Syria.
The US and some of the other Western producers – that’s another matter. Shale oil costs a LOT to produce, and some people are going to hemorrhage money if this continues.
How long can it continue? The Saudis are playing with fire here, in more ways than one. IMO this won’t go on for any kind of extended period.
According to Rashid Abanmy, President of the Riyadh-based Saudi Arabia Oil Policies and Strategic Expectations Center, the dramatic price collapse is being deliberately caused by the Saudis, OPEC’s largest producer. The public reason claimed is to gain new markets in a global market of weakening oil demand. The real reason, according to Abanmy, is to put pressure on Iran on her nuclear program, and on Russia to end her support for Bashar al-Assad in Syria.
When combined with the financial losses of Russian state natural gas sales to Ukraine and prospects of a US-instigated cutoff of the transit of Russian gas to the huge EU market this winter as EU stockpiles become low, the pressure on oil prices hits Moscow doubly. More than 50% of Russian state revenue comes from its export sales of oil and gas.
The US-Saudi oil price manipulation is aimed at destabilizing several strong opponents of US globalist policies. Targets include Iran and Syria, both allies of Russia in opposing a US sole Superpower. The principal target, however, is Putin’s Russia, the single greatest threat today to that Superpower hegemony.
…
Today the US-backed wars in Ukraine and in Syria are but two fronts in the same strategic war to cripple Russia and China and to rupture any Eurasian counter-pole to a US-controlled New World Order. In each, control of energy pipelines, this time primarily of natural gas pipelines—from Russia to the EU via Ukraine and from Iran and Syria to the EU via Syria—is the strategic goal. The true aim of the US and Israel backed ISIS is to give the pretext for bombing Assad’s vital grain silos and oil refineries to cripple the economy in preparation for a “Ghaddafi-â€style elimination of Russia and China and Iran-ally Bashar al-Assad.
In a narrow sense, as Washington neo-conservatives see it, who controls Syria could control the Middle East. And from Syria, gateway to Asia, he will hold the key to Russia House, as well as that of China via the Silk Road.
The Secret Stupid Saudi-US Deal on Syria
By F. William Engdahl
http://www.boilingfrogspost.com/2014/10/24/the-secret-stupid-saudi-us-deal-on-syria/
Oil and gas pipeline geopolitics has been driving Saudi and Qatari, and ultimately U.S. actions against Syria.
As noted in the Guardian 15 months ago:
In 2009 – the same year former French foreign minister Dumas alleges the British began planning operations in Syria – Assad refused to sign a proposed agreement with Qatar that would run a pipeline from the latter’s North field, contiguous with Iran’s South Pars field, through Saudi Arabia, Jordan, Syria and on to Turkey, with a view to supply European markets – albeit crucially bypassing Russia. Assad’s rationale was “to protect the interests of [his] Russian ally, which is Europe’s top supplier of natural gas.”
Instead, the following year, Assad pursued negotiations for an alternative $10 billion pipeline plan with Iran, across Iraq to Syria, that would also potentially allow Iran to supply gas to Europe from its South Pars field shared with Qatar. The Memorandum of Understanding (MoU) for the project was signed in July 2012 – just as Syria’s civil war was spreading to Damascus and Aleppo – and earlier this year Iraq signed a framework agreement for construction of the gas pipelines.
The Iran-Iraq-Syria pipeline plan was a “direct slap in the face” to Qatar’s plans. No wonder Saudi Prince Bandar bin Sultan, in a failed attempt to bribe Russia to switch sides, told President Vladmir Putin that “whatever regime comes after” Assad, it will be “completely” in Saudi Arabia’s hands and will “not sign any agreement allowing any Gulf country to transport its gas across Syria to Europe and compete with Russian gas exports”, according to diplomatic sources. When Putin refused, the Prince vowed military action.
It would seem that contradictory self-serving Saudi and Qatari oil interests are pulling the strings of an equally self-serving oil-focused US policy in Syria, if not the wider region. It is this – the problem of establishing a pliable opposition which the US and its oil allies feel confident will play ball, pipeline-style, in a post-Assad Syria – that will determine the nature of any prospective intervention: not concern for Syrian life.
Syria intervention plan fueled by oil interests, not chemical weapon concern
By Nafeez Ahmed
http://www.theguardian.com/environment/earth-insight/2013/aug/30/syria-chemical-attack-war-intervention-oil-gas-energy-pipelines
thank you for this