Friday, December 19, 2014

Is Saudi Arabia deliberately helping crash world oil markets in order to hurt Iran?

It's not totally implausible.

Plummeting oil prices are generating economic and political effects around the world. I don't think any serious analyst would suggest that this situation can be attributed entirely or straightforwardly to actions (or plots) by any of the major players in the international oil market. A lot of factors have come together to put downward pressure on oil prices, including a slowdown in demand by industrialized countries undergoing an economic slump, the increasing flood of shale oil (and natural gas) from North America, the reduced effectiveness of the OPEC cartel, and so on.

But it does seem possible that policy decisions by Saudi Arabia based on geopolitical as well as strictly economic concerns might be one significant piece of this larger picture. It's interesting that the Saudis have not responded to falling oil prices by trying to orchestrate production cutbacks that might help counteract the slide. On the contrary, they've been ramping up their own production. It's possible that this policy is the result of strictly business calculations—i.e., they concluded that it would be fruitless to try to maintain high oil prices, and they would lose a lot of money in the attempt, so they might as well recoup their losses by just selling more oil at lower prices. According to some analysts, it's as simple as that.

But it's also possible, and not incompatible with most of the factors just outlined, that an additional factor involving Middle Eastern geopolitics is also involved. Again, the Saudi regime couldn't have created the current situation all by itself. But perhaps it decided it would be a good idea to take advantage of the situation by deliberately helping accelerate the drop in oil prices. After all, the countries most hurt by falling in oil prices include not only Iran, which the Saudi regime regards as a dangerous foe, but also Russia, which happens be the other crucial supporter of the Assad regime in Syria (which the Saudis regard as an anti-Sunni Iranian client regime they would like to see overthrown). And they can't quickly compensate for lost revenues with short-term production increases, as Saudi Arabia can.

That's the argument put forward yesterday by Andrew Scott Cooper in Foreign Policy:  "Why Would the Saudis Deliberately Crash the Oil Markets? Simple: to undermine Tehran". Some highlights
Today, oil prices have again plummeted, from a high of $115 per barrel in August 2013 to under $60 per barrel in mid December 2014. Western experts, predictably, have seized the opportunity to ponder what cheaper oil might mean for the stock market. As for why prices have dropped, some analysts have suggested it has little to do with any manipulation of Saudi spigots: A December essay in Bloomberg Businessweek credited the American shale revolution with “breaking OPEC’s neck.”

There’s no doubt that shale has eroded Saudi Arabia’s “swing power” as the world’s largest oil producer. But thanks to their pumping capacity, reserves, and stockpiles, the Saudis are still more than capable of crashing the oil markets — and willing to do so. In September 2014, they did just that, boosting oil production by half a percent (to 9.6 million barrels per day) in markets already brimming with cheap crude and, a few days later, offering increased discounts to major Asian customers; global prices quickly fell nearly 30 per cent. As in 1977, the Saudis instigated this flood for political reasons: Whether foreign analysts believe it or not, oil markets remain important venues in the Saudi-Iranian struggle for supremacy over the Persian Gulf.

This isn’t the first time since the late 1970s that Saudi Arabia has used oil as a political weapon against its rival.  [....]   Signals of a new flood emerged as early as June 2011. While addressing an audience of senior American and British officials at a NATO operations base, Prince Turki warned Iran not to take advantage of the regional unrest triggered by the Arab Spring. Paraphrasing some of Turki’s comments, the Guardian noted that Iran’s economy could be squeezed hard by “undermining its profits from oil, something the Saudis … were ideally positioned to do.”

The Saudis understood, too, that the best time to crash the markets would be when prices were already soft and consumer demand low. In early December, just a few months after Saudi Arabia unleashed its latest oil flood, Obaid wrote in a Reuters article that his government’s decision to depress prices is “going to have a huge effect on the political situation in the Middle East. Iran will come under unprecedented economic and financial pressure as it tries to sustain an economy already battered by international sanctions.” Around the same time, the Saudis were no doubt pleased to see bread prices shoot up by 30 percent in Tehran. (Bread is a staple of the Iranian diet, and its prices are a bellwether for the economy.)

On Dec. 10, the Saudi oil minister said his country would keep pumping 9.7 million barrels per day into the global markets, regardless of demand. For their part, the Iranians have shown alarm, if not yet panic. Without naming names — he didn’t have to — President Hassan Rouhani decried the “treacherous” actions of a major oil producer whose “politically motivated” behavior was evidence of “a conspiracy against the interests of the region…. Iran and the people of the region will not forget such conspiracies.” The previous day, Vice President Eshag Jahangiri had described the rapid plunge in oil prices as a “political plot … not a result of supply and demand.”

Riyadh’s real hope, if history is any indicator, is that escalated production will force Rouhani’s government to implement an austerity budget that will ultimately stoke underlying social unrest and once again push people into the streets. If this happens, it might not lead to an event as significant as the shah losing his grip on power — but it would reinforce the Saudis’ faith in oil as a potent weapon in the battle to dominate the Middle East. And oil floods, in turn, would likely continue their periodic, dangerous rattling of both the markets and the region.
This analysis may or may not be entirely correct—a confident judgment about that is beyond my expertise. But it strikes me as plausible that it does, indeed, capture a significant part of the picture.

On the other hand, it's also true that for decades the Saudis (as well as their enemies) have often tried to  exaggerate the effectiveness of their "oil weapon". So we shouldn't swallow this line of analysis too uncritically either. But one way or another, what's indisputable is the key role played by the ongoing struggles and mutual hostility between the regimes in Tehran and Riyadh in the politics of the Middle East.

—Jeff Weintraub