Saudi Arabia’s Oil End Game It is not about America. It is really about Iran

image_pdfimage_print

WASHINGTON – More than a year ago, when it became obvious that massive increases in US oil production (thanks to shale and fracking) had created a global glut, Saudi Arabia did not react in the usual manner. It did not work with its OPEC associates to cut the cartel’s production in order to diminish supply and support oil prices.

No more production cuts

No, Saudi Arabia stated instead that it would let the market determine a new balance. No supply cuts. From then on supply and prices would be determined by actual global demand.

At that time it was widely believed that the Saudis wanted to kill US shale production. The conventional wisdom was that relatively expensive fracking operations in the US could not survive with oil below $ 70 per barrel. They just could not. And, in truth, many US shale producers have been hurt badly by the precipitous price fall allowed by Saudi Arabia. Some had to fold.

US shale sector very resilient 

However, a significant segment of the US shale oil industry has proven to be remarkably resilient. It streamlined operations, and it has quickly become far more efficient. Some shale oil producers claim to be profitable with oil at $ 40 or even $ 30 per barrel.

In other words, the US shale oil industry has been badly wounded by the oil price collapse; but it is still very much alive. This is astonishing. Only a couple of years ago most industry analysts asserted that the shale sector could not survive with oil prices this low.

Did Saudi Arabia miscalculate? Did the Saudis wrongly assume that in just a few months they would have smothered the Americans? Or may be they have some other goal in mind?

Saudi Arabia needs high oil prices  

Be that as it may, whatever the Saudis are trying to accomplish, they need quick results. Indeed, the massive over supply they created with the intent to kill or weaken less competitive rivals did what it was intended to do. It caused a glut and an oil price collapse.

The problem is that rock bottom prices are beginning to hurt the Saudis.

It is no secret that beyond oil Saudi Arabia has no other sources of real revenue. And it is also well-known that the stability of the Kingdom is based almost entirely on the ability of the Saudi Royal Family to keep subsidizing directly or indirectly almost the entire country: that’s 29 million people. These subsidies, paid for with oil revenue, buy consensus, social peace and popular support for the Monarchy.

Sharply lower oil revenues, sustained over several years, will translate into growing public deficits, and therefore into a diminished ability to throw cash around as a way to keep the people happy.

Of course, for the moment Saudi Arabia can rely on its significant dollar reserves. But they are beginning to dwindle. The government has also started borrowing in order to finance its growing yearly deficit. At some point, its ability to subsidize the country will be impaired.

Unsustainable 

Let’s be clear. We are still far from an economic or fiscal emergency. But, assuming no policy changes regarding oil prices, at some point this course will become unsustainable. Soon enough, the Saudi government will need higher oil revenues.

As noted above, American energy producers are hurting. Some are gone, or will be gone pretty soon. Still, the news from America is that the shale oil sector is far more resilient and flexible that anybody thought.

At least some shale producers have become far more efficient. They can start and stop production without creating havoc. Of course, some shale oil plays cannot be profitable with crude below $ 40 or $ 30. But many are. If and when OPEC will decide to go back to its old ways –cutting production in order to support prices– expect the US shale sector to start ramping up production.

What is the game plan? 

Given all this, assuming that the Saudis must understand what is going on, one wonders what they have in mind. What do they plan to achieve by allowing oil prices to fall more and more? Whom are they trying to squeeze?

What is the game plan? I believe that the target is Iran. Saudi Arabia sees Iran as its only rival for regional influence, when it comes to politics, military assertiveness (Iraq, Syria, Yemen) and religious activism. Iran is Saudi Arabia’s existential threat.

Hit Iran where it hurts

For this reason the Saudis are trying to hit Iran where it can really hurt: oil revenue; this way hopefully undermining the legitimacy of the government run by the Ayatollahs.

It is clear that if Saudi Arabia needs high oil prices to keep its people happy, so does Iran. Who knows, may be Saudi intelligence has information we do not have about the fragility of the government in Tehran.

If protracted low oil prices end up undermining the Ayatollahs’ regime in Tehran, then this semi-suicidal, low oil price strategy pursued by Saudi Arabia all of sudden makes sense.

, , , ,

Leave a Reply

Your email address will not be published. Required fields are marked *