Saudi Arabia’s Goal: Hurt Iran Low oil prices are meant to strangle the oil-dependent Iranian economy

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WASHINGTON – A few days ago I argued that Saudi Arabia is imposing rock bottom oil prices through over production in order to damage Iran. Subsequent developments confirm this. In Saudi Arabia there is now a confluence of anti-Shiite moves at home, culminating in the recent execution of Nimr al-Nimr, a prominent Saudi Shia cleric, (an act of open provocation vis-a-vis Shia Iran), and openly anti-Iranian attitudes and policies.

Low oil prices, steal Iranian customers 

The Saudis aim to mix anti-Shia religious animosity with their ability to keep oil prices low, this way hurting oil-dependent and relatively poorer Iran. Indeed, beyond its “pump as much as you can” policy inaugurated more than a year ago, now Saudi Arabia is openly trying to steal business from Iran. Knowing that with the forthcoming easing of sanctions (the outcome of the nuclear deal) Iran will be once again allowed to sell oil to its old European customers, (Spain and Italy are on top of the list of old pre-sanctions buyers of Iranian oil), Saudi Arabia just announced extra discounts to European oil consumers. Obviously they want to sway them, so that they will not resume business with Iran, their old supplier, once the sanction are lifted.

So, here is the strategy. Keep oil prices low, so that Iran, even when allowed to sell more oil, gains as little as possible. At the same time steal old Iranian customers through heavy discounts. Clearly Saudi Arabia wants to hurt Iran economically using its ability to keep oil prices down as its weapon.

Will it work? 

Assuming that this is indeed the Saudi end game, can the plan be executed until it reaches its objective of seriously damaging Iran?  I am not so sure. To begin with, by forcing the entire OPEC cartel to tighten its belt (member countries produce about 30% of the entire world oil supply) Saudi Arabia is not winning any new friends.

And certainly oil at around $ 30 a barrel is hurting Moscow very badly. Russia is not an OPEC member, but it is a giant oil exporter, and it desperately needs high oil revenues just to stay afloat.

Pressures 

Which is to say that there will be pressures –direct and indirect– to force Saudi Arabia to change this course that is ruining many oil-producing countries –big and small.

Besides, how much damage will low oil prices inflict on Iran? Moderate? Severe? My hunch is that, even in a worst case scenario, this is not a mortal blow for Iran.

Saudi Arabia hurting itself 

In the meantime, however, while Saudi Arabia is trying to strangle Iran economically, it is also creating huge problems for itself. Saudi policy aimed at depressing prices through its own over production (now at 10.4 million barrels a day), have caused an unprecedented fiscal shortfall.

With sharply diminished oil revenue, in 2015 Saudi Arabia run a huge budget deficit of almost $ 100 billion, equal to more than 20% of GDP. In order to finance it, the Saudi rulers had to dip into their cash reserves, (in excess of $ 700 billion) while issuing bonds at the same time.

How long more? 

So, far so good. Saudi Arabia still has ample funds that can be used to re-balance public accounts. But this game cannot go on for ever. At some point (about 5 years according to many analysts) the ample cash cushion will be gone, and this low oil prices policy will have to stop. Saudi Arabia can impose a change of course very easily. Simply by cutting its own production, it can eliminate the oil glut that depressed world prices for crude.

However, what if at that point Iran, while damaged, is still alive and kicking? What if the economic punishment inflicted by the Saudis failed to kill the Ayatollahs (alleged) hegemonic dreams? Then this would have been for nothing.

Western consumers (and car makers) are doing well 

At the moment, the only net beneficiaries of this almost suicidal oil policy are hundreds of millions of Western and Asian consumers. Almost nobody in Germany, Japan or the US objects to rock bottom gasoline prices. (Of course, in the US the once vibrant energy sector led by the fracking revolution now is bleeding. But America as a whole is still a net oil importer. Most sectors gain from low energy prices. Take Detroit, for instance. US car manufacturers had a stellar year in 2015, almost entirely because low gasoline prices enticed millions of people to buy new cars).

Clever strategists at the helm? 

So, here is the question. Is Saudi Arabia run by clever people who have properly calculated risks and rewards of this new “low prices” oil policy? Or is this just reckless behavior?

Is this a super smart Machiavellian strategy, or the brain child of untutored leaders who believe they can bend rivals at will, when in fact they cannot?

I suspect the latter.

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