(November 13, 2014) With the U.S. no longer a reliable ally, and no longer in need of Saudi oil, the Saudis know they are on their own against Iran.
Falling oil prices — down 30% since the summer to $75 a barrel — have something to do with business strategy, something to do with economics, and everything to do with geopolitics. The drop stems largely from a Saudi Arabian decision to use its most potent weapon — the oil weapon — in its self-preservation. Otherwise, the outlook is dire for the Saudis, who are in an undeclared but existential war that could sink the House of Saud, and the Saudi state along with it.
The Saudis no longer view the U.S. as their protector. U.S. President Barack Obama’s assist in the overthrow during the Arab Spring of Egypt’s Mubarak, a loyal, long-time U.S. ally, was one wake-up call. Another is America’s emergence as the world’s largest oil producer — it soon will need no oil from Saudi Arabia, or from anyone else. With the Saudis’ sole, long-time protector gone, they realize that they are on their own now, facing unprecedented threats from Iran, which may soon acquire nuclear weapons, and Sunni jihadists in Syria and Iraq such as ISIS, which is on Saudi Arabia’s border and has threatened to invade.
To protect themselves from ISIS, the Saudis have enlisted the Arab world’s most populous country, Egypt, whose large army Saudi money now props up. Egypt’s troops stand at the ready to thwart ISIS’s threatened invasion of Saudi Arabia. To protect against other Saudi-unfriendly jihadis, the Saudis have been bankrolling factions in Syria more to their liking.
The Saudis have one last, faint hope for stopping Iran — driving down the price of oil to levels so low that Iran’s economy may implode.
But Saudi Arabia can’t write cheques to defend itself from Iran and it can’t count on a military saviour. The U.S., which has the ability to take out Iran’s nuclear program, has no stomach for another Middle East war and Israel, which has the stomach, may not have the ability. No other military power would have the inclination and the means to stop Iran.
Until recently, U.S. negotiations with Iran, coupled with economic sanctions, offered Saudis some hope. Those hopes may now be dashed — the sanctions on Iran have been eased and the U.S. is rumoured to be caving in its demands on Iran. That leaves the Saudis with one last, faint hope for stopping Iran — driving down the price of oil to levels so low that Iran’s economy may implode.
Iran needs oil to be priced at $135 to $140 per barrel to balance its budget, perhaps more according to various estimates. Although its currency reserves stand at an estimated $80-billion, these are being depleted, offering the prospect of crippling Iran enough to cause the mullahs to capitulate under fear of another popular insurrection. In a race to the bottom, the Saudis can easily outlast Iran — they have 10 times the currency reserves and at today’s $75 a barrel are just $15 shy of the $90 oil they need to balance their budget. A war of attrition against Iran that brought oil prices down to $70 or even lower would be affordable and winnable, particularly if Iran isn’t as close to obtaining the bomb as many believe.
Low oil prices hold other advantages for the Saudis as well. They cut into the revenue of ISIS, which lives off contraband oil sales. They harm enemy Syria, an oil exporter. And they punish Russia, an ally to both Syria and Iran.
The Saudis also have business reasons to keep pumping oil although one that’s frequently cited — to shackle the U.S. shale oil industry — seems largely futile. For one thing, the U.S. shale oil industry is flexible, able to start or stop production with relative ease, giving the Saudis no hope of deterring U.S. shale production on the long term. For another, fracking technologies have been improving, making some shale fields profitable at $60 or even $55 a barrel, levels that the Saudis could not indefinitely maintain. And with vast new fields expected to open up in two years, when Obama leaves office and is no longer able to prevent drilling on public land, the Saudis could have no expectation of keeping shale oil off the market over any length of time.
The key business reason — to maintain their market share — is also required to wage a war of attrition against Iran. In the 1980s, when the Saudis and the rest of OPEC cut back production to raise the price of oil, the Saudi production fell by more than two-thirds — from 9.6 million barrels a day to a near-irrelevant 2.8 million, with non-OPEC suppliers making up the difference. Today those alternate suppliers would include Russia, ISIS, Syria and Iran — the last thing the Saudis need.