A downturn in the global oil price has put the cat among the pigeons. Saudi Oil Minister Ali Al Naimi has said that even if the price of a barrel drops to $20 OPEC will not be reducing production, indicating there is much more to the crisis that the purely economic, as Ed Blanche reports.
A growing rift within the Organisation of Petroleum Exporting Countries (OPEC) over a potentially calamitous slump in oil prices since June – from $115 per barrel to around $60 in mid-December – is increasingly starting to look like Saudi Arabia waging economic warfare against its religious and geopolitical rival Iran.
In many quarters, Riyadh’s opposition to letting the 12-member cartel to slash its production of 30m barrels per day (bpd) and push prices back up, is also aimed at Russia, which like Iran supports the embattled Syrian regime of President Bashar Assad that the kingdom wants to see stamped out.
And even the United States, Saudi Arabia’s long-time ally and protector, is seen as a target. Riyadh is increasingly disenchanted with the Americans over their plan to drastically scale down the US military presence in the Middle East, a move Riyadh sees as leaving it more vulnerable to nuclear wannabe Iran and the jihadist juggernaut.
That’s compounded by Saudi anxiety over the US shale oil boom that has sharply reduced US dependence on the Gulf monarchies’ vast energy resources and undercut their economic clout.
Shale oil boom has boosted US production to the point that it’s now the second largest producer in the world and is expected to eventually push the Saudis off their perch. The Paris-based International Energy Agency estimates that the US will produce around 14m bpd by 2015, well above Saudi Arabia’s current 10m bpd level.
Producing shale oil is far more expensive than conventional methods, and US producers would thus be hard hit by tumbling oil prices and forced to stop operations, a production cut by other means which would balance the energy market. That would benefit the Gulf producers, whose production costs are minimal.
Saudi Arabia, which produces about one-third of OPEC’s total output, denies any geopolitical purpose behind its strategy of blocking any boost in OPEC production, as it did at the cartel’s annual meeting in Vienna on 27 November despite the fervent opposition of Iran and others.
“Saudi Arabia is playing a dangerous game,” observed Mohammad Bazzi, a former fellow of the New York-based Council on Foreign relations who is writing a book on the mushrooming Saudi-Iran conflict.
“With ongoing proxy wars in Syria and Iraq, Saudi Arabia risks instigating an oil war with Russia and Iran – a war that the kingdom can perhaps win in the short term. But like sectarian conflict, Saudi actions threaten a conflagration that can spin out of everyone’s control.”
The Gulf petro-monarchies are comfortably cushioned against hard times with vast reserves accumulated over the last few years when oil prices were $105-$110 per barrel. Saudi Arabia alone has an estimated $750bn stashed away in foreign reserves.
But Iran, Venezuela and other economically battered OPEC members cannot afford a sharp and sustained drop in prices, just like non-member Russia.
Iran’s president, Hassan Rouhani, declared on 10 December that the prices collapse was the result of “treachery”, a clear stab at Saudi Arabia.
He told his cabinet that the “fall of the oil prices is not just something ordinary and economical. This is not due to only global recession. The main reason for it is a political conspiracy by certain countries against the interest of the region and the Islamic world and it is only in the interests some other countries … Iran and its people will not forget such conspiracies … or treachery.”
But prices were sliding long before the Vienna meeting, because of soft demand despite substantial cuts in Libyan, Iranian, Syria, Iraqi and South Sudanese oil exports. This was accentuated by the high rate of oil production.
Oil prices are now at their lowest level for five-and-a-half years and could slump even further in the weeks ahead. The IEA predicts that demand will continue to shrink, raising the prospect of wider negative economic impact.
As it is, the price slide is already inflicting serious economic harm on Iran and other OPEC radicals. It’s also battering Russia, where the impact of the price slump has been heightened by economic sanctions imposed by Europe and the US over the Ukraine crisis.
The rouble has lost about half its value against the dollar since January. After oil prices slipped below $60 a barrel on 16 December, the Russian Central Bank was forced to boost interest rates from 10.5% to 17%, severely cutting Russians’ purchasing power.
Russia and Iran depend greatly on stable oil prices. Russia needs around $100 per barrel to get by. Iran needs even more than that.