The oil
price drop that has dominated the headlines in recent weeks has been framed
almost exclusively in terms of oil market economics, with most media outlets
blaming Saudi Arabia, through its OPEC Trojan horse, for driving down the
price, thus causing serious damage to the world's major oil exporters - most
notably Russia.
While
the market explanation is partially true, it is simplistic, and fails to address
key geopolitical pressure points in the Middle East.
Oilprice.com looked beyond the headlines for
the reason behind the oil price drop, and found that the explanation, while
difficult to prove, may revolve around control of oil and gas in the Middle
East and the weakening of Russia, Iran and Syria by flooding the market with
cheap oil.
The oil
weapon
We
don't have to look too far back in history to see Saudi Arabia, the world's
largest oil exporter and producer, using the oil price to achieve its foreign
policy objectives. In 1973, Egyptian President Anwar Sadat convinced Saudi
King Faisal to cut production and raise prices, then to go as far as
embargoing oil exports, all with the goal of punishing the United States for
supporting Israel against the Arab states. It worked. The "oil price
shock" quadrupled prices.
It
happened again in 1986, when Saudi Arabia-led OPEC allowed prices to drop
precipitously, and then in 1990, when the Saudis sent prices plummeting as a
way of taking out Russia, which was seen as a threat to their oil supremacy.
In 1998, they succeeded. When the oil price was halved from $25 to $12,
Russia defaulted on its debt.
The
Saudis and other OPEC members have, of course, used the oil price for the obverse
effect, that is, suppressing production to keep prices artificially high and
member states swimming in "petrodollars". In 2008, oil peaked at
$147 a barrel.
Turning
to the current price drop, the Saudis and OPEC have a vested interest in
taking out higher-cost competitors, such as US shale oil producers, who will
certainly be hurt by the lower price. Even before the price drop, the Saudis
were selling their oil to China at a discount. OPEC's refusal on Nov. 27 to
cut production seemed like the baldest evidence yet that the oil price drop
was really an oil price war between Saudi Arabia and the US.
However,
analysis shows the reasoning is complex, and may go beyond simply taking down
the price to gain back lost marketshare.
"What
is the reason for the United States and some U.S. allies wanting to drive
down the price of oil?" Venezuelan President Nicolas Maduro asked
rhetorically in October. "To harm Russia."
Many
believe the oil price plunge is the result of deliberate and well-planned
collusion on the part of the United States and Saudi Arabia to punish Russia
and Iran for supporting the murderous Assad regime in Syria.
Punishing
Assad and friends
Proponents
of this theory point to a Sept. 11 meeting between US Secretary of State John
Kerry and Saudi King Abdullah at his palace on the Red Sea. According to an
article in the Wall Street Journal, it was during that meeting that a
deal was hammered out between Kerry and Abdullah. In it, the Saudis would
support Syrian airstrikes against Islamic State (ISIS), in exchange for
Washington backing the Saudis in toppling Assad.
If in
fact a deal was struck, it would make sense, considering the long-simmering
rivalry between Saudi Arabia and its chief rival in the region: Iran. By
opposing Syria, Abdullah grabs the opportunity to strike a blow against Iran,
which he sees as a powerful regional rival due to its nuclear ambitions, its
support for militant groups Hamas and Hezbollah, and its alliance with Syria,
which it provides with weapons and funding. The two nations are also divided
by religion, with the majority of Saudis following the Sunni version of
Islam, and most Iranians considering themselves Shi'ites.
"The
conflict is now a full-blown proxy war between Iran and Saudi Arabia, which
is playing out across the region," Reuters reported
on Dec. 15. "Both sides increasingly see their rivalry as a
winner-take-all conflict: if the Shi'ite Hezbollah gains an upper hand in
Lebanon, then the Sunnis of Lebanon -- and by extension, their Saudi patrons
-- lose a round to Iran. If a Shi'ite-led government solidifies its control
of Iraq, then Iran will have won another round."
The
Saudis know the Iranians are vulnerable on the oil price. Experts say the
country needs $140 a barrel oil to balance its budget; at sub-$60 prices, the
Saudis succeed in pressuring Iran's supreme leader, Ayatollah Ali Khamanei,
possibly containing its nuclear ambitions and making the country more pliable
to the West, which has the power to reduce or lift sanctions if Iran
cooperates.
Adding
credence to this theory, Iranian President Hassan Rouhani told a Cabinet
meeting earlier this month that the fall in oil prices was "politically
motivated" and a "conspiracy against the interests of the region,
the Muslim people and the Muslim world."
Pipeline
conspiracy
Some
commentators have offered a more conspiratorial theory for the Saudis wanting
to get rid of Assad. They point to a 2011 agreement between Syria, Iran and
Iraq that would see a pipeline running from the Iranian Port Assalouyeh to
Damascus via Iraq. The $10-billion project would take three years to complete
and would be fed gas from the South Pars gas field, which Iran shares with
Qatar. Iranian officials have said they plan to extend the pipeline to the
Mediterranean to supply gas to Europe - in competition with Qatar, the
world's largest LNG exporter.
"The
Iran-Iraq-Syria pipeline - if it's ever built - would solidify a
predominantly Shi'ite axis through an economic, steel umbilical cord," wrote
Asia Times correspondent Pepe Escobar.
Global
Research, a Canada-based think tank, goes further to
suggest that Assad's refusal in 2009 to allow Qatar to construct a gas
pipeline from its North Field through Syria and on to Turkey and the EU,
combined with the 2011 pipeline deal, "ignited the full-scale Saudi and
Qatari assault on Assad's power."
"Today
the US-backed wars in Ukraine and in Syria are but two fronts in the same strategic
war to cripple Russia and China and to rupture any Eurasian counter-pole to a
US-controlled New World Order. In each, control of energy pipelines, this
time primarily of natural gas pipelines -- from Russia to the EU via Ukraine
and from Iran and Syria to the EU via Syria -- is the strategic goal,"
Global Research wrote in an Oct. 26 post.
Poking
the Russian bear
How
does Russia play into the oil price drop? As a key ally of Syria, supplying
Assad with billions in weaponry, President Vladimir Putin has, along with
Iran, found himself targeted by the House of Saud. Putin's territorial
ambitions in the Ukraine have also put him at odds with US President Barack
Obama and leaders of the EU, which in May of this year imposed a set of
sanctions on Russia.
As has
been noted, Saudi Arabia's manipulation of the oil price has twice targeted
Russia. This time, the effects of a low price have hit Moscow especially hard
due to sanctions already in place combined with the low ruble. Last week, in
an effort to defend its currency, the Bank of Russia raised interest rates to
17 percent. The measure failed, with the ruble dropping another 20 percent,
leading to speculation the country could impose capital controls. Meanwhile,
Putin took the opportunity in his annual televised address to announce that
while the economy is likely to suffer for the next two years and that
Russians should brace for a recession, "Our economy will get diversified
and oil prices will go back up."
He may
be right, but what will the effect be on Russia of a sustained period of low
oil prices? Eric Reguly, writing
in The Globe and Mail last Saturday, points out that with foreign exchange
reserves at around $400 billion, the Russian state is "in no danger of
collapse" even in the event of a deep recession. Reguly predicts the
greater threat is to the Russian private sector, which has a debt overhang of
some $700 billion.
"This
month alone, $30-billion of that amount must be repaid, with another
$100-billion coming due next year. The problem is made worse by the economic
sanctions, which have made it all but impossible for Russian companies to
finance themselves in Western markets," he writes.
Will it
work?
Whether
one is a conspiracy theorist or a market theorist, in explaining the oil
price drop, it really matters little, for the effect is surely more important
than the cause. Putin has already shown himself to be a master player in the
chess game of energy politics, so the suggestion that sub-$60 oil will crush
the Russian leader has to be met with a healthy degree of skepticism.
Moscow's
decision on Dec. 1 to drop the $45-billion South Stream natural gas pipeline
project in favor of a new pipeline deal with Turkey shows Putin's willingness
to circumvent European partners to continue deliveries of natural gas to
European countries that depend heavily on Russia for its energy requirements.
The deal also puts Turkey squarely in the Russian energy camp at a time when
Russia has been alienated by the West.
Of
course, the Russian dalliance with China is a key part of Putin's great
Eastern pivot that will keep stoking demand for Russian gas even as the
Saudis and OPEC, perhaps with US collusion, keep pumping to hold down the
price. The November agreement, that would see Gazprom supply Chinese state
oil company CNPC with 30 billion cubic meters of gas per year, builds on an
earlier deal to sell China 38 bcm annually in an agreement valued at $400
billion.
As
Oilprice.com commented
on Sunday, "ongoing projects are soldiering on and Russian oil output is
projected to remain unchanged
into 2015."
"Russia
will go down with the ship before ceding market share - especially in Asia,
where Putin reaffirmed the pivot is real. Saudi Arabia and North America will
have to keep pumping as Putin plans to uphold his end in this game of
brinksmanship."
