Why Would the Saudis Deliberately Crash the Oil Markets?Why
Would the Saudis Deliberately Crash the Oil Markets? BYANDREW SCOTT
COOPER-DECEMBER 18, 2014
On January 2, 1977, the Shah of Iran made a painful admission
about his countrys economy. Were broke, he confided bluntly to his
closest aide, court minister Asadollah Alam, in a private meeting.
Alam predicted still more dangers to come: We have squandered every
cent we had only to find ourselves checkmated by a single move from
Saudi Arabia, he later wrote in a letter to the shah. [W]e are now
in dire financial peril and must tighten our belts if we are to
survive.The two men were reacting to recent turmoil in the oil
markets. A few weeks prior, at an OPEC meeting in Doha, the Saudis
had announced they would resist an Iran-led majority vote to
increase petroleum prices by 15 percent. (The shah needed the boost
to pay for billions in new spending commitments.) King Khalid bin
Abdulaziz Al Saud argued that a price hike wasnt justified when
Western economies were still mired in a recession but he was also
eager to place economic constraints on Iran at a time when the shah
was ordering nuclear power plants and projecting influence
throughout the Middle East. So the Saudis flooded the markets,
ramping up oil production from 8 million to 11.8 million barrels
per day and slashing crude prices. Unable to compete, Iran was
quickly driven from the market: The countrys oil production plunged
38 percent in a month. Billions of dollars in anticipated oil
revenues vanished, and Iran was forced to abandon its five-year
budget estimates.A damaging ripple effect persisted: Over the
summer of 1977, industrial manufacturing in Iran fell by 50
percent. Inflation ran between 30 and 40 percent. The government
made deep cuts to domestic spending to balance the books, but
austerity only made matters worse when thousands of young,
unskilled men lost their jobs. Before long, economic distress had
eroded middle-class support for the shahs monarchy which collapsed
two years later in the Iranian Revolution.Today, oil prices have
again plummeted, from a high of $115 per barrel in August 2013
tounder $60 per barrelin mid December 2014. Western experts,
predictably, have seized the opportunity to ponder what cheaper oil
might mean for the stock market. As for why prices have dropped,
some analysts have suggested it has little to do with any
manipulation of Saudi spigots: ADecember essayinBloomberg
Businessweekcredited the American shale revolution with breaking
OPECs neck.Theres no doubt that shale has eroded Saudi Arabias
swing power as the worlds largest oil producer. But thanks to their
pumping capacity, reserves, and stockpiles, the Saudis are still
more than capable of crashing the oil markets and willing to do so.
In September 2014, they did just that, boosting oil production by
half a percent (to 9.6 million barrels per day) in markets already
brimming with cheap crude and, a few days later, offering increased
discounts to major Asian customers; global pricesquickly fellnearly
30 percent.As in 1977, the Saudis instigated this flood for
political reasons: Whether foreign analysts believe it or not, oil
markets remain important venues in the Saudi-Iranian struggle for
supremacy over the Persian Gulf.This isnt the first time since the
late 1970s that Saudi Arabia has used oil as a political weapon
against its rival. In November 2006, Nawaf Obaid, a Saudi security
consultant connected to Prince Turki al-Faisal, then Saudi Arabias
ambassador to Washington, wrote an op-ed in theWashington
Postnoting thatif [i]f Saudi Arabia boosted production and cut the
price of oil in half it would be devastating to Iran [and] limit
Tehrans ability to continue funneling hundreds of millions each
year to Shiite militias in Iraq and elsewhere. Two years later, at
the height of the global financial crisis, the Saudis acted: They
flooded the market, and within six months,oil prices had fallenfrom
their record high of $147 per barrel to just $33. Thus, Iranian
President Mahmoud Ahmadinejad began 2009, an election year,
struggling with the sudden collapse in government oil revenues and
forced to slash popular subsidies and social programs. The
elections contested outcome was accompanied by economic contraction
and the worst political violence in Iran since the fall of the
shah.Signals of a new flood emerged as early as June 2011. While
addressing an audience of senior American and British officials at
a NATO operations base, Prince Turki warned Iran not to take
advantage of the regional unrest triggered by the Arab Spring.
Paraphrasing some of Turkis comments,theGuardiannotedthat Irans
economy could be squeezed hard by undermining its profits from oil,
something the Saudis were ideally positioned to do.The Saudis
understood, too, that the best time to crash the markets would be
when prices were already soft and consumer demand low. In early
December, just a few months after Saudi Arabia unleashed its latest
oil flood,Obaid wrotein a Reuters article that his governments
decision to depress prices is going to have a huge effect on the
political situation in the Middle East. Iran will come under
unprecedented economic and financial pressure as it tries to
sustain an economy already battered by international sanctions.
Around the same time, the Saudis were no doubt pleased to seebread
prices shoot upby 30 percent in Tehran. (Bread is a staple of the
Iranian diet, and its prices are a bellwether for the economy.)On
Dec. 10, the Saudi oil ministersaid his countrywould keep pumping
9.7 million barrels per day into the global markets, regardless of
demand. For their part, the Iranians have shown alarm, if not yet
panic. Without naming names he didnt have to PresidentHassan
Rouhani decriedthe treacherous actions of a major oil producer
whose politically motivated behavior was evidence of a conspiracy
against the interests of the region. Iran and the people of the
region will not forget such conspiracies. The previous day, Vice
President Eshag Jahangiri haddescribedthe rapid plunge in oil
prices as a political plot not a result of supply and
demand.Riyadhs real hope, if history is any indicator, is that
escalated production will force Rouhanis government to implement an
austerity budget that will ultimately stoke underlying social
unrest and once again push people into the streets. If this
happens, it might not lead to an event as significant as the shah
losing his grip on power but it would reinforce the Saudis faith in
oil as a potent weapon in the battle to dominate the Middle East.
And oil floods, in turn, would likely continue their periodic,
dangerous rattling of both the markets and the region.Posted
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