Is Someone Funding Saudi’s Oil Flood?

Iran, Venezuela, Algeria, Nigeria, Russia, Ecuador, Iraq, Angola. Those are the countries the budgets of which will face significant shortfalls if the Saudis succeed in their bid to drive the oil price down below $90/barrel for the year or more. Kuwait, the Emirates, Qatar — all Saudi partners (albeit reluctantly, in Qatar’s case) in whatever the hell it is doing — can afford the cuts, with Libya on the bubble.

New reports make it clear the Saudis intend to keep prices low for some time — and will force customers to lock in for a year.

Some, like Zero Hedge’s Tyler Durden, have suggested this ploy is part of the plan the US and Saudis made when the Saudis finally agreed to engage in combat against ISIL.

I’m not sure I buy that though. Cutting prices will make it far harder for Iraq’s Shia led government to invest in the fight against ISIL. So long as Western sanctions continue, it will destabilize Iran significantly, not only making it a lot harder for Iran to help Iraq and Syria, but also undermining the government that has chosen to deal with the US. The cuts will also destabilize Iran’s allies in Venezuela and Ecuador. Oligarchic forces have been trying to foment a coup in the former country for some time and this may well help to do so.

The cut, made just before winter strengthens Vladimir Putin’s hand with Ukraine and the rest of Europe, and made in such a way that may make Europe as dependent on the Saudis as they are on Russia, will make it harder for Putin to play the waiting game that otherwise was bound to achieve his objectives in Ukraine. Without that Ukrainian victory, Putin will be unable to invest resources as heavily in Bashar al-Assad’s government. The Saudis have been trying to undercut Russia for some time and — to the extent the ruble exchange with the dollar doesn’t shelter Russia from these changes [Update: though see Mark Adomanis on how this is hurting Russian consumers] — this price cut will hurt Russia too.

Ultimately, though, I suspect the US is just as much the target of this move as Iran and Russia are. Since the US refused to take out Assad last year and inched forward with its Iran deal, the Saudis have been worried about having Shia Iran and Iraq take over its role as the swing producer in the world, mirroring what happened in 1976 when the US replaced Iran’s Shah with the Saudis. By destabilizing the government in negotiations with the US, the price cut will make it a lot harder to achieve such a deal.

Just as importantly, the US is now a petro-state. And this price cut will make fracking (and deepwater drilling) unprofitable. We’ve been fracking largely to give ourselves some breathing room from the Saudis; cutting the price will make it far harder for us to sustain that effort (and will make some renewables uncompetitive).

To me, then, this move looks like part of an effort to force the outcome the Saudis have been chasing for a decade and even more aggressively since the Arab Spring: to paralyze Shia governments just as the chaos of ISIL threatens to remap the Middle East.

The Saudis may well claim to be supporting our fight against ISIL, but the long-term commitment to dropping oil prices, looks more like an effort to undercut it.

All that said, something remains unexplained here. The Saudi break-even point is $90/barrel. Oil prices are already below that and may drop still further. And the Saudis rely on bribery just as much as some other petro-states to keep their populace from rising up. How will the Saudis sustain this for a year or more, if that’s what they’re doing (especially since they are at least purportedly contributing to the ISIL fight)?

Saudis have low debt-to-GDP right now, so it may be they’ll just finance this play. But I wonder whether some cash rich Asian country has backed this move? What better way to end US hegemony than to ensure it gets sucked into another unwinnable war in the Middle East, wallowing in really cheap oil for the middle term, with the understanding that it will replace the US after the US exhausts itself with this latest Mideast adventure?

Sure, low oil prices might help Democrats retain the Senate. Low oil prices certainly will avoid any immediate backlash against the ISIL war. So it may well be this is part of a deal with the Obama Administration. But if so, it seems like a counterproductive deal, because it’s going to make it even harder to achieve any success against ISIL.

18 replies
  1. bloopie2` says:

    Sheesh. How can anyone (in the US) carry out any kind of operation and not face enormous unintended consequences? All those smart people in D.C., can they truly put their arms around this and come out looking good? Or perhaps this is merely this season’s situation/crisis to deal with, in the life of a professional. Do this for five or ten years, retire to the M/I complex, and hope that, in the end, you got Something right?

  2. jayackroyd says:

    In a rational world, there’d be a discussion of a crude tax to bring the price, effectively, back up to a point where renewables are competitive.

  3. Ben Franklin says:

    Don’t forget that Russia’s economic forecasts are based on $100 per barrel.

    Also, the price at the pump is projected to reach 2009 levels.

    Now just exactly why has the US been so helpful on ISIS? A backroom deal?

    Combined with domestic production acceleration and Saudis cheapening their brand with deep discount, could this be an October surprise for the mid-terms? People do vote their pocketbook.

    It’s a twofer.

    • emptywheel says:

      Yup. Included Russia in that list.

      They’re not in the fancy graphics because they’re not OPEC. But they are a likely target of this.

  4. ArizonaBumblebeeper says:

    A few weeks ago Pope Francis commented that World War III had already begun. His comments were met with skepticism and derision by some commentators. However, I believe he knew what he was talking about. Just consider the following items from the news:

    1. On Saturday, Chinese Vice Premier Wang Yang indicated that China was willing to sell oil and gas equipment to Russia. Today, Monday, China announced a major currency -swap arrangement with Russia.

    2. Russia’s Minister of Industry and Trade, Denis Manturov, met today with United Arab Emirates Minister of Foreign Affairs, Sheikh Abdullah ben Zayed Al Nahyan, to discuss ways for their countries to begin settling purchases of oil in currencies other than the US dollar. At the conclusion of their meeting the UAE foreign minister was quoted as saying, “From a political standpoint, the UAE is set on full cooperation with Russia. If there is the political will, then the technical difficulties can be overcome.”

    3. The Romanian government has informed Russia’s Lukoil that it must stop its refinery operations at its Ploetski refinery in Romania.

    4. The Indian Punchline reports that Uzbekistan has become a hotbed of intrigue by the security services of China, Russia, and the US. Rising Islamist activity and support for ISIS is fueling this activity along with great power intrigues to control the destiny of the country. Adding to this uncertainty was the arrest of the President Islam Karimov’s daughter (and potential successor) three weeks ago.

    By the way, did Empty Wheel notice that an Iranian plane carrying seven people, including three senior Iranian police officers, crashed on its way to Zahedan to investigate a series of attacks on security forces in Sistan-Baluchistan province?

    • Jim White says:

      Yes, I was very interested in that crash, since I keep an eye on those skirmishes at the Iran-Pakistan border. A report in the Iranian press today, though, puts the crash site as far removed from the border area and only about halfway from Tehran to the skirmish areas. The plane crashed in a mountainous area at night, so it looks to me more like an accident than the border infiltrators having any success.

  5. ess emm says:

    Saudis have low debt-to-GDP right now, so it may be they’ll just finance this play. But I wonder whether some cash rich Asian country has backed this move?

    What does KSA need from China to achieve their policy objectives? KSA has $745 billion in foreign exchange reserves, they can pay cash.

    Ben Franklin wrote:

    Don’t forget that Russia’s economic forecasts are based on $100 per barrel.

    And Russia has $450 billion in foreign exchange reserves.

  6. CTuttle says:

    Don’t forget about the Chinese Dragon…! China Helps Russia to Weather Western Sanctions

    Russia and China signed energy, trade and finance agreements on Monday proclaimed by Moscow as proof that a policy turn to Asia is bearing fruit and will help it to weather Western sanctions over the Ukraine crisis.

    The 38 deals, signed on a visit to Moscow by Premier Li Keqiang, allow for deeper cooperation on energy and a currency swap worth 150 billion yuan ($25 billion) intended partly to reduce the sway of the U.S. dollar.

    They are among the first clear successes of the eastward shift, ordered by President Vladimir Putin to avoid isolation over the sanctions, since the vast nations reached a $400 billion, 30-year natural gas supply agreement in May.

  7. Les says:

    The precedent for this action was the 1988 Saudi action to drive down oil prices to force an end to the Iran-Iraq war. If the ultimate goal of the US-Saudi-Qatar axis is to take out Assad in Syria and reduce Shia influence in Iran, this seems to be in line with what Saudi Arabia has done in the past to weaken its rivals in the region.

    Driving down the price of oil before the military action also reduces anxiety about the effects of a long war against Assad.

    The Saudis have made their contribution to the dirty war. The US has now pledged 30-40 billion dollars a year.

  8. Don Bacon says:

    US/Israel has stepped up the anti-Assad propaganda message.
    Inside Bashar Assad’s torture chambers
    Photos to be displayed at U.S. Holocaust Museum are ‘smoking gun’ evidence of war crimes, State Department official tells Yahoo News
    Are the photos really from US torture chambers?

  9. Les says:

    re: torture

    That’s really the whole point of covert regime change, which is to exert pressure on the governments to suppress dissent in order to force a fall from within. On the other hand, the US reportedly has 50+ torture/detention facilities throughout the world in prosecuting their global regime change policy, I mean the global war against terror.

    Add Salon by way of Tomsdispatch to the list of news outlets that view this as driven by US foreign policy.

    Obama’s stealth oil wars

  10. prostratedragon says:

    I doubt this has gone away, really.

    CSX rejects CP merger proposal

    CP “has staked much of its future on transporting oil from Canada’s energy fields in crude-by-rail shipments, an alternative to oil pipelines,” the WSJ noted. “It has said it expects one-third of its targeted revenue growth over the next four years will be driven by CBR and plans to invest heavily to expand its operations in Alberta and North Dakota to boost the effort. CP has said it expects to move about 200,000 carloads of crude in 2015, up from 120,000 this year and 90,000 in 2013. CSX’s rail network links to five oil terminals and six refineries along the eastern seaboard, which can be reached from the Chicago interchange within 48 hours, according to the company’s website—crucial assets in efforts to export North American production.”


    “For years, Hunter Harrison has commented on the need to find a faster way to move through Chicago, an interchange used by six out of the seven major North American railroads,” added the WSJ. “Taking CSX under its fold would give CP more options to navigate to the U.S. Midwest, including a majority stake in the Indiana Harbor Belt Railroad, a major interswitching terminal [railroad] in Chicago. CP currently owns 49% of the IHB, while CSX and Norfolk Southern own the rest.”

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