Saudi Arabia does not control the price of oil, but it is trying to manipulate the current, temporary, price decline for its own purposes -- and it should be careful.
The price of oil, like any commodity, is subject to immutable laws of supply and demand. The addition of North American oil to the worldwide mix, plus the continuing weak demand, particularly from China, have acted to cut the price per barrel nearly in half. One way to raise the price would be for producing countries to cut supply -- but countries are so dependent on oil revenue that they are loathe to do it. The November OPEC meeting ended with no agreement on cutting production.
The Saudi interest is primarily to punish its two main enemies: Iran and Russia, both dependent on high-priced oil to finance their internal and external priorities. Persian (more important than Shiite) Iran is Saudi Arabia's historic enemy. Iran's budget requires oil at $136/bbl to break even and Russia needs $102/bbl. Saudi Arabia's break-even price on oil is $91, but with almost endless cash reserves, the Saudis have decided to weather the shortfall and maintain market share at the reduced price -- an indication that the current low price will continue for now.
The headquarters of the Saudi Aramco oil company in Dhahran, Saudi Arabia, behind the Al Mujamma Mosque. (Image source: Wikimedia Commons/Eagleamn)
Iran and Russia, without such reserves, may be forced to rethink both foreign and domestic priorities. For better or worse; maybe lots of worse. Neither country is without the means already to make life more difficult for Saudi Arabia and for the West. And both countries have ample reason not to cooperate with the Saudi plan for their economic collapse without a fight.
Iran needs money for domestic subsidies to keep an increasingly unhappy population quiet, and to arm the internal police and spy services for the same purpose. The nuclear program is both a domestic and foreign priority, as is arms production for the Iranian military, which provides jobs while threatening its Gulf neighbors and the West.
External priorities also include the money-sucking war in Syria -- which, according to the Syrian Defense Minister, amounted to $15 billion as of early 2014, plus weapons. External priorities also now include: a contingent of Iranian troops, financial and military support for Hezbollah; the new war against ISIS in Iraq; arms support for Hamas; support for jihadist groups in North Africa; and support for Venezuela. (Venezuela, by the way, requires oil at $121/bbl. Saudi Arabia does not seem to mind the discomfiture of Iran's key Western ally.)
Iran's Speaker of the Parliament, Ali Larijani, in an interview in Damascus insisted, "It is a mistake to imagine that by oil they can change the strategic major issues in the region. We Iranians have experienced much harder situations than this." And they have. The last year was relatively good in Iran, thanks to the U.S. freeing up several billion dollars in frozen funds, plus the partial lifting of the economic embargo that produced immediate -- though limited -- improvements in some industrial sectors.
But Larijani also admitted that the country will move to an "austerity budget" next year, the first indication that Iran is worried, but nevertheless may give nuclear weapons, Syria, and Iraq higher priority than the public.
The ability to pose an external threat is not limited to Syria. An increasingly sophisticated Iranian navy threatens the Gulf States' and Saudi Arabia's ability to export oil, and Iranian encouragement of Shiite minorities in most of those countries poses a dilemma for them. The increasing range of Iranian missiles and continued nuclear progress threatens Europe and the U.S. Some of Iran's purported military capabilities may be bluffs, but which ones and how much are unclear. The nuclear program is not a bluff.
Russia's domestic concerns do not include a restive population, at least not the Slavic population, among whom Putin's popularity is stratospheric. They are accustomed to domestic shortages and their nationalism is stoked by Putin's evident intention to restore the old Empire. Russia's Muslim population, however, is a different story. Muslims are growing in size and as a percentage of the Russian population. (It is estimated that there are 2 million legal Muslim residents of Moscow and another 2 million illegal migrant workers.) They are increasingly radical, thanks in part to Saudi-sponsored schools, mosques and preachers in Chechnya and elsewhere. In Chechnya and Dagestan, the war never ended.
This drives foreign policy in some respects. Russia calculates that Iran, with a nuclear weapons program and a stronghold on Syria, is much less threatening than Sunni jihadists, who include Chechens bringing Stinger missiles and military training back to Russian territory. If both Iran and Russia had assumed a short, brutal war in Syria, they got a vicious and expensive quagmire. Russia's adventure in Ukraine has also been expensive, including not only weapons and troops, but also the partial Western embargo. There was even a touch of unhappiness among Russians whose children served and died there, but that was offset by nationalist fervor for "protecting" Ukrainian Russians.
Russian cybercrimes have become ubiquitous, and Russia has invested heavily in a military buildup that includes modernization of its nuclear arsenal. Challenging the U.S. directly, Russian bombers entered American airspace 16 times in August and 6 times in September. In October, Russian bombers circled Europe in an unusual pattern, although the planes remained in international airspace. While Russian Defense Minister Sergei Shoigu acknowledged that the defense buildup may be curtailed for lack of money, he also announced plans for long-range bomber flights near U.S. shores in the Gulf of Mexico and the Caribbean.
Bluff? Maybe, but it would be foolish for the U.S. to assume that budgetary constraints will rein in Russian -- or Iranian -- behavior. And Saudi Arabia would be foolish to assume that temporary management of the temporary oil price decline makes it ruler of the world.