Saudi Arabia is playing chicken with its oil

December 15, 2014

Saudi King Abdullah sits before a meeting with U.S. Secretary of State Kerry at the Royal Palace in Jeddah

In August 1973, Egyptian President Anwar Sadat paid a secret visit to the Saudi capital, Riyadh, to meet with King Faisal. Sadat was preparing for war with Israel, and he needed Saudi Arabia to use its most powerful weapon: oil.

Until then, King Faisal had been reluctant for the Arab members of OPEC to use the “oil weapon.” But as the October 1973 Arab-Israeli war unfolded, the Arab oil producers raised prices, cut production and imposed an embargo on oil exports to punish the United States for its support of Israel. Without Saudi Arabia, the oil embargo would not have gotten very far.

Today, Saudi Arabia is once again using its “oil weapon,” but instead of driving up prices and cutting supply, it’s doing the reverse. In the face of a global slide in oil prices since June, the kingdom has refused to cut its production, which would help to drive prices back up. Instead, the Saudis led the charge to prevent OPEC from cutting production at the cartel’s last meeting on Nov 27.

The consequences of Saudi policy are impossible to ignore. After two years of stable prices at around $105 to $110 a barrel, Brent blend, the international benchmark, fell from $112 a barrel in June to around $65 on Friday. “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. His answer? “To harm Russia.”

That is partially true, but Saudi Arabia’s gambit is more complex.

The kingdom has two targets in its latest oil war: it is trying to squeeze U.S. shale oil—which requires higher prices to remain competitive with conventional production—out of the market. More broadly, the Saudis are also punishing two rivals, Russia and Iran, for their support of Bashar al-Assad’s regime in the Syrian civil war. Since the Syrian uprising began in 2011, regional and world powers have played out a series of proxy battles there.

While Saudi Arabia and Qatar have been arming many of the Syrian rebels, the Iranian regime—and to a lesser extent, Russia—have provided the weapons and funding to keep Assad in power.

Since the U.S. invasion of Iraq in 2003, the traditional centers of power in the Arab world—Egypt, Saudi Arabia and other Gulf states—have been nervous about the growing influence of Iran: its nuclear ambitions, its sway over the Iraqi government, its support for the militant groups Hezbollah and Hamas, and its alliance with Syria.

The conflict is now a full-blown proxy war between Iran and Saudi Arabia, which is playing  out across the region. 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.

Today, the House of Saud rushes to shore up its allies in Bahrain, Yemen, Syria and wherever else it fears Iran’s nefarious influence. And the kingdom is striking back at Iran, and Russia, with its most effective weapon.

Russia and Iran are highly dependent on stable oil prices. By many estimates, Russia needs prices at around $100 a barrel to meet its budget commitments. Iran, facing Western sanctions and economic isolation, needs even higher prices. Already, Iran has taken an economic hit from Saudi actions. On Nov. 30, as a result of OPEC’s decision not to increase production, the Iranian rial dropped nearly six percent against the dollar.

The kingdom believes it can protect itself from the impact of the price drops. It can always increase oil production to make up for falling prices, or soften the blow of lower profits by accessing some of its $750 billion stashed in foreign reserves.

Still, Saudi Arabia is playing a dangerous game—there is little evidence that authoritarian regimes like Russia and Iran would change their behavior under economic pressure. Worse, the Saudi policy could backfire, making Russia and especially Iran more intransigent in countering Saudi influence in the Middle East.

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.

PHOTO: Saudi King Abdullah bin Abdul Aziz al-Saud sits before a meeting with U.S. Secretary of State John Kerry at the Royal Palace in Jeddah September 11, 2014.  REUTERS/Brendan Smialowski/Pool

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The USA is punishing Russia this is all planned .
They want to get rid off Putin and this is the cheapest way to do it.

Posted by Dillanger | Report as abusive

Abdullah bin Abdul Aziz al-Saud, in the photo, is over 90, without a grey hair! Visualizing this gold robed caviar stuffed pile of oily protoplasm at the hair dresser turns the stomach, as does the way he allows men to treat the women in his backward plutocracy.

Posted by Bookfan | Report as abusive

Sellers of a commodity can ill afford to treat customers – or rivial producers – as enemies.

The Law of Substitution insures the doom of the Kingdom and all who would use market leverage as a tool of extortion rather than trade/business.

Posted by DonD1977 | Report as abusive

i wish the saudi win the war im sick of paying 3.50 a gallon in nyc

Posted by xoomzoom | Report as abusive

The Saudis are playing chicken? It is the US oil producers who are being FORCED to play chicken with each other as prices fall. US producers belong to their own totally free market system, with no way for our government to step in and control output to help buffer prices. The Saudis up until now have helped to keep prices reasonably stable. American producers have no way of doing that, so for at least the near future it appears that the world is in for more oil price volatility.

Posted by 123456951 | Report as abusive

What absolute nonsense,the Saudis are under orders to put their neck out so that the Americans can pressure Russia to play ball. Remember Iraq and Libya?.

Posted by mirab | Report as abusive

I am delighted to see Russia taking a pummelling for engaging in international mischief. This is triple whammy for the left-wing kleptocracies, Russia, Iran and Venezuela, so, enjoy! I keep thinking of Lloyd-George’s comment about Germany in 1918: squeeze them until the pips squeak.

Posted by Lepetit | Report as abusive

Correction;On Nov. 30, as a result of OPEC’s decision not to increase (decrease) production, the Iranian rial dropped nearly six percent against the dollar.

Posted by umercx | Report as abusive

Saudi & Russia agreed not to cut the production before OPEC meeting which makes all of your arguments wrong!

Posted by siena | Report as abusive

this kind of power should not be left in the hands of the House of Saud. their insights are limited. can this shift become lethal? we shall see.

Posted by rikfre | Report as abusive

Saudis already said that will stand prices down to US 40 per barrel for lonterm

Posted by gentiler | Report as abusive

At the core, increased production combined with domestic export controls given the continued consumer grip on spending that in turn reduced Chinese demand, reached a threshold to erode the speculative part of the price basis. I think we can expect to see the price at the pump settle around $1.89 to $2.19.

Posted by Mott | Report as abusive

One can only hope that the prices keep falling. High fuel prices have sucked the life out of the economy, preventing a full recovery. The consumers need a break.

Posted by Robert76 | Report as abusive

The objective is to alter Russian and Iranian behaviour. It won’t work, neither has a foreign policy that can be driven by short term economic concerns. All three will lose money, or rather fail to make money they might have otherwise. So if this really is the Saudi motivation then it’s pure spite and I don’t believe that of them. My take is that their real target is the shale industry and that inflicting collateral damage on Iran and Russia just makes this a two-fer.

Posted by WCTopp | Report as abusive

Let us get the facts straight. Before the 1973 war, Nixon met with the Saudi king for his support in getting back the Sinai for Egypt. King Feisal was assured that when it was over, the US would level the playing field in US-Israeli relations with the Arab world.

Nixon broke his word and not only rearmed Israel for the materiel used in the war, but supplied a cornucopia of the latest weaponry, plus continuing the $3 billion annual aid.

To an Arab Bedouin a man’s word is his deed, his honor, as it used to be for an English gentleman. Nixon broke his oath; Saudi Arabia replied by cutting off its oil.

Posted by expat75 | Report as abusive

if the usa did this, it would be called “capitalism”. i am thankful for cheaper gas and drinkable water.

Posted by harrykrishna | Report as abusive

“free market” ? There hasn’t been one in oil since the 1870’s!
Comrade Putin could turn the tables by shelling Ceyhan. That’s probably why he took Crimea in the first place.

Posted by alowl | Report as abusive

If this is the new Cold War, let it be cold.

Posted by Slammy | Report as abusive

what does this statement translate to ?
‘Worse, the Saudi policy could backfire, making Russia and especially Iran more intransigent in countering Saudi influence in the Middle East.’
– that can be translated to :

‘making Russia and especially Iran more uncooperative in countering Saudi influence in the Middle East.’ ?

‘making Russia and especially Iran more intolerant toward Saudi influence in the Middle East.’ ?

dictionary used :

Posted by jkhjkhv | Report as abusive

From the article:

“Still, Saudi Arabia is playing a dangerous game—there is little evidence that authoritarian regimes like Russia and Iran would change their behavior under economic pressure.”

Wow, this is quite an amzing sentence! The author is trying to convince dumb people, for a lack of a better world, that the democratic republic of the kingdom of geriatric psychotic wahhabis (the Arabia of Ibn Saud and his 105 descendants, from 11 different wives) are trying to rectify the evilness of bad bad evil “regimes” like the Russian Federation or the Republic of Iran.

How low can the Western media stoop?

Posted by mcanterel | Report as abusive

Thank Goodness that the Saudis are acting. We certainly can’t count on our arrogant, weak, inept, INCOMPETENT, worthless President to do anything against Al Qaeda, ISIS, Iran, or Russia. No matter how stupid and weak they all make him look. Lets hope that the Saudis keep the price under $60 for the next 6 months to a year. While the U.S. will cut back on production it won’t reverse it, and the oil and natural gas will still be in the ground ready to go. Meanwhile the lower oil prices will be like a huge tax cut and may go a long way to get our economy and jobs going again after the terrible damage Obama and the democrats have inflicted the last 6 years. With the Republican in control of Congress and lower oil prices for awhile we might just be able to overcome the albatross of Obama. Meantime Russia and Iran have played Obama for a complete fool and moved aggressively against our weak President. This will hurt both of them more than anything our weak, incompetent President might do. Neither Iran nor Russia can win an oil war unless they resort to other means. Other means which are not possible if the U.S. makes it clear it won’t tolerate any threat to Saudi Arabia. Of course, Obama is so weak Iran or Russia may think they can roll Obama again, but if our weak kneed President allows something like that which would endanger the entire strategic situation of the U.S. and the west, than the entire security establishment of the U.S. would likely go into revolt against our incompetent President. So lets sit back and enjoy lower oils prices while they last.

Posted by valwayne | Report as abusive

The Saudi’s played this game in the late ’90s. To force the rest of OPEC to toe the line and stop cheating on export quotas. The Saudi’s drove oil all the way down to $12 in 1999. That finally caused so much damage that OPEC paid attention – and led the way for oil to go up 10x in the next 9 years. $60 Brent is still a long way from the dark days of 1999.

Ironically, this would have happened years earlier if US Energy Policy wasn’t so idiotic – this drop in prices is the sole result of US technology in fraccing – which has revolutionized (not exaggeration) domestic production, adding 3MM bpd (the equivalent of Iran’s production). This avalanche of oil has caused a huge decline in trade balance, added billions to local, state and federal tax coffers, and created tens of thousands high paying blue collar jobs.

Of course, fraccing has been stupidly opposed by the most ill-informed ecowhackjobs imaginable. Imagine how low oil prices would have been years ago if there had been a sane, pro energy, pro fraccing, pro job, pro tax policy? Think of the billions that would have stayed in consumer’s pockets, allowing increased consumption, plus added billions in new taxes/royalties, all the while employing tens of thousands blue collar men and women with high paying jobs! Think of the tens of billions we would have saved from outrageous subsidies to so-called “green” energy companies (all run by well connected political cronies) that has a nasty habit of only producing pink slips and red ink.

Posted by OracleOfMumbai | Report as abusive

I don’t think the part abut pressuring shale in the U.S. is accurate. At $45 per barrel only 4% of U.S. shale producers will drop out (according to the WSJ). At $40 12% more drop out. At $35, the Saudi regime shakes pretty hard because, unlike country’s where oil is in private hands, the revenue for oil supports nationalized countries’ budgets. (It costs just a few dollars a barrel to extract Saudi Arabian oil, but the International Monetary Fund in September estimated that the “break-even” price required to balance the country’s budget rose to $89 a barrel in 2013 from $78 in 2012.) The technology for fracking (love it or hate it) is improving very, very rapidly. Put in Internet terms, fracking is disrupting the established order in oil.

Posted by LibMind | Report as abusive

It’s all about Iran. Sunni v. Shiia. Saudi Arabian Sunni and Gulf States are trying to destroy Shiia Iran. U.S. blesses this because of Russia. Economic War, not shooting war (for now).

Posted by Kahnie | Report as abusive

The Saud family is acting like a loose serpent lurking and waiting for the right time to attack its prey. They work behind the scene to instigate the US and even Israel to fight their wars. They play the Islam game where they see fit in order to maintain control of their people and will not hesitate to do anything in order to maintain their grip on the unsuspecting Saudi population. They have this enormous wealth that they have gathered over the years and will use it where they see fit to eliminate any obstacle in their way to maintain power and control.

Posted by Ibenzawla | Report as abusive

I would love to know as a US citizen as to why Iran is an enemy and Saudi is not, from Pakistan to Indonesia its the saudis who have been spreading poison of religious hatred , making moderate voices hard to find. Whereas the rulers themselves don’t really care about things much – their subjects have all been islamic slaves in the mirror of old fighting Mohammad tribes.
would love to know what can US do to change Saudi to make it modern- rest will follow thereafter easily. who decides whether wahabi muslims are a pain for civilization now or the communist friendly Shia’s – even historically who was more militant_ Mohammed or Ali?

Posted by reason_man | Report as abusive

No, I can’t buy this. If I am Saudi Arabia I’m honestly not that worried about a few years of production from the latest rock squeezing technologies, I can handle that. What I am worried about in the long term are the larger reserves held in the old Soviet bloc, and the idea that i’ve just spent the last forty or fifty years partnering with, and investing in QE Disneyland.

Posted by Laster | Report as abusive

I recall another middle-eastern country cheating on their OPEC quota in 1990 and telling others to go to hell. That country was invaded by a mega-maniacal dictator, one that, fortunately for the Saudis did not possess thermonuclear weapons.

Be careful what you wish for, House of Saud. We (USA), most certainly won’t have your back if it means global thermonuclear war.

Posted by ChiRich | Report as abusive

Do you think te House of Said cares? they have $ 750 billions, who cares if they stop producton?

Posted by MissNedPhil | Report as abusive

These proxy wars and economic fights will in time come back to bite everyone. The power fight is multifaceted and the US is caught right in the middle. This is the time to built the keystone pipeline. That sends the right message to Saudi. We can use itif we need to. It also buys time to grow R&D for new more effective energy supplies that can be easily scaled up.

Posted by vxx | Report as abusive

It is just create economic turmoil. That is it!

Posted by Nicholas212 | Report as abusive

Eventually ,all the current games were derived from US policy and drove by motives of US politicians in The White house .their ultimate goal is Putin who is the public enemy of the whole West .The OPEC ,Saudi and other gulf countries are the underlings of The United states .But i think they have underestimated the duration of Russian who had showed their incredible tolerance in the second world war .so this oil war will become long term cold war between Russia and West ,even the two different blocs direct conflict in future .Who will benefit from this standoff ? no any surprise –china ,not only get huge gains from his humble neighbor Russia but also reap plentiful fruits from OPEC and West countries .the Chinese are reveling in the windfall while Yankees are wrestling with Bear in frosty winter.

Posted by 6652911636 | Report as abusive

Gas is a USD 1.95 in Alabama.

Posted by Shankar-N | Report as abusive

The drop in oil prices is good for the world. People will now pay less money for transportation, less money for energy and staying warm. Ultimately the price of all items in which power and transportation is a factor will come down, for example price of food will come down as cost of energy needed for production and shipping to market will come down.

Chinese imports to the USA will now be cheaper, industrial production costs in Germany, Japan, India, and China will now be lower and become more competitive with US products.America which is a consumer market, will stand to suffer as the fracing industry will dwindle and foreign competition will increase leading to increased unemployment.

The economies of Russia, Iran, and Venezuela will suffer but the citizens of those countries will benefits from the reduction in the cost of energy.

Saudi Arabia will have less money to support the war in Syria and to spend on welfare for its citizens as the livelihood of its citizens is based on welfare from the government. So basically the Saudi and the Americans who planned this scheme will suffer the most and their strategy will backfire. It is as if they shot themselves in the foot. Still, lower oil prices is good for the world in general.

Posted by SamHist | Report as abusive

Its more about Russia although they would like to restrict shale. Its easy to say its the US because that that is save rather than claim its to reign in the world despots. Putin is the target as his allies are foes of Saudi Arabia. Putin has been a spoiler for USA and Saudi Arabia with his support for Syria, Iran. Putin has declared the West as his enemy without the approval of his own people although they like to think that they can be the empire again. Russian economy is the same size as Texas and he is dreaming to think he can be the leader of a superpower. I have more respect for Russians but if this is the kind of leadership they want they should pay for that luxury with a cratered economy. They will come around. Putin at least a few months ago was a lot like Hitler in 1939 where he had annexed other countries without much of a fight but once Hitler escalated, Germans followed sheepishly- Russia don’t make the same mistake, rid your self of the despot before he becomes more dangerous, already 1,000 in Georgia and 5,000 in Ukraine have died because of his ambitions. The media call Putin smart but he is a clown a midget with a flying circus that is pulling the tent down around him.

Posted by ThomasOne | Report as abusive

I thik the US has been beaten up long enough by the Saudi’s. Shale is the future and can be profitable down to $50. Stick with the US. Obama’s gone soon and the leases will open up again. We are the only country in the world that can support itself. I think it’s time we do just that. Russia and Isn, both sworn enemies can die off.and I hope they both do. Russia’s close to collapse already Last time this happened, the military died off and they behaved. They behaved until they were shown how to build pipelines by our own oil companies…..which was a gigantic mistake.

Posted by MDABE80 | Report as abusive

For those who are quick to assume that America is the master, and Saudi Arabia, the subordinate, please look again. Not everything is so black and white, our relationship with Saudi Arabia is complex, who is serving whom is perhaps not so clear…

Posted by CanyonLiveOak | Report as abusive

I think you are making it more complicated than it is. The Saudis are acting in their own economic best interest first and foremost and the political reasons are secondary.

The Saudis can drive prices lower for now, but U.S. shale oil isn’t going anywhere. Remember Canadian tar sands were developed at $10 a barrel. Much of the cost for high U.S. shale production is sky high prices on oil goods, services, and workers. There is a lot of fat to cut with regards to shale oil pricing and despite what industry insiders are balking at, my guess and I would assume the Saudi’s guess is that even at $40 a barrel, U.S. shale production isn’t going to taper off. Remember a lot of these future prices are not set by the market but by prices locked in via futures contracts. There was a reason for bacwardation in oil futures.

With Syria, that all comes down to natural gas. Saudi Arabia wants to sell its gas to Europe. Middle Eastern countries are flaring off, literally wasting, billions of dollars in natural gas per year. There are three routes from Saudi Arabia and Qatar to Europe: Iran, Iraq, or Syria/Jordan. Obviously, the Saudis want Syria/Jordan, and the Russians and Iranians want to stop it.

I don’t see Saudi Arabia playing a dangerous game as much as making a bet. That makes it sound like they are in total control, and they are not. Saudi Arabia has its ultimate power when they are in sole possession of excess capacity. With U.S. production soaring by 1 million bpd in the last 9 months and 2.5 million bpd in the last 3 years and Libyan production, which was around 1.8 million bpd, coming back on line, the Saudis were desperate to keep the customers that they had.

What I don’t think some pundits get is that even at $100 a barrel, when the Saudis cut production by one million bpd, they lose $100 million per day or $36 billion in revenues per year, and that is if the price stays the same. However, if they do cut production, U.S. shale producers pick up the slack. Saudi Arabia would have to keep cutting until they no longer produced any oil at all. And we haven’t even talked about other countries doing shale production.

Posted by docjoe999 | Report as abusive

well this report is 100% true and factual and around all this revolves the USAs policy,i m sure USA has started this but they cannot hold this for long because low oil price means US oil companies loosing revenues as they need high oil prices to continue since it costs US to extract oil at very high price from gulf of mexico where oil lies very deeep and thus costs more to extract

Posted by parvaez | Report as abusive

The Saudis live in an empty desert and they couldn’t care less who they hurt. Savages with great oil wealth, they cut off hands , heads and Allah knows what else. As for them shutting down the shale oil mines…that’s a good thing. Shale oil is some dirty stuff and shouldn’t have ever been touched. Greed drives all these loathsome countries. A pox on all their houses.

Posted by Seaglassman | Report as abusive

“Already, Iran has taken an economic hit from Saudi actions. On Nov. 30, as a result of OPEC’s decision not to increase production, the Iranian rial dropped nearly six percent against the dollar.”

What? I’m pretty sure OPEC decided not to DECREASE production.

Posted by Fenn | Report as abusive

The Special relationship was with Former President George Bush Senior.”W;” or Junior just happened to be in the Oil Business as was Dick Cheney.The Royal House of Saud will be the only Earth bound entity insulated from the Chosens reach…..Aramco only wanted 80 USD per Barrel when oil was 27 USD…..The Embargo
Oct. 16th, 1973 a thank you note for U.S. aid going to Israel…..Saudi Royals will never be pressured economically…the only thing to worry about will be 47 years of U.N. veto votes by your Uncle Sam plus the one against Palestine…The Bedouin say,” The Brave Die only Once.”

Posted by DJSanDiego | Report as abusive

You know who loses in the fight between the East and the West? The people.

Posted by TheGreenWeenie | Report as abusive

a solution would be to let Russia bomb the nefarious kingdom of Saudi Arabia.

it would let pressure off the ruskys, who want a scapegoat for their crappy economy. it would bring down oil production and increase the price which would keep shale oil production alive in the US and it would above all undercut financing to terrorist groups

the upside is that it would open the door to normalization with Iran which has an amazing cultural heritage, unlike the rest of the regional barbarians. sure they would have to undergo detox from anti-west propaganda but that could be done quite quickly

Posted by rugby79 | Report as abusive

Of course the US is the Managing Partner behind the scene in this war. We’re officially in WWIII. Why use conventional arms in warfare when you can inflict indiscriminate mayhem behind a cloak against your enemies. Now we wait for the Russian/Chinese counter-attack. Obama is a disaster for not only the US but for the world.

Posted by sarkozyrocks | Report as abusive

Saudi Arabia is high level democracy,so we must follow and do everything they are doing!!I’m very happy we are their friends,coz Human Rights there are on the place in the whole World!!If Oil need to be 10$ a gallon,it must be!! Long Live Kingdom Of Saudi Arabia,Kingdom of Freedom and Happy future!!

Posted by voiss | Report as abusive

@Dillanger “The USA is punishing Russia this is all planned”.
That’s b.s. The US loses with this action also. Think a little before jotting down all your sick conspiracy theories and delusions.

Posted by miller57 | Report as abusive

How does the EU expect to deal with Hamas having voted to release their assets and no longer consider them terrorists? Just how stupid are the leaders of Europe? That’s rhetorical. That’s another way of saying u don’t worry about future Russian intransigence as if it’s something u buy at WalMart. Expect them to be the enemy. Know Iran is the enemy. Know Hezbollah and Hamas are terrorists. Any other thinking is foolish. U act out of strength. They want to bury u and that’s putting it delicately.

Posted by MyNameGoesHere | Report as abusive