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The Saudis are playing a clever game with oil supplies. Here’s how to understand it

6 January 2015

3:32 PM

6 January 2015

3:32 PM

As oil prices continue to plummet, the rather sterile debate over Saudi intentions drags on. Some believe the Saudis are locked into a secret conspiracy with Washington to stiff Russia and Iran. Others prefer to take the Saudi oil minister at his word and believe that it’s all about market share.

The truth is that the debate is founded on a false dichotomy: the Saudis are doing both things at once, and several other things as well.

The best way to understand this is to try to step into the shoes (or sandals, rather) of a senior member of the al-Saud family. Your neighbourhood is convulsed in war and revolution, and you have seen apparently stable regimes in Tunisia and Egypt swept away, while your own vassal state of Bahrain is on the verge of civil war. Syria has fallen into a free-for-all that has no good outcome – either your enemy Assad prevails, or your enemy Isis prevails. And Isis is not confining its ambitions to Iraq and Syria, but now attacking your northern border posts.

Underlying all of this is your struggle with Iran and Shia Islam. Not only are the Ayatollahs close to becoming a nuclear power, they are backing Assad in Syria, their co-religionists in Iraq and Hezbollah in Lebanon, as well as poking their noses into your Eastern Province and Bahrain. In much of this they are facilitated by Russian weapons, intelligence, advice and diplomatic support.

 

If Isis worries you, then the Muslim Brotherhood worries you even more because they combine Islamic legitimacy in the eyes of the people with a revolutionary form of democracy and institutional rule.

Of course traditionally, as in the first Gulf war, the US Cavalry can be relied on to come charging over the hill in the nick of time. But the Obama administration has shown (at least until very recently) a marked interest in drawing down US security commitments to the Gulf, Israel and Europe, while pivoting to Asia. That’s driven in part by the realisation that Saudi is no longer the kingpin of the world oil market: the world is awash with oil, the US is now practically self-sufficient and anyway, 60 per cent of Saudi oil goes to Asia. Some in Washington have whispered that the Chinese ought to take a hand in securing their own energy supplies through the Strait of Hormuz, and even more quietly have suggested that the US Fifth Fleet might not stay in Bahrain forever.

Driving down the price of oil addresses all of these rather heinous threats with an elegant unity. As I suggested back in March, the oil weapon gives Saudi the means to rein in the excesses of Russia and Iran. It appears that this is already moderating the Iranian position in nuclear negotiations and while Putin continues in his efforts to destroy Ukraine, he is increasingly constrained by the carnage the Saudis are inflicting on his economy. Russia’s response is to ramp up oil production in order to sell more barrels at a lower price, which pushes prices down yet further.

At the same time, it reminds the US that Saudi is not just another sandpit but a serious player in geopolitics and the global economy, and one that cannot be hung out to dry.

How does it end? My guess is that the Saudis hope to knock out a large part of the recent supply in the word market, and can then start to throttle back production. Later they will reap the rewards of higher prices and market share, which will more than make up for the losses they are enduring today. At the same time, Iran and Russia become more docile and the US remembers its interest in defending the House of Saud.

On the other hand, the genie is out of the bottle: few predicted this nosedive in oil prices, and where we go from here is just as hard to predict.

Neil Barnett runs Istok Associates (www.istok.co.uk) , a corporate intelligence consultancy.


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