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Page added on January 25, 2015

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The real story behind Saudi Arabia’s oil games

The near $50 drop in oil prices since June has led to rampant speculation about Saudi Arabia’s master plan.

As the world’s biggest producer of crude oil, Saudi Arabia has a lot of influence on prices. One theory is that the Saudis are intentionally crashing oil markets to undermine Iran. The implication is clear: Saudi Arabia is once again using oil as a weapon to weaken its political rivals.

But here’s the catch: The health of the Saudi economy — and some would argue, the viability of the Saudi state itself — remains extremely dependent on oil.

Despite numerous initiatives and billions of dollars spent on efforts to diversify the Saudi economy, oil proceeds continue to account for 90% of export earnings, approximately 80% percent of government revenues and about 40% of GDP.

Saudi’s oil woes: The Saudi government owns all natural resources in the country, including oil, and uses their sales to maintain its social contract with Saudi citizens, many of whom have come to expect free or heavily subsidized education, healthcare, housing as well as government employment in return for their political acquiescence.

On Thursday, the Saudi Ministry of Finance announced its 2015 budget with an expected a deficit of $39 billion, the largest in the country’s history. The budget and falling oil prices have dominated both traditional and social Saudi media.

The government is the largest employer in Saudi Arabia. While the Arab spring has largely faded from the collective memory of Saudis — many of whom now associate it with instability and violence — it was not a coincidence that the Saudi government announced a $130 billion spending boost on new housing, education, healthcare and job creation in 2011.

As is the case in the rest of the Middle East, large segments of the young and increasingly better educated Saudi population now routinely express their frustration over their economic well-being on social media.

Saudi Arabia wouldn’t risk disturbing this delicate domestic balancing act to undermine Iran.

Intentionally cutting the oil price in half is the equivalent of a self-inflicted gunshot to the head for Saudi Arabia. The current oil “crash” has little to do with the Saudis playing politics and everything to do with market fundamentals.

We are experiencing basic economics: An increase in global supplies — largely due to increased shale production in the United States — has been combined with lower global demand as economies in Europe continue to sputter and Asian growth. This is the main driver of the oil price meltdown.

While it’s true that Saudi Arabia used oil as a weapon in the past, it was hardly a great success.

 

Some argue the Saudi-orchestrated oil embargo against the United States for its support of Israel during the 1973 Yom Kippur War was a seminal event that made the playing field between “North and South” more level. But others argue that the U.S. did not alter its policy and that the increase in oil prices — largely due to production cuts by OPEC — strained relations between oil producers and consumers, prompting the latter to issue calls for energy independence.

obama saudi king abdullah
US President Barack Obama meets with Saudi King Abdullah at Rawdat Khurayim, the monarch’s desert camp northeast of Riyadh in March 2014.

History lessons: The Saudis are also unlikely to forget how Iraq’s Saddam Hussein invaded Kuwait in August 1990, due to Saddam’s perception that they were trying to cripple his economy by playing politics with oil.

While the chances of a military confrontation between Saudi Arabia and Iran over oil are extremely remote, Iran’s President Hassan Rouhani recently attributed the drop in prices to a “conspiracy against the interests of the region, the Muslim people and the Muslim world.”

Recent reports indicate that Saudi Oil Minister Ali Al-Naimi actually tried to broach the subject of a broad supply cut with some major oil producers just prior to OPEC’s meeting in November but was rebuffed.

Related: You’re saving $550 gas. Should you save or spend it?

If this oil crash is about curtailing Iran’s influence in the region, why not implement this policy two years ago, to prevent Iran – and Russia -from tipping the scale in favor of Bashar al-Assad in his war with the rebels, for whom Saudi Arabia has expressed its full support?

Had they done so then, the Saudis would have also weakened another ally of Iran’s, Iraq’s Prime Minister, Nouri Al Maliki, whom the Saudis viewed as a polarizing figure whose marginalization of Iraq’s Sunni minority created the fertile ground in which the militant group, the so called Islamic State, has thrived.

Those advancing the theory that Saudi Arabia is slashing oil prices to hurt Iran are woefully underestimating the importance of oil to the Saudi economy and to the way the Saudi state sustains itself.

CNN



28 Comments on "The real story behind Saudi Arabia’s oil games"

  1. Plantagenet on Sun, 25th Jan 2015 12:49 pm 

    Those people who don’t think that KSA is slashing oil prices are woefully underestimating how important oil market share is to the Saudis

  2. GregT on Sun, 25th Jan 2015 1:46 pm 

    “Those people who don’t think that KSA is slashing oil prices are woefully underestimating how important oil market share is to the Saudis”

    Of course some of those ‘woefully underestimating’ people believe that lower oil prices are being caused by an ‘oil glut’.

  3. rockman on Sun, 25th Jan 2015 2:56 pm 

    The oil market share of the KSA per se is irrelevant to them compared to their revenue IMHO. What’s critical for the KSA is market share X oil price. That’s the factor they want to max…not whether they control 10% or 6% of the market. In reality if they cut production and oil prices increase their revenue might be higher with a smaller market share AND they are preserving their reserves. But that’s the tricky estimate: what is that “sweet spot” all manufactures are looking for?

    And the KSA revenue has taken a major hit: current oil price for the next 12 months = the KSA loses about $160 BILLION compared to $100/bbl oil. And 24 months = $320 BILLION. Etc. Prior to 2012 the KSA budget has never exceeded $160 BILLION per year. In fact the KSA 2011 budget was just $154 BILLION.

    The nearly 50 percent plunge in the price of oil during the past six months is expected to leave oil-rich Saudi Arabia with its first budget deficit since 2011 and the largest in its history.

    The budget, announced on Dec. 25, will include spending during fiscal 2015 of $229.3 billion, higher than in 2014, despite revenues estimated at only $190.7 billion, lower than in the current fiscal year. That would leave a deficit of $38.6 billion.

    But we should look at the chicken vs egg dynamic: is the budget determined by need or by how much revenue the KSA brings in? Apparently the KSA got by just fine in 2011 with the same revenue they are receiving now. And if they really need to spend more to maintain BAU? No problem: they have a monetary reserve exceeding $700 BILLION.

    One can toss out an hypothesis that the KSA is not cutting production in order to hurt other govts. And just as easily assume that the KSA is just following valid self-serving business practices. It really doesn’t matter what motivation one subscribes to: the dynamics in play are the same either way.

    And the Rockman’s conclusion? Keeping it simple: those greedy bastards are just trying to max their profits in the face of a softening market. Just like the Rockman tries to do every day. LOL.

  4. bobinget on Sun, 25th Jan 2015 2:57 pm 

    Woefully absent from this little squib is any mention
    of ISIL, Sunni superiority, Maliki’s Sunni favoritism,
    Iran’s rise to power in Iraq, or under inflated footballs.

  5. Go Speed Racer on Sun, 25th Jan 2015 4:37 pm 

    Where can I buy a school bus? Probably used one. Where is the used school bus lot?

    At $1.95 a gallon, I can commute the 45 minute commute to work each day, in a school bus. I always wanted to do that, now that there is an oil glut, now is the time !!

    And I will take the seats out, and put in a bowling alley. 🙂

  6. Davy on Sun, 25th Jan 2015 4:45 pm 

    Speeder, put in a jacuzzi with big screen, bar, and big beer frig. Girls will love you.

  7. Mike on Sun, 25th Jan 2015 4:52 pm 

    Personal interpretation:

    The house Saud has been living large, yet in the same respect has taken care of their own people (tribes – peacefully).

    There are Sunnis’ Shiites, Arabs, and Jews within such a small piece of real estate.

    The ultimate may perhaps be to crush the fracking industry in the U.S. and Canada – make it more expensive – and no profit margin to be found.

    Yet – here is what is really happening – technology advancing in such a short time frame – a glut is more oversupply.

    Technology – solar and wind power. Electric vehicles. Natural gas reserves. Advances in drilling – finding oil and drilling deeper.

    Oil – IMHO – is everywhere with today’s technology.

    War will come full-scale to the Middle- East – it will be brutal and tribal. The French Revolution will appear as a walk in the park.

    I’m into solutions.

    House of Saud.

    Guarantee a ppb at $50 U.S. for five years. It won’t hurt us – yet it will give all countries a time to adjust.

    A breather.

    I hesitate to think of the alternatives.

  8. Mike on Sun, 25th Jan 2015 5:09 pm 

    $50 U.S. ppb.

    Think about it …

    War averted.

    Putin able to feed his people.

    A “slow transition” vs. a rapid one.

    A breather – for all parties involved.

    A Summit is required – not a secret OPEC meeting – a summit in Manhattan.

  9. rick on Sun, 25th Jan 2015 5:20 pm 

    Hey Speeder; leave the seats in and pick up riders going the same way. Charge them a little less than what they would pay for gas to drive themselves. It could end up making you a lot of money!

  10. Mike on Sun, 25th Jan 2015 5:21 pm 

    Once upon a time, I think it was called

    The United Nations.

    .

    We shall see.

    War or Peace?

    Personally I don’t care.

  11. Mike on Sun, 25th Jan 2015 5:35 pm 

    Am I liberal, or conservative?
    Stupid?
    Both?
    Neither?
    No.
    Too many lives lived.

    Point being – do not take my proposal as naïvete’. I’ve lived a long life; I’ve hurt many people (to my regret), and in return been hurt on many levels.

    My proposal is a gift – take it as such.

    A United Nations Summit; a quick on the fly meeting for all parties involved including China, Russia, and Japan, as well as all African Nations that wish to participate in order to avert this inevitable war-which I see so clearly.

  12. Shaved Monkey on Sun, 25th Jan 2015 5:36 pm 

    Put a nail hole in the fuel tank just to show you dont care about fuel prices.

  13. Mike on Sun, 25th Jan 2015 5:44 pm 

    I’ll leave this board now.

    Opinion expressed.

    The rest – well – for those involved.

  14. Makati1 on Sun, 25th Jan 2015 6:45 pm 

    rockman, I think your analysis is spot on. The game is a lot deeper than just this or that single reason. But, in the end, it is about maintaining the Saud dictatorship in KSA for as long as possible.

  15. rockman on Sun, 25th Jan 2015 8:31 pm 

    Mike – “The ultimate may perhaps be to crush the fracking industry in the U.S. and Canada – make it more expensive – and no profit margin to be found.” That might be a part of their consideration. But if it is they’ll be sorely disappointed for what they get in return for giving up hundreds of $billions IMHO. The low oil prices won’t “crush” the crackers. All it will accomplish in reducing the number of wells drilled and lower US production.

    And when the KSA “decides” to let oil prices get beck to $100/bbl? The frackers will pick back up right where they left off IMHO. Remember it was just 10 years after the oil patched was “crushed” by $17/bbl oil they began throwing money at the shales as if there were no tomorrow. And for good reason: without $100/bbl and the shales there is no tomorrow for many of the US public oils.

  16. Makati1 on Sun, 25th Jan 2015 8:31 pm 

    “…Saudi Arabia reduced its official selling prices for November crude sales to Asia to the lowest since 2008 as it sought to defend market share in the fastest-growing demand region. China’s imports from the kingdom climbed 13 percent in December from the previous month, the first gain since September. December cargoes were sold at $75 a barrel, compared with the full-year average of $101.50…”

    And the beat goes on…

    http://www.hellenicshippingnews.com/chinas-record-russian-crude-imports-erode-saudi-market-share/

  17. Makati1 on Sun, 25th Jan 2015 8:34 pm 

    rockman, I don’t see the frakers picking up anything except their unemployment checks. The economy/finances will not be there to allow the suckers to jump in again and take another beating down the road. But that is my opinion.

  18. Go Speed Racer. on Sun, 25th Jan 2015 11:16 pm 

    Rick Davy and Shaved Mknkey, LOL. Need to do all 3. Yay for cheap gas. Uhoh when does it go back up.

  19. Ali on Mon, 26th Jan 2015 2:07 am 

    Makati1 – “The economy/finances will not be there to allow the suckers to jump in again and take another beating down the road”.
    I’m with you on that one. Confidence in the US fracking industry will be shot and it will be a few years before anybody dares to make large investments in that industry again.

  20. Arthur75 on Mon, 26th Jan 2015 4:56 am 

    “Some argue the Saudi-orchestrated oil embargo against the United States for its support of Israel during the 1973 Yom Kippur War was a seminal event that made the playing field between “North and South” more level.”

    Ah this embargo little song again ….

    For your info, the “embargo” was mostly a win win situation, was very lited and remained totally fictive from Saudi Arabia to the US in particular :
    The was never any embargo from KSA to the US.

  21. Arthur75 on Mon, 26th Jan 2015 4:57 am 

    A bit more detailed summary about the first oil shock :
    – end 1970 : US production peak, the energy crisis starts from there, with some heating fuel shortages for instance (some articles can be found on NYT archive on that)
    – Nixon named James Akins to go check what is going on
    – Akins goes around all US producers, saying this won’t be communicated to the media, but needs to be known, national security question
    – The results are bad : no additional capacity at all, production will only go down, the results are also presentede to the OECD
    – The reserves of Alaska, North Sea, Gulf of Mexico, are known at that time, but to be developed the barrel price needs to be higher
    – In parallel this is also the period of “rebalance” between oil majors and countries on each barrel revenus.
    – So to be able to start Alaska, GOM, North Sea, and have some “outside OPEC” market share, the barrel price needs to go up (always good for oil majors anyway) and this is also US diplomacy strategy
    – For instance Akins, then US ambassador in Saudi Arabia, is the one talking about $4 or $5 a barrel in an OAPEC meeting in Algiers in 1972
    – Yom Kippur starts during an OPEC meeting in Vienna, which was about barrel revenus percentages, and barrel price rise.
    – The declaration of the embargo pushes the barrel up on the spots markets (that just have been set up)
    – But the embargo remains quite limited (not from Iran, not from Iraq, only towards a few countries)
    – It remains fictiv from Saudi Arabia towards the US : tankers kept on going from KSA, through Barhain to make it more discrete, towards the US Army in Vietnam in particular.
    – Akins is very clear about that in below documentary interviews (which unfortunately only exists in French and German to my knowledge, and interviews are voiced over) :
    http://www.youtube.com/watch?feature=player_embedded&v=fQJ-0jAr3LQ
    For instance after 24:10, where he says that two senators were starting having rather “strong voices” about “doing something”, he asked the permission to tell them what was going on, got it, told them, they shat up and there was never any leak. The first oil schock “episode” starts at 18:00
    (the “embargo story” was in fact very “pratical”, both for the US to “cover up” US peak towards US public opinion or western one in general, but also for major Arab producers to show “the arab street” that they were doing something for the Palestinians).
    If this was a bit more known, maybe current propaganda “US energy boom, peak oil is dead, etc” would be a bit tougher to convey.

    About Akins, see for instance :
    http://www.washingtonpost.com/wp-dyn/content/article/2010/07/26/AR201007
    And his key article in April 73 “The oil crisis : this time the wolf is here” :
    http://www-personal.umich.edu/~twod/oil/NEW_SCHOOL_COURSE2005/articles/for_aff_aikins_oil_crisis_apr1973.pdf
    The report he did for Nixon after US peak (and that was also presented to the OECD) is still classified to my knowledge. It would be interesting to know if it could be declassified now, isn’t there a 30 years limit or something for this ?

  22. Arthur75 on Mon, 26th Jan 2015 6:09 am 

    typo
    “was very lited and remained totally”
    ->
    was very limited and remained totally

  23. Davy on Mon, 26th Jan 2015 7:21 am 

    welcome back Art.

  24. Jason on Mon, 26th Jan 2015 12:12 pm 

    Nobody mentions that most of the drilling companies have their oil hedged for the next couple of years or so at prices closer to 90. So as long as the ride out the downturn of price all is good.

  25. marmico on Mon, 26th Jan 2015 2:46 pm 

    For your info, the “embargo” was mostly a win win situation

    Huh. Are you really saying that the almost quadrupling of the WTI oil price from 1972 @ $3.60 to 1976 @ $13.10 and the corresponding transfer of money from consumers to producers was a win-win?

    Consumers got screwed. Producers did nothing for the windfall.

  26. Arthur75 on Mon, 26th Jan 2015 3:59 pm 

    @marmico

    – You can check the evolution of Exxon and others revenues in 74 75 and follow up (they shot up)
    – You can know what were the percentages on each barrel revenues
    – You can know that the US WANTED to barrel to rise (especially to be able to start Alaska, GOM , North sea)
    – You can know that the US were the top producer by far at that time.
    – You can know that the embargo was NEVER EFFECTIVE from KSA towards the US (check James Akins interview linked above)
    – …
    – You can check the associated figures (numbers)

    This embargo story is truly one of the biggest “myth” of the twentieth century

    Yes the price shot up on the spot markets that just had been created after the “embargo” was declared.
    But again this was a win win

    The first oil shock was the direct consequence of US peak.

    It’s truly amazing how “peak oilers” and Americans in particular, know almost nothing about that (and the history of the oil industry in general).

  27. ghung on Mon, 26th Jan 2015 6:44 pm 

    Arthur: “The first oil shock was the direct consequence of US peak.

    It’s truly amazing how “peak oilers” and Americans in particular, know almost nothing about that (and the history of the oil industry in general).”

    Most studious peak oilers I know understand the that the US production peak in the early 70s was a turning point. I would throw in years of Viet Nam war debt and Johnson’s ‘New Society’. This combination led to Nixon taking the US off of gold and ballooning debt since then.

  28. Arthur75 on Tue, 27th Jan 2015 3:45 am 

    ghung,

    Maybe, but it remains that US peak is simply never mentioned, and in particular never appearing on any “explained price chart history” as for instance on Goldman Sachs chart below (first one) :
    http://www.zerohedge.com/news/2015-01-26/why-oil-prices-will-be-lower-longer-3-simple-charts
    (And neither is the exit of Bretton Woods)

    This image :

    “first oil shock = geopolitical event = nothing to do with geology”

    has truly “shaped” the “common understanding” and US peak is for sure the truly missed event regarding getting the peak oil story.

    By the way I would be interested if someone knows the name of the senators mentioned by Akins about the embargo :
    – they were asking for “action” towards Saudi Arabia
    – Akins told them what was going on : no embargo at all from KSA towards the US
    – They shat up and there was never any leak

    Will try to find out in NYC archive if I find the time …

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