21.01.2015 Author: Salman Rafi Sheikh

Contours of the “Oil War”

S342342342Saudi Arabia’s oil minister Ali al-Naimi is reported to have said that the falling oil prices would help stabilize global economy and stimulate economic growth. Where his comments reinforce the ‘OPEC’s decision’ to maintain oil production at 30 million barrels per day, there he is also indirectly alluding to the crucial link between economy and resources—Oil, in this case, and the damage the latter can do to the former if manipulated in a particularly designed way. Notwithstanding the rhetoric of Saudi Arabia, the fall in oil prices has, unfortunately, nothing positive to contribute to global economy; rather, it is as much related to regional and global geo-political maneuvering as to a war, waged on full scale, albeit using different weapons and accordingly different tactics.

Saudi Arabia has, with the help of its regional cronies, managed to create such a situation whereby it can fight the otherwise lost battle for “Sunni” hegemony in the Middle East and beyond, and at the same time, help its Western allies against Russia. On December 21, powerful OPEC members, Saudi Arabia and Kuwait, said that they would not cut production even if non-OPEC members reduced their output, while Iraq and the United Arab Emirates shrugged off calls for an emergency meeting of the 12-nation cartel— a clear indication of political intransigence working behind the scene! While for the Gulf States, establishment of hegemony in the Middle East may be the immediate concern, they are not weary of accommodating Western interests too—hence, focus of Russia and by default om Iran.

The gist of the matter was quite aptly highlighted by the President of Venezuela, Nicolas Maduro. When he was asked about the reasons for the US’ and its allies’ willingness to accept such a fall, he sharply replied that the main reason for the West was “to harm Russia.” But the question that should be raised here is: Wouldn’t the fall in oil price badly hit Saudi Arabia and its allies too? Yes, Saudia, and its allies will be badly hit by these crisis. As a matter of fact, Gulf countries are expected to lose at least half their income from oil, or about $350 billion a year, at current price levels. Saudi Arabia, too, will be hit by this policy. However, the Kingdom is in a far better position than any other state to withstand the affects. Only two weeks ago, a clearly relaxed finance minister of Saudia, Ibrahim Alassaf, said that his 2015 budget would go ahead despite “challenging” global economic conditions. Alassaf has championed the kingdom’s “counter-cyclical” fiscal policy, which helped build up a mountain of foreign assets when oil prices were high.

So while the world’s top oil exporter is believed to need an average crude price above $90 a barrel to balance its budget, and a first budget deficit since 2009 will involve the sale of foreign assets to balance the books, it can survive for many years at $60 a barrel. The cost involved in this case does not, according to Saudi calculations, outweigh potential benefits.

As a matter of fact, Saudi Arabia is trying to achieve two basic objectives—which are to an extent contradictory— by playing the Oil Politics: to checkmate the US’ shale oil—which requires higher prices to remain competitive with conventional production. Low prices of conventional oil would naturally make shale oil less attractive. Despite the fact that the decision of not cutting production was unwelcome among some members of OPEC, the majority stood by it not only because they all wanted to cut Iran and Russia to size, but also to counter-balance the increasing demand in the international market for shale oil. As a matter of fact, OPEC has been feeling the heat from rising shale production in Texas, North Dakota, and other places in North America. Venezuela and Iran wanted to cut output, in hopes of raising prices. But decision-makers in Saudi Arabia, OPEC’s most influential member, decided to defend the cartel’s market share, even if at a cost.

More broadly, the Saudis are also planning, in alliance with the West, to punish two rivals, Russia and Iran, for their support of Bashar al-Assad’s regime in the Syrian war, and thereby reinforce their hegemony in the OPEC, as also in the Middle East. It is an open secret that 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 November 30, as a result of OPEC’s decision, the Iranian rial dropped nearly six percent against the dollar. While Saudia may not have a ‘direct’ conflict with Russia as such, it certainly has waged an “oil war” on Iran. Since the US  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, 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, Iran will have won another round.

To avoid such a scenario, the Saudi Kingdom has resorted to its most effective weapon: Oil. The purpose of this war is self-evident: to strangulate Iran’s economy to death, and thereby eliminate its base for extending support to Syria and Hezbollah. However, strangulating Iran’s economy would serve only the half purpose; for, without harming Russia too, Saudia and its allies, both regional and extra-regional, cannot hope to have any meaningful success in this war—hence, the Western sanctions on Russia.

On the other hand, the fact that the West is having to change its course from imposing economic sanctions to manufacturing an artificial fall in oil prices signifies the failure of the Western policy of imposing sanctions to force Russia into accepting the Western agenda. While the West wishes to “punish” Russia, the West itself stands to gain a lot. As a matter of fact, the UK, now a net importer of oil, has already benefited by an estimated £3m-a-day reduction in fuel costs. Businesses will gain from cheaper energy, and cheaper petrol in effect puts more cash in consumers’ pockets. In the US alone, each $10-per-barrel drop in the price of oil boosts GDP by 0.1%, according to Swiss investment bank UBS. Taken in the round, global GDP could rise by 0.2% to 0.5% as the wheels of trade are lubricated a little more.

The multi-pronged war thus launched is structurally weak, as this analysis shows, with every state or block of states, following a different trajectory, having different aims in sight to achieve. For instance, Saudi Arabia and the West seem to be on the same page, however, they are certainly looking in different directions’ and, their interests are clearly conflicting when it comes to competition between conventional oil and shale oil. Similarly, Saudi Arabia’s hegemony in OPEC is not unopposed. It is only Saudi which can afford such a downfall in oil prices, other states, including the Gulf members of OPEC, do not seem to have enough reserves to balance their budget—hence, the question: how long would they stand with the “oil war” Saudi Arabia has launched?

Salman Rafi Sheikh, research-analyst of International Relations and Pakistan’s foreign and domestic affairs, exclusively for the online magazine “New Eastern Outlook”.