Some see it as the long arm of Saudi Arabia; others as a concerted action with the US; and, finally, there are those who just see the markets move, at a Europe on the brink of recession and a world submerged in a ‘new mediocrity’. The fact is that Saudi officials, including Ali al-Naimi, its Oil Minister, are comfortable with a barrel of Brent at US$88 and are even willing to let it drop to US$80. Oil has already dropped to three-quarters of the price it had in June. This may have economic consequences: some wished for, since according to a calculation in the Financial Times this will inject more than US$660 billion into the global economy, in addition to benefitting consumers; while others are to be feared, especially if cheaper oil contributes to plunging the European economies into deflation. In any case, with oil set in dollars and the currency’s value on the rise, the Kingdom stands to lose little in local currency.
But there are also geopolitical consequences of the drop in oil prices, which have led to conspiracy theories about what it is that Saudi Arabia is really seeking. For a start, the drop will penalise the revenues of oil-producing countries such as Syria, Iraq and Iran. It should not be forgotten that Riyadh’s obsession is to halt the rise of Shia Islam, which the US’s actions are fuelling. The Saudi priority, despite the country’s active participation in the bombing missions of the international coalition put together by the US, is not so much to put an end to the Islamic State (IS) that has taken over territory in Iraq and Syria, but to finish off the regime of Bashar El Assad in Damascus and weaken the Shia- and Iranian-controlled Iraq.
But, meanwhile, the Saudis are also undermining the IS, which generates between US$1 million and US$3 million by extracting oil in the areas it has under occupation and then smuggling it, at low cost, to Jordan, Turkey, Syria and Iraqi Kurdistan. For that reason the coalition’s bombing campaign is to a large extent directed at the oil facilities controlled by the IS, whose capacity has been reduced by 70%, or so it is claimed. A report by the International Energy Agency has concluded that the IS only produces 20,000 barrels per day, when in August it was up to 70,000.
Incidentally, cheaper oil also damages Iranian interests, already penalised by Western economic sanctions. Saudi Arabia and Iran are locked in a rivalry that is one of the axes around which revolves all that is happening in the Middle East. Nevertheless, cheap oil also means that Tehran and Baghdad might have a lower budget to combat IS. The price drop also harms Russia’s interests, as it further burdens its damaged domestic economy and reduces its ability to help the Assad regime in Syria. In this it is fully in line with Washington’s policy.
However, there is another aspect that is not convenient for Washington. Saudi oil prices below US$100/barrel might make it no longer profitable to pour new investments into shale oil and other varieties, and put in doubt the current revolution aimed at effecting the transition to US energy independence. And this will have enormous geopolitical implications. It is well known that this is something that is looked askance at by Saudi Arabia, which also feels frustrated by Obama stepping back last year from attacking Assad’s regime.
Given this scenario, Saudi Arabia seems to be more interested in achieving its geopolitical goals and preserving its market share than in ensuring its level of income. The OPEP will be meeting next month and we shall then see whether we are in a price war or in something quite different. Should it be the latter, the Kingdom will have shown that it has geopolitical intelligence. Raising oil prices proved to be a powerful tool, but lowering them can also be.