Nevermind U.S. shale, Saudi Arabia’s oil power play targets Iran’s economy

All politics are local, except for oil politics.

The Russians think these low oil prices are an American-Saudi conspiracy. American commentators believe that the Saudis have driven down prices to punish North Dakota’s shale oil revolution and drive its high-cost producers out of the game. In Canada, the paranoia in Calgary is that the Saudis and other Gulf oil producers want to drive the oil sands out of business.

But what are the Saudis up to and are they powerful enough to control prices? This week the Saudi minister blamed low prices on oversupply from North America. But that is simply trash talk.

The Saudis and Gulf States have engineered this price crash as a tactic in their war against Iran, its potential nuclear bomb and its proclivity to export terrorism across their neighborhood. This collapse in prices is cheaper than what they face in terms of military and other costs down the road if Iran is not solved.

This cartel’s days are far from over and the Saudis and their Gulf allies are in charge. The Saudis produce 13% of oil worldwide and the United Arab Emirates, Iraq, Kuwait, Qatar, Oman and Bahrain account for another 12.48% for a total of 25.48%. (All of the oil cartel members represent 45% of all production and 81% of all reserves).

The Gulf States’ control is absolute because the governments own the stuff; they can act unilaterally unlike free enterprise nations; they have more of it than anyone else; they have gotten very rich over the decades and can finance themselves at lower prices and they have the lowest costs in the world so lower prices don’t mean losses.

This means they will win any game of chicken and, by the way, they have done this before. They outlast competitors and can, and do, ignore their cartel colleagues like Nigeria and Venezuela who are dependent on oil revenue and are whining about prices a lot these days.

This price drop is simply economic war waged by the Arabs against Iran and a shot across the bow in the Shia versus Sunni religious war underway in the Middle East. Iran is “Shia” oil and Gulf or Saudi oil is “Sunni” oil. Iran has exported revolution for decades throughout the region and has spent years developing nuclear power that may, or may not, become nuclear weapons. Indications are that Iran has even been financing ISIS (even though it is Sunni-based) just to create chaos among Sunnis. And there is solid evidence that Iran has been supporting the wholesale suppression of Sunnis in both Iraq and Syria.
Advertisement

The timing of this price drop is designed to keep Iran at the nuclear negotiating table by crippling its economy (and that of its nuclear supplier, Russia). These talks continue with faintly positive signs of resolution and the oil cloud will help. It may even be a bargaining chip and that is why it would be a good bet if Iran signs onto a non-proliferation treaty, and meaningful audits and inspections, prices will increase.

Few realize that fear grips the Gulf States and has led to a massive military buildup, for political and religious reasons.

“Almost all Middle Eastern and North African states are evolving in the opposite direction of Europe, having doubled – or even tripled – their defense spending in recent years,” according to a 2014 report by the European Union Institute for Securities Studies. “Six of the world’s top ten military spenders are now located in the Middle East and North Africa: all of the Gulf States, for instance, have tripled their spending since 2003.”

Arab concerns are that if Iran gets a bomb, they must too at a cost of half a trillion dollars or more over several years. This means if you are the King of Saudi Arabia the calculus behind this price plummet is simple: lower oil prices at a cost of tens of billions to the Royal treasury in order to avoid spending half a trillion to develop nuclear deterrence. The aim is to bring Iran to heel, and make support for Shia violence against Sunnis difficult or impossible.

By the way, this price crash has been welcomed, endorsed and possibly encouraged by Washington and Europeans, even the Chinese. All three regions are huge net importers of oil and have gotten a boost in their GDPs as a result.

Another side benefit is that Mr. Putin has been delivered the biggest sanction of all for illegally invading Ukraine. The Russian economy, and corporate roster, is headed for a major meltdown and Mr. Putin is now exposed as a potentate with a gasoline station, not a sustainable empire builder.

Another region to benefit is the Western Hemisphere because outlier Venezuela has been humbled and has contributed greatly to Cuba’s change of heart toward Washington. Fellow travellers in Moscow and Caracas can no longer subsidize the Castro regime which has helped lead to the U.S.-Cuba agreement. This is an underappreciated landmark deal that will shift attitudes and alliances throughout South America and the Caribbean where U.S. (and Canadian) companies have been blocked, confiscated and badgered by Cuba and its proteges.

Finally, Canada’s economic prospects have been trimmed somewhat too by the oil situation, but the fallout is far from fatal. Canadians in general will benefit for a while from lower energy costs, but Alberta will feel some pain. However, it’s the most fiercely free enterprise region in the nation whose fortunes have ebbed and flowed on the whims of a handful of sheikhs (and Ottawa) before.

Albertans will do what they always do: tighten their belts, shake out the high-cost producers and continue to be the country’s principle engine of economic growth.

http://business.financialpost.com