Saudi Arabia In Trouble
Serves the sneaky buggers right, after our country protecting them all of these years.
How Saudi Arabia Turned Its Greatest Weapon on Itself
FOR the past half-century, the world economy has been held hostage by just one country: the Kingdom of Saudi Arabia. Vast petroleum reserves and untapped production allowed the kingdom to play an outsize role as swing producer, filling or draining the global system at will.
The 1973-74 oil embargo was the first demonstration that the House of Saud was willing to weaponize the oil markets. In October 1973, a coalition of Arab states led by Saudi Arabia abruptly halted oil shipments in retaliation for America’s support of Israel during the Yom Kippur War. The price of a barrel of oil quickly quadrupled; the resulting shock to the oil-dependent economies of the West led to a sharp rise in the cost of living, mass unemployment and growing social discontent.
“If I was the president,” Secretary of State Henry Kissinger fumed to his deputy Brent Scowcroft, “I would tell the Arabs to shove their oil.” But the president, Richard M. Nixon, was in no position to dictate to the Saudis.
In the West, we have largely forgotten the lessons of 1974, partly because our economies have changed and are less vulnerable, but mainly because we are not the Saudis’ principal target. Predictions that global oil production would eventually peak, ensuring prices stayed permanently high, never materialized. Today’s oil crises are determined less by the floating price of crude than by crude regional politics. The oil wars of the 21st century are underway.
In recent years, the Saudis have made clear that they regard the oil markets as a critical front line in the Sunni Muslim-majority kingdom’s battle against its Shiite-dominated rival, Iran. Their favored tactic of “flooding,” pumping surplus crude into a soft market, is tantamount to war by economic means: the oil trade’s equivalent of dropping the bomb on a rival.
In 2006, Nawaf Obaid, a Saudi security adviser, warned that Riyadh was prepared to force prices down to “strangle” Iran’s economy. Two years later, the Saudis did just that, with the aim of hampering Tehran’s ability to support Shiite militia groups in Iraq, Lebanon and elsewhere.
Then, in 2011, Prince Turki al-Faisal, the former chief of Saudi intelligence, told NATO officials that Riyadh was prepared to flood the market to stir unrest inside Iran. Three years later, the Saudis struck again, turning on the spigot.
But this time, they overplayed their hand.
When Saudi officials made their move in the fall of 2014, taking advantage of an already glutted market, they no doubt hoped that lower prices would undercut the American shale industry, which was challenging the kingdom’s market dominance. But their main purpose was to make life difficult for Tehran: “Iran will come under unprecedented economic and financial pressure as it tries to sustain an economy already battered by international sanctions,” argued Mr. Obaid.
Oil-producing countries, especially ones like Russia, with relatively undiversified economies, base their budgets on oil prices not falling below a certain threshold. If prices plunge below that level, fiscal meltdown looms. The Saudis expected a sharp reduction in oil prices not just to hurt the American fracking industry, but also to hammer the economies of Iran and Russia. That in turn would weaken their ability to support allies and proxies, particularly in Iraq and Syria.
The tactic had been brutally effective in the past. This was the grim scenario that confronted the shah in 1977 when the Saudis flooded the oil market to rein in Iran’s influence. The 1977 flood was not the sole cause of the Iranian revolution, but it certainly was a factor: The shah’s rule was destabilized just as Ayatollah Ruhollah Khomeini mounted his offensive to replace a pro-Western monarchy with a theocratic state. In that sense, the oil markets fueled the rise of political Islam.
The price of oil also helped end the Cold War. Then, like Russia today, the Communist superpower was a global energy producer heavily reliant on revenues from oil and gas. In 1985-86, the Saudis’ decision to flood the market — which some believe was encouraged by the Reagan administration — led to a collapse in prices that sent the Soviet economy into a tailspin.
“The timeline of the collapse of the Soviet Union can be traced to Sept. 13, 1985,” wrote the Russian economist Yegor Gaidar. “On this date Sheikh Ahmed Zaki Yamani, the minister of oil of Saudi Arabia, declared that the monarchy had decided to alter its oil policy radically.”
Today, in Russia, fully half of government revenue comes from oil and gas. Even if oil returns to $40 a barrel — it twice fell below $30 earlier this year — that depressed price still creates “a dangerous scenario,” according to Mikhail Dmitriev, a former Russian deputy economic minister. Inflation in Russia hit double digits last year; its sovereign wealth fund, which bails out struggling Russian companies, is depleted; and factory closings are fueling labor unrest.
Unhappily for President Vladimir V. Putin, Russia’s fiscal crisis has coincided with his military interventions in eastern Ukraine and Syria. If Russia’s economy worsens and Mr. Putin feels cornered, he may look for ways to distract the Russian people with more rally-round-the-flag provocations, as well as induce panic in the oil markets about supplies and gin prices back up.
Future shock has already arrived for oil producers like Venezuela, whose economy has been gutted by lost revenues from oil, which makes up 95 percent of its export earnings. With inflation predicted by the International Monetary Fund to reach 720 percent this year, Venezuela has become a financial zombie state — a harsh reminder of what can happen to countries that rely so heavily on a single unstable commodity price. President Nicolás Maduro is at the mercy of the markets that, every day, nudge his tottering regime nearer the abyss.
Another oil producer, Nigeria, is running out of money, hobbling President Muhammadu Buhari’s campaign against the Islamist Boko Haram insurgents in the northeast. The plunge in oil prices has also shaken Central Asia, where Azerbaijan and Kazakhstan have expressed interest in emergency bailouts from the I.M.F. and other lenders.
In the Middle East, reduced oil revenues have restricted Iraq’s ability to wage war against the Islamic State. Persian Gulf oil producers like Qatar and the United Arab Emirates estimate collective losses of $360 billion in export earnings in the past year. Such a big budgetary hole poses problems with maintaining order at home while fighting wars in Syria and Yemen, and propping up cash-strapped allies like Egypt.
And then there is Saudi Arabia itself.
All the evidence suggests that Saudi officials never expected oil prices to fall below $60 a barrel. But then they never expected to lose their sway as the swing producer within the Organization of the Petroleum Exporting Countries, or OPEC. Despite wishful statements from Saudi ministers, the kingdom’s efforts last month to make a deal with Russia, Venezuela and Qatar to restrict supply and push up prices collapsed.
The I.M.F. has warned that if government spending is not reined in, the Saudis will be bankrupt by 2020. Suddenly, the world’s reserve bank of black gold is looking to borrow billions of dollars from foreign lenders. King Salman’s response has been to promise austerity, higher taxes and subsidy cuts to a people who have grown used to state largess and handouts. That raises questions about the kingdom’s internal cohesion — even as the king decided to shoulder the burden of regional security in the Middle East, fighting wars on two fronts. Has there ever been an oil state as overleveraged at home and overextended abroad?
Meanwhile, by concluding the historic nuclear agreement, Iran is getting out from under the burden of economic sanctions. It will not be lost on Riyadh that this adds another oil producer to the world market that it can no longer control.
The instability and economic misery for smaller oil-producing states like Nigeria and Azerbaijan look set to continue. But that’s collateral damage. The real story is how the Saudis have been hurt by their own weapon.
Read more: http://www.nytimes.com/2016/03/13/opinion/sunday/how-saudi-arabia-t...
Views: 5551
Replies to This Discussion
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Permalink Reply by Thomas Malcolm Pendergast on
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Hi Joseph!
So, are you saying that you don't think it's right that we pay Saudi Arabia, Canada and Venezuela for their heavy crude and pay Nigeria for their light, sweet crude (to thin it out) at a time when our Gulf Coast refineries couldn't source enough domestic supplies but, now that we do have abundant supplies of light sweet that exceed our refineries' capacity to process, and that it's OK for us to charge countries like Nicaragua for crude that we don't need but they do need, thus transferring wealth from an impoverished country that needs to preserve as much wealth as possible to a country that isn't in such dire straits????
Rather than pay U.S. dollars for crude from Saudi Arabia, Canada and Venezuela, should we have instead been trading for corn, soybeans, beef, pork, chicken or some other commodity? That's what the Soviet Union used to do. That didn't work out too well for them.
Since we first started buying Saudi crude seventy five years ago, have our living standards declined? By the same token, have Russian living standards declined since they stopped barter transactions and switched to cash transactions?
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Permalink Reply by Joseph-Ohio on
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Yes they have.
Forget 75 years.
Don't want to pay for any foreign flag's providing their citizenry free education / health care and living standards.
Along with outsourcing our jobs as well.
I don't give a hoot for any other country /citizenry when it comes to making a living /surviving.
USA 1st - ALWAYS.
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Hi Joseph! Thanks for reading and responding.
Seventy years ago, growing up in Dad's house, we had a coal-fired furnace and the water supply was spring fed. We milked the cows by hand and washed (or I should say 'wiped') their udders first with a filthy rag. A couple of years before Dad replaced the furnace with a fuel-oil one, it had begun spreading acrid smoke throughout the house and the chimney caught on fire twice. The water supply was fine, although it was very, very hard. We had no radio or TV. No air conditioning.
Mom used a wringer-washer but had no dryer. She made all our butter and cottage cheese. She had no bread machine. Her pride and joy was the KitchenAid mixer which she used for many things besides mixing: shelling peas, grinding vegetables and meat, stuffing sausages, making noodles, etc.
Outside of the Amish in Holmes county, I can't find many families living under such standards today.
Thanks a great deal to natural gas, manufacturing jobs are growing. Whirlpool, for example, now makes 90%+ of the goods they sell in the U.S. in their U.S. factories. GE's Appliance Park near Louisville, once nearly abandoned, is now humming again. That place is humungous. The French steel company Valourec started up a completely new pipe plant in Youngstown four years ago. In the Cleveland area, Arcelor-Mital (an Indian firm), U.S. Steel and Republic Steel, almost given up for dead have all been resuscitated and will be vibrant again once oil prices recover.
In Newark, German company Xperion established a new manufacturing plant to produce CNG/LNG automotive fuel tanks. And Aerial Corp. of Mount Vernon is building a major manufacturing plant here to build compressors. Those compressors are used on all MarkWest and Sunoco pipelines as well as internationally in places as far afield as Russia and Kazakhstan. They also have training facilities in those two countries, indicating that they're in it for the long haul.
For a more comprehensive view of the impact that natural gas is having on the job picture in Ohio, I recommend that you take a look at Matt Warnocks compilation at Bricker and Eckler titled "Shale Economic Development Overview", go to bricker.com. He lists $18,000,000,000 worth of projects just in Ohio.
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Permalink Reply by Joseph-Ohio on
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Forget the past 75 years.
Look rather to the future.
Investing in foreign flags has done little for our citizenry.
There have been many costly errors during the past 75.
I see no need to make more / do more damage.
There's more than 1% of the country's population to consider.
All IMHO.
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Dear Joseph,
Didn't I point out the $18,000,000,000-worth of projects and jobs that have already been committed in Ohio? That's now; not 75 years ago. That's the future you can look forward to with domestic Ohio businesses expanding in Ohio and internationally. Plus, foreign companies setting up shop in Ohio. Is that harming Ohio?
I don't know what you mean by "investing in foreign flags". Do you mean like India's Arcelor-Mital, France's Valourec and Total, Norway's Statoil, China's Husky Oil, Russia's Lukoil, Germany's Xperion and Siemens setting up major operations in Ohio are not benefiting Ohio citizens? We're not investing in their flags; they're investing in our flag.
I don't know about the country as a whole, but at least 10% of Ohio's workforce benefits from the expansion of oil and gas exploration and development.
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Permalink Reply by Joseph-Ohio on
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Haven't you read or heard about all of the cutbacks and layoffs in the oil & gas and iron and steel industries ?
To me that doesn't portend a healthy economy domestically.
Just sayin'.
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Of course there are lots of layoffs in the upstream of oil and gas. We're in a down cycle. It always recovers. Nobody knows when but it will.
Refining, petrochemicals and midstream are still bright spots.
For sure, a less than 2% growth rate is not a healthy economic sign. For what do we have to blame for that anemic growth?
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Permalink Reply by Joseph-Ohio on
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'What's to blame ? you ask.
Thinking past and present leadership political and industrial.
However hopefully not future leadership.
I personally I don't think it's too damn smart to be trying to do business with potentially or outrightly hostile flags / bending over backwards to do so while sacrificing the domestic citizenry / their economy / their standard of living here at home.
That's what I think has been happening and to blame.
JMHOs
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Permalink Reply by Mike Fulper on
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Foreign investment takes money OUT of the USA...
pretty simple to figure out.. that's not in our interest.....
100 people get jobs in OHIO and a BILLION $s leave the country ??
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Yes, when ExxonMobil made its largest foreign investment with the 50/50 joint venture with SABIC (the world's 2nd largest petrochemical company), the Kemya Al Jubail Petrochemical Co., that put U.S. money into Saudi Arabia. To make matters worse, because of the U.S. government's highest corporate tax in the world, ExxonMobil won't repatriate its Saudi profits to the U.S. Thus, zero benefit to U.S. citizens.
On the other hand, Sabic has invested in 57 U.S. plants (including 4 in Ohio). Those are U.S.-dollar investments coming back from Saudi Arabia and put into 57 U.S. communities. Is that a benefit to those communities or does it undermine their economies?
Generally speaking, local corporate taxes are used to support local schools and sometimes water and sewage and other city services. But never for healthcare to my knowledge.
Do Honda's activities in Ohio benefit Ohio citizens? Or do they benefit Japanese citizens more than they benefit Ohio citizens?
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Permalink Reply by Mike Fulper on
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Before the "signing" of the illegal UN Treaty in 1947....
The USA was the strongest Nation on Earth..
Since the illegal "signing" of the Illegal UN Treaty
The USA has been slowly destroyed......
duhhhhhhhhhhhhhhh is there a "connection"?
Democrats have been behind all this... since Wilson....
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I'd like to respond to Annie a bit: she said
"The house of Saudi wants our gas and oil endeavors to fail miserably; we represent a clear and present danger to their monopoly of oil prices and control.
I agree still with Henry Kissenger's advice to let the house of Saudi stick their oil where the sun doesn't shine. Let them eat and drink their oil; I would recommend a full embargo of their country. You can't create food or water out of oil; if no one buys their product, then the free market is in total control of gas and oil prices !"The Saudis have no monopoly on oil (let alone gas): Maybe that was true of OPEC as recently as six years ago but not any more. The big three producers now are Saudi Arabia, Russia and the U.S. with roughly equal amounts of production. Today, the big three have been joined by many new non-OPEC producers. That's hardly a monopoly. More like an increasingly toothless cartel.
As for creating food and water out of oil; well, of course not, not directly. But what is the major feedstock for producing fertilizer? The answer is natural gas. And where does the electricity come from that powers our drinking water treatment plants? Mostly coal, hydrocarbons, nuclear, hydroelectric, wind and solar, in descending order, I would say. Incidentally, most of Saudi Arabia and Israel's desalinization plants are powered by liquid fuels (diesel or fuel oil).
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