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: 5534
Replies to This Discussion
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Permalink Reply by Thomas Malcolm Pendergast on
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Hi Joseph!
OK, let me see if I can try to stabilize our floundering. I think it helps to be specific so we have something to focus on.
For example, you say that in your opinion, it's no good teaming up with and investing in other countries if they're funding 'the WAR efforts' against us. Is Saudi Arabia one of those countries? I think a very strong case can be made for saying that it is, because of the tight relationship since before the founding of Saudi Arabia between the royal family and the Wahabi sect of Mohammadism. It's the Wahabis that fund the madrassas in countries like Pakistan where so much anti-U.S./Israel hatred is fomented.
So, for you, and me, that would be a red line, for sure, right? So, let's not team up with Saudi Aramco and invest in Saudi Arabia. That means that ExxonMobil would need to exit from their largest foreign investment, their 50/50 joint venture with Saudi Arabia Basic Industries Corporation (SABIC, the world's second largest petrochemical company), Kemya Al Jubail Petrochemical Co.
And, of course, we would need to force SABIC to vacate all 57 of its U.S. operations, including four in Ohio: Sharonville (Cincinnati), Brooklyn Heights (Cleveland), Tipp City (Dayton) and Maumee (Toledo).
That would also mean that Dow Chemical would have to dissolve its 50/50 joint venture with Aramco. That's the Sadara Chemical Company. That is the world’s largest chemical complex with 26 integrated world-scale manufacturing plants that produce more than three million tons of products every year. Halliburton would also have to withdraw from their joint venture with Sadara. I realize that that's a heck of a lot of business that Dow and Halliburton would have to walk away from. But they're just going to have to suck it up.
And, of course, Aramco would have to completely withdraw from U.S. operations, starting with Motiva. I'm sure that would have a huge impact on Houston's economy since that refinery is the largest in America. But it wouldn't have any impact on Ohio. And ExxonMobil would have to pull out of the Saudi Aramco Mobil Refinery Co. in Yanbu.
Then, you say "Let's just worry about and invest in providing the best standard of living for OUR population. If error is tolerated let's err in OUR best interest." To hell with the 70-year + project to lift a backward, nomadic, impoverished Bedoin society to world-class living standards. Let's just concentrate on our own society. I'm sorry, Houston, for how this will impact you. But, like us, you're pretty resillient.
I hope this gives a little more clarity in this discussion
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Permalink Reply by Joseph-Ohio on
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Chips will fall.
How many pertaining to what you've written would remain to be seen.
Maybe SA would accommodate a more meaningful arrangement and become TRUE allies.
I do not know - neither do you - and I think neither does anyone.
Risk vs. Reward ? ?
What's OUR risk ? ?
We've enough Oil & Gas to accommodate us and our TRUE allies so I've heard and read it said.
On that basis we have no risk.
Who are our TRUE allies in all this.
Let's identify them and coalesce.
JMHOs
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Permalink Reply by Joseph-Ohio on
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See if you can refrain from the sarcasm should you care to respond.
I don't think it helps the meaningful parts of the dialogue we've established thusfar myself.
Maybe it's only me and my thin skin but I just had to say.
If I didn't I thought you might think I were too stupid to make note of it.
Regards,
J-O
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Hi Joseph!
I think I spelled out pretty explicitly where the chips would fall (mostly in Texas but also in Ohio) if we severed our business relationships with Saudi Arabia. If you think that should extend to other enemy flags such as Abu Dhabi and Japan, I'm confident that I could precisely indicate where those chips would fall in the U.S. for you as well.
You say that if Saudi Arabia would accommodate a more meaningful arrangement and become true allies . . What could be more meaningful than Motiva, and the relationships of ExxonMobil, Dow and Halliburton with Sabic, Sadara and Kemyya Al Jubail Petrochemical Co? True allies?? Who's fighting the Islamist militants in Yemen? Not the U.S. The Saudis are bearing that burden. If we were a true ally, shouldn't we be joining them in fighting a common threat?
If you would compare the past performance of U.S. oil suppliers, there are only two countries that have demonstrated consistent reliability over the past 60-70 years: Canada and Saudi Arabia, followed by Mexico and Venezuela. I'd say that's a pretty good sign of good business relationships and true ally-ship (except for Venezuela!).
"I do not know - neither do you - and I think neither does anyone." I think I know a lot more about this than you want to give me credit for. If I don't know something, I know where to look for reliable information. I doubt that you are willing to do so but I suggest that you read a 20-page report published on March 24, 2016 by Jean-Francois Seznec. You'll be hard pressed to find better insights into Saudi Arabia and oil and gas issues anywhere else. That was confirmed to me by John Browne, former CEO of BP as well as a BP friend who worked at the Ras Tanura refinery. Both of them read the full report more than once.
You can read a short version of his report by clicking on the following link:
http://www.atlanticcouncil.org/blogs/new-atlanticist/privatization-...
For the full report, recommended, click on the following link:
http://www.atlanticcouncil.org/images/publications/Saudi_Energy_Cha...
Risk vs. Reward ? ?
What's OUR risk ? ?
I think ExxonMobil, Shell, BP, Dow, Halliburton and the like would all agree that over the years of their relationships with Saudi Arabia, Aramco and SABIC, the benefits have far outweighed the risks.
We've enough Oil & Gas to accommodate us and our TRUE allies so I've heard and read it said.
Question: Although we now export crude, why do we still import it?
On that basis we have no risk.
Who are our TRUE allies in all this.
Let's identify them and coalesce.
First, our true allies are (perhaps in declining order) Canada, Mexico, the E.U., Australia, New Zealand, Japan, the Republic of Korea, Taiwan, Colombia, the Philippines, Thailand, Malaysia, Indonesia, India, Israel, Cyprus, Malta, South Africa, Mozambique, Nigeria, Kenya, Uganda, Morocco (the first country to recognize the independence of the United States!), Saudi Arabia - - - and now it gets a little iffier - - - Azerbaijan, Turkmenistan, Uzbekistan, Kyrgistan, Tajikistan, Afghanistan, Russia, the countries of the Gulf Cooperation Council, Egypt, Tunisia, Sudan, South Sudan, Lebanon, the Palestinian Authority and Pakistan (scraping bottom here).
I think we've got quite a good group of really strong, reliable allies. And many more are fairly reliable but also relatively powerless. Our true enemies? Not so many. Some would say China. I would not but for argument's sake, I'll accept them as a 'true enemy'. Cuba, Venezuela, Ecuador, Bolivia, Iran, North Korea - - - I have probably missed some, but overall I think the list of 'true enemies' is pretty short.
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Permalink Reply by Joseph-Ohio on
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I think you've got a pretty good handle on friends and enemies myself BUT I'm more locally oriented and in no way as 'worldly' as you from what I gather.
But, I'll say that SA policing it's radicals to the point of elimination would be much more meaningful for one thing and on their own without our military involvement.
That would go for any other flag as well.
Why are we expected to step in militarily when we appear to reap no reward ? We go in with our military and clean things up and the OPEC / China / Russia are rewarded but never us.
No deal.
Piss on that.
How about they foot the bills for our population's health care and education as compensation for saving their buts ?
All of that would be representative of a more meaningful relationship and in step with a TRUE ally the way I see it.
JMHO's
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Permalink Reply by lance on
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You guys are goin deep here aint ya? The basic idea is to preserve our way of life for the young ones, freedom of speech, press, and expression. A government by the people , for the people and of the people, anything less is treason!!!!! Right?
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Permalink Reply by Joseph-Ohio on
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Military involvement is in itself deep.
Doesn't get much deeper if you ask me.
If you get thrown in the deep end on behalf of another it's sink or swim from that point on - the way I see it.
If your in the deep end on your own behalf it's different (I'd call it defense then) but your still in the deep end and it's still sink or swim.
Thinking we're in the deep end for both reasons.
I say swim.
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Permalink Reply by Joseph-Ohio on
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Regarding 'going deep' in the context of comments / replies here in this discussion.
Catching the distinct drift that 'Allieship' seems to be being weighed primarily by benefit to the corporate world by member TMP whereas my comments display my bent to weigh 'Allieship' on the basis of benefit to myself / folks such as myself (potential hopeful lessors / lessors / private citizens).
We each seem to be looking at things from different perspectives.
Personally, I currently don't reap many rewards from the corporate world and actually am apprehensive (and am as cautious as I can be) of being taken advantage of by the powerful corporate entities that appear to be calling all the shots on these oil & gas development matters these days.
This discussion really underlined that for me.
Everyone can take that FWIW or NW to them individually.
Good luck to all of us I think we need it.
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In the month of January 2016 alone, King Salman had over 100 people beheaded. Those were criminals and radicals on Saudi territory, not outside the country. But outside the Kingdom, it is waging war in Syria and Yeman without any support from the U.S. against radical Islamists.
I don't understand why the U.S. doesn't do more to support the Iraqi Kurdish Peshmegar. They are generally regarded as the best resistance to ISIS, far better than the Iraq ground forces. Yet we give the Peshmegar only the flimsiest support.
I would also think we should help the Iraq Kurds protect the oil pipeline that runs from the Iraq-Kurd border, through Turkish Kurd territory to the Turkish port of Ceyhan. Instead, the Turkish Kurds repeatedly sabotage the pipeline and thus cut off the most dependable source of income for Iraqi Kurdistan.
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Permalink Reply by Joseph-Ohio on
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Forget support to the ME.
Forget the OPEC.
The ME is a complex never ending series of civil wars
If Israel needs help they'll ask us.
JMHOs
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Permalink Reply by lance on
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You are mistaken about who are our true enemies are. The Palestinian Authority is not our friend... Any and all Islamic countries should be considered our enemies because they despise our way of life and would destroy us if they could and that is their ultimate goal. They only disagree on how it should be done. Groups like ISIS (Shiites)want to get it done sooner than later and the Sunnis' (Saudi Arabia) among others, are willing to wait it out and let it happen slowly. At any rate, Islamic countries are our true enemies. To them we are the Great Satan, and Israel is the little Satan. We should not trust any muslim nation because according to their Holy Book the Koran, they are permitted to lie to achieve that end. They will also fight amongst each other until one or the other is completely destroyed... Google it, you'll see that Islam is not a peaceful ideology. Islam itself means "submission." Their God, "Allah" is a false God. Can't you tell by what they do? And how they treat their women? They want the entire world under submission to Islam and Sharia law which mean harsh punishments for minor infractions, drinking alcohol= beheading, gay people are beheaded, stealing food= cutting off a hand. Men are permitted to beat their wives and to kill their own kids if they convert to another religion. I could go on but it's best if those of us who want to know the truth about Islam research for themselves.
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