Middle East

Why is Saudi Arabia using oil as a weapon?

Oil rig

A recent meeting in Vienna, between the member states of Opec finally uncovered what the world had expected for months.

Saudi Arabia is playing politics with oil, forcing Opec to maintain its current production levels at 30m barrels per day, to force down the price.

Consequently oil prices have fallen 35% in 2014, tipping under the $70 mark for the first time since May 2010.

The question is why the Saudis would risk the goodwill of other Opec members, simultaneously emasculating the organisation and undercutting their ability to use it in the future to serve their interests.

It is a game of high-stakes poker and in the long run will cause the Saudis some harm, but that is not where their immediate thoughts lie.

Since the first oil shocks following the 1973 Middle East War, the Saudis have understood the role they can play in regional and world affairs by turning the taps on and off.

But recently, as the US upped its production, it would have been reasonable to assume that Saudi would have correspondingly cut surplus supply to maintain a healthy balance sheet.

But instead Riyadh has done the opposite.

From Riyadh the world looks a grim place, and the Saudis have a host of concerns that they feel are not being addressed adequately, either by their allies in the West or by their partners in the region.

Saudi-Iran tension

Many experts talk of a Cold War between Saudi and Iran, where on every major issue of regional concern an Iranian gain is viewed by the Saudis as a loss, and for the House of Al Saud alarm bells are ringing.

In their view the US has effectively caved in, and allowed Iran off the hook.

The Iranians were not supposed to be allowed any domestic uranium enrichment capacity, let alone get paid $7bn for the privilege.

Image caption For the Saudis, Iranian President Hassan Rouhani is the friendly face of a regime it does not trust

Yet the US and Europeans have spent months looking at ways to creatively offer Iran's "moderate" President Hassan Rouhani economic crumbs to appease the hardliners back in Tehran.

For the Saudis the mild mannered Rouhani is friendly manifestation of a regime that seeks to dominate the Middle East, and which is trying desperately to be accepted by the world.

Iran's reach across the Middle East region worries Saudi even more than its nuclear programme.

In Iraq, the Iranians have as good as sewn up the state security apparatuses, and were it not for the intervention of Iran's Revolutionary Guard Corps (IRGC) to assist northern areas of Iraq, including Kurdish border regions, IS would be rampant in all but the most distinctly Shia regions of the country.

In Syria, as the US-led coalition strikes the Islamic State (IS), the pressure on Iranian ally Bashar al-Assad appears to have lifted.

Where once there was a determination to remove him from power, rumours grow that the West will have to consider dealing with him to help fight the bigger threat of the Islamic State.

Propped up by Iranian money and proxies such as Hezbollah, and cushioned with Security Council support by Russia, Assad looks to be safe.

To make matters worse on the Kingdom's southern and eastern borders, Shia rebels in Yemen, and protestors in Bahrain, only contribute to the sense that the Kingdom is being strangled by Iranian power from all sides.

Hitting back

In the midst of the chaos from which Iran seems to be profiting so well, Saudi Arabia has taken the decision that it has to hit back.

And given that Riyadh would prefer not to be drawn into a military confrontation with the Iranians, it has had to seek other ways to confront Iran.

The easy way it can do this is by picking Tehran's back pocket.

Iran's economy is heavily reliant on hydrocarbons, which make up some 60% of its export revenue and provided 25% of total GDP in 2013.

Deeply committed to the fight in Syria, and Iraq, the Iranians are spending untold millions of dollars a month to maintain their operations in the two countries, all the while attempting to placate potential domestic unrest.

Interestingly, the Iranians proposed cutting Opec output ahead of the November conference only for the Saudis to rebuff them.

Additionally, the Saudis get a chance to deal Russia, Bashar al-Assad's stalwart ally, a bloody nose, by driving down the cost of oil and hurting Moscow's hydrocarbon revenue streams, which prop up a shaky domestic economy.

As oil prices have fallen so has the value of Russia's Rouble, plummeting 35% since June.

Killing two birds with one stone would seem a smart policy, especially since it is highly unlikely to result in the sort of military escalation the Saudis wish to avoid.

Big reserves

How long can the Saudis keep this game up? Realistically a few months, but if the price of oil keeps falling the Saudis may have to rethink their strategy.

Nevertheless the Kingdom sits on $741bn of currency reserves and posted a $15bn surplus at the end of last fiscal year, and the Saudis can absorb the cost of budget deficits for a few years if needs be.

This is helped by the fact that recent mega-arms purchases have been completed and the Kingdom's future defence expenditure is projected to fall in the coming two or three years, freeing up cash for other endeavours.

Image caption Abu Bakr al-Baghdadi is hostile to the Saudi kingdom

Although Riyadh has tried to stamp its authority on the region, which will undoubtedly cause headaches in Tehran and Moscow, the oil weapon cannot reverse some of the more critical issues facing the region.

IS runs an entity roughly the size of Britain across Iraq and Syria, its hostility to the "Al Salool" (a derogatory term for the Al Saud family) recently made clear in a 17 minute speech by its Caliph AAbu Bakr al-Baghdadi.

Cheap oil from IS territory will continue to flow, earning the organisation millions a day in revenue, and although the Saudis have had notable success in striking IS targets, it is not enough to ensure their defeat unless the US and Iran openly cooperate to solve the issue, which may result in grudging acquiescence from the Riyadh.

Likewise, the Saudis will have to grudgingly accept that some form of deal between Iran and the P5+1 (US, Russia, China, UK, France and Germany) will have to be struck, if regional war is to be avoided.

It is the best of a bad series of options, and recent attempts by the Saudis to diplomatically engage their Iranian counterparts, particularly on regional security issues like Islamic State appear positive.

But the mistrust is still deep, and the threat of IS appears not to have stopped the Kingdom in its drive to blunt Iran.

Michael Stephens is Research Fellow for Middle East studies and Head of RUSI Qatar (Twitter: @MStephensGulf)

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