Saudi Arabia's Bold New Oil Strategy Could Backfire

June 8, 2016 Topic: Economics Region: Middle East Tags: Saudi ArabiaPetroleumEnergyExportsiran

Saudi Arabia's Bold New Oil Strategy Could Backfire

Fossil fuels’ bleak future spells trouble for Riyadh.

Speaking at the December 2013 meeting of the Organization of the Petroleum Exporting Countries, then Saudi oil minister Ali al-Naimi warned of repercussions from a pledge by Iran—hit the year before by harsh U.S. and European sanctions—to return to producing four million barrels of crude a day, “even if the oil price reaches twenty dollars per barrel.” Naimi predicted this basement-level value would wipe out producers of then burgeoning “nonconventional” petroleum such as shale and oil sands.

Despite its best market-crashing intentions three years ago, Iran had to wait until it gained the relief of last year’s nuclear deal to begin realistically pursuing its previous output. In the interim, the Saudis have proven themselves far more adept at affecting low prices through OPEC, responding to rising production from those primarily North American nonconventional producers by merely adding to the glut, in an attempt to bankrupt these higher cost rivals. In February of this year, Naimi even spoke of twenty dollars a barrel as a distinct possibility, and without concern that it might also take out more than a few fellow OPEC members.

Such historical context is necessary when dealing with a regime as opaque but also clearly self-interested as that in Riyadh. At the most recent OPEC gathering, in Vienna last week, its new oil minister Khalid al-Falih attempted to reclaim the role of conciliator , suggesting that the Saudis now “realize that a long time under lower prices doesn’t bring enough supply to meet the rise in demand.” This came as the cartel again refused to cut production and thus exerted a small amount of downward pressure on prices. These had recently rebounded to about fifty dollars per barrel, owing to factors outside Saudi control, such as Canadian wildfires and Nigerian instability.

The price stabilization may have precluded a true test of the Saudis’ future strategy, though there is ultimately little reason to believe that maintenance of high supply has been abandoned; it has merely been recalibrated to make the Kingdom a price taker rather than maker. Despite seeming to soften the message of Prince Mohammed bin Salman last week, Falih’s actions at OPEC will continue to be directed by the upstart Saudi leader, whose ambitious post-oil Vision 2030 strategy ensures the Saudis retain considerable interest in maximizing oil returns in a short space of time, with the fate of other producers, or the market itself, of little concern. This make-or-break gamble will necessarily have immense repercussions beyond those already felt. It certainly puts an end to any notions of an imminent Western uncoupling from Middle Eastern–dictated oil politics.



The End of OPEC, and Beyond

The OPEC triumphalism on display in Vienna was in stark contrast to the mood at the cartel’s April meeting in Doha. At that event, Riyadh refused to move forward on a production freeze at January 2016 levels, as had been agreed beforehand with Russia. This was due to the deal’s exclusion of Iran, which had again invoked its desire to reach pre-sanctions targets, albeit with a higher likelihood of success this time. After this episode, a common observation was that the Saudis had hastened the death of OPEC. That assessment likely remains accurate, and was certainly the view of Russian executive Igor Sechin, an adviser to Vladimir Putin, who said that the group has “practically stopped existing as a united organization.”

Suzanne Maloney, deputy director of foreign policy at the Brookings Institution, called the Doha affair a “botched Saudi bid to stem the precipitous decline in oil prices.” Oil industry watchers I spoke to saw it quite differently. They said the Saudis were never that interested in curbing production to begin with, least of all Prince Mohammed bin Salman. In the most appropriately Machiavellian reading, this prince was fairly certain of how Iran would respond to the offer on the table, and used the affair to reassert authority on the market. It probably didn’t hurt that Riyadh could paint its great rival as the villain, while advancing its own agenda.

This most recent death-of-OPEC narrative is thus a firm reversal of the one that became popular in prior years: that the organization’s demise would represent an effective neutering of Saudi influence as rising nonconventional production from the United States, Canada and elsewhere diminished the importance of the Middle East (not to mention non-OPEC Russia). To the most utopian observers, such a turn of events would herald the end of the outsized global role of the region and the Western foreign policy of alternatively coddling and killing off its typically authoritative regimes.

There have certainly been signs that considerations around Middle Eastern oil—and all that it buys and influences—have already changed following recent market fluctuations. The Iran nuclear deal, for one, came against stern Saudi objections, as did recent U.S. congressional approval for families of September 11 victims to sue Riyadh for its complicity in those attacks. There has also been noticeably greater level of scrutiny of weapons shipments to the Saudis from North America and Europe in recent months.