Editing Oil Diplomacy: Saudi Arabia game Plan against Russia/Iran


  Oil exporting countries across the globe that had built their budgets on visions of perennially high oil prices are begining to press the panic button as oil prices continue to remain well below the fiscal break even for many of these countries.Many countries governments in oil exporting countries will face a difficult time in financing the populist programmes that they need to maintain public support ,hence there will be pressure from many OPEC members to curtail production to arrest the decline of oil prices.In the oil game,the Saudis are unlikley to cut oil production for the simple fact that in the 1980s when they cut production as part of the OPEC cartel,they lost a huge portion of their market share,without affecting global oil prices.It is the past precedent that has probably resulted in less confidence that production cuts by the Saudis,the largest oil exporter in OPEC,would have a desired impact.With global demand slowing,it is highly unlikely that OPEC could cut production for the near-term.There are reports that Saudi Arabia and OPEC are trying to squeeze US Shale oil production who requires higher prices to remain competitive via-a-vis conventional producers out of the market.New exploration technology have allowed US to surpass all but Saudi Arabia in crude oil prodction.Lower oil prices put the viability of higher cost oil wells in jeopardy and many weaker firmes are likely to stop production or even exit.Such a ploy could be foolhardy and boomerang badly on OPEC as recent report has emerged that with greater technological prowess.US Shale oil production for many producers is likely to remain viable at $50 per barrel.


Saudi Arabia and its oil exporting West Asian allies differ from other global producers in the cost of extraction for many of their wells,which is low even at current prices,meaning that they will be able to produce profitability at current or even lower prices.It is estimated that Saudi Arabia needs oil prices at $99 for break-even,but it has $750 billion reserve along with non-existent debt.The Saudi budget is laden with big infrastructure prjects which could be cut if necessary.High oil prices ensured that the Arab monarchies were fortunate in keeping at bay the political turmoil that affected many of the countries in North Africa and West Asia by increasing public spending significantly.Although it has significant reserves,Saudi Arabia will be keeping a close eye to prevent any social spillover due to low oil prices in neighbouring Baharin.Any financial instability notably among the neighbouring countries could lead to political instability also.Currently all appear to be in good financial health,the strain of low oil prices a could begin to emerge in a year and as the Arab spring events demonstrated,a small problem could easily turn into a significant trouble for the political system.A further decline in crude prices could have global ramifications,though it is Venezuela and not any West Asian nation that could be impacted first.

Despite the decline in oil prices,the Saudi-led GCC will extend political and monetary support to stabilise Egypt and Libya,two countries that are threatened by Islamists,it is highly likely that the GCC will become involved if the security situation in Egypt and Libya goes worse.In a law of unintended consequences,the declining oil prices have given Saudi Arabia some leverage in the shadow jousting between itself and Iran across West Asia,even as both battle a common foe-ISIS.There appears between to be a game of supermacy between Iran and Saudi Arabia in the region.The Arab states across West Asia have been watching Iran's nuclear ambition,its control over Iraq,its alliance with Syria and its leverage over Hamas and Hezbollah.Saudi actions in ensuring low oil prices have meant that Iran will take an economic hit as it currently remains under sanctions.Using lower oil prices as a tool,the Saudis are seeking to arm-twist Russia and Iran for their support of Bashar al-Assad's regime in Syria conflict.While Saudi Arabia and its allies armed many of the Syrian rebels,Iran and to a minor extent Russia,by providing weapons and funding,have kept Assad in power.It is clear that the Saudi are perfectly content to see Iran and Russia struggle domestcially on account of declining oil prices.Saudi Arabia would prefer the current status quo,in which it has gained greater leverage rather than do a course correction,by cutting oil production and aim to raise crude price.Lower oil prices are likely to have significant ramifications across West Asia as it means that GCC will have to take on greater responsibility to ensure that the fiscal woes of the weaker monarchies does not lead to political instability.


Place-New Delhi
Date-4/1/2015                                        Anil Kumar Upadhyaya