Kemp: Oil Prices and Saudi Diplomacy

Kemp: Oil Prices and Saudi Diplomacy
Saudi Arabia sets oil market policy purely on an economic basis, no less and no more, the kingdom's oil minister reiterated in a broad-ranging interview with the newspaper Al-Hayat.

John Kemp is a Reuters market analyst. The views expressed are his own


LONDON, Dec 22 (Reuters) - Saudi Arabia sets oil market policy purely on an economic basis, no less and no more, the kingdom's oil minister reiterated in a broad-ranging interview with the newspaper Al-Hayat.

Ali al-Naimi rejected "conspiracy theories" that Saudi Arabia was using oil as a diplomatic weapon against Iran, Russia or any other country, calling such beliefs a misunderstanding, tendentious and a fantasy without foundation.

Naimi was countering widespread suggestions in the Western media and think tanks that the kingdom had deliberately caused the price of oil to collapse in order to weaken its adversaries in Syria, Iraq and Iran.

But is there really any evidence to suggest the kingdom's top policymakers have deliberately sought lower oil prices? Or has Saudi Arabia simply responded to events beyond its control by selecting the most sensible strategy from a range of unappealing options?

We will never know the answer for certain. Saudi oil policy is set by the minister alone in consultation with the king and a tiny group of senior princes. Access to those discussions is severely limited. Those who know tend not to talk, and those who talk tend not to know.

Nonetheless, there are good reasons to doubt the kingdom is wielding the oil weapon as part of some grand "geopolitical strategy" either on its own or in conjunction with the United States.

In his newspaper interview, Naimi blamed falling oil prices on the global economic slowdown, rising production from outside OPEC, the spread of misinformation, and speculators.

Certainly those factors (sluggish demand, rising non-OPEC supply, and behavioural reactions in financialised commodity markets) can provide a plausible explanation for the near-halving of oil prices since June. There is no need to invoke a conspiracy theory about a secret plan to damage Iran and Russia to explain recent price history.

Some conspiracists respond by suggesting that while Saudi Arabia may not have triggered the price slide, it has done nothing to prevent it. But there is nothing Saudi Arabia could have done to keep prices near $100 a barrel in the medium term.

As Naimi explained, if Saudi Arabia had cut production, it would simply have encouraged more output from higher-cost producers in the United States, Brazil and elsewhere. The kingdom would have lost market share without gaining an enduring improvement in price.

If lower oil prices provide a diplomatic benefit to Saudi Arabia and the United States by intensifying economic pressure on hostile states such as Iran, Russia and Venezuela, that has been a side benefit, not the principal policy objective.

Saudi Arabia's only rational response to rising shale oil supplies and stagnating demand for crude was to allow prices to fall to curb shale investment and buy back some of the demand growth that had been lost.

To read a conspiracy into recent events is both unnecessary and entirely unproven. Proponents of the "oil as a diplomatic weapon" theory have not cited a single piece of direct evidence. In the circumstances, there is no reason to doubt the Saudi oil minister's own explanation.

In the past, I have criticised Saudi policymakers for not communicating their strategy more clearly, creating an information vacuum into which outsiders have projected their own views.

Naimi's extensive comments and press interviews over the last few days appear designed to eliminate that vacuum and state clearly for the record how the kingdom expects oil markets and its policy to unfold and why. There is no reason to doubt him.

Political Factors

Energy is power (with apologies to physicists). Control of energy supplies confers enormous power on the nations that wield it.

Access to oil supplies played a critical role in Germany's and Japan's military and diplomatic strategies during World War Two. In 1973, the U.S. Department of Defense actually developed plans for a Rapid Deployment Force to seize Saudi Arabia's oil fields to break an embargo as a way of pressuring the kingdom.

There is no doubt that diplomatic factors have sometimes played a role in Saudi oil policy. King Faisal openly employed oil as a "political instrument" in the form of said embargo in 1973 in an (unsuccessful) attempt to change U.S. policy towards Israel. In the 1980s, King Fahd reportedly ordered extra oil sales to pay for an arms deal with Britain.

More recently, Saudi Arabia stepped in to make up the threatened shortfall in supplies during the first and second U.S.-Iraq wars. And there seems to have been some sort of understanding between Riyadh and Washington to increase Saudi production to fill the gap left by Iranian exports as a result of sanctions.

But political intervention in oil policy has been the exception rather than the norm over the last 40 years. In general, Saudi Arabia sells as much oil as it can for the highest price that it can, given sales by rival producers and the state of the markets.

That hasn't stopped outsiders trying to project their own agendas onto Saudi policy. In March 1986, in the midst of a similar meltdown in the oil market, the conservative New York Times columnist William Safire published a famous opinion article titled "Reading Yamani's Mind".

"My strategy is to produce and produce until the low prices bankrupt Iran," Safire imagined Zaki Yamani, Saudi Arabia's then-minister of oil, saying. "My orders from the royal family could not be more clear: at all costs, break Iran. With our very survival at stake, we are willing to suffer these falling prices because we know we are starving Iran's war machine."

Questioned about it later by his biographer Jeffrey Robinson, Yamani denied he had tried such a strategy and ascribed it to "journalistic wishful thinking" and Safire's own political motives for advocating a hawkish line on Iran ("Yamani: the inside story", 1988).

In retrospect, it is clear the 1986 price collapse was a disaster for the kingdom, pushing it to the verge of bankruptcy, and cost Yamani his job. The idea it was all part of some grand geopolitical scheme to harm Iran is a neoconservative fantasy.

Yet much the same armchair strategising is now being used to impute deliberate policy motives to the current collapse in oil prices, and it is no more plausible than before.

Big shifts in oil prices sometimes have significant economic, political, diplomatic and military consequences. Russian economist Yegor Gaidar has argued the collapse in oil prices in the mid-1980s was responsible for the dissolution of the Soviet Union ("The Soviet collapse: grain and oil", 2007).

But no serious analyst argues the oil price collapse of 1985-86 was deliberately engineered by Saudi Arabia, the United States or anyone else to bring down the USSR.

It occurred because the high prices of the late 1970s and early 1980s had stimulated a huge increase in non-OPEC supplies and massive fuel conservation in the advanced economies.

More or less the same thing has happened as a result of the big rise in real oil prices between 2002 and 2012. Now the delayed response from supply and demand has caused the cycle to turn again.

Conspiracy theories are neither necessary nor helpful in trying to understand recent events in the oil market. Not necessary, because they add nothing to explanations for why prices have fallen. And not helpful, because they imply Saudi Arabia could rationally have pursued a different policy.

There are times when history is made through secret backroom deals among the great and powerful. But most of the time it unfolds on its own as a result of mistakes, miscalculations, accidents and unforeseen events which catch senior policymakers as much by surprise as the rest of us.

(Editing by Dale Hudson)


Generated by readers, the comments included herein do not reflect the views and opinions of Rigzone. All comments are subject to editorial review. Off-topic, inappropriate or insulting comments will be removed.

Ekomobong Ekanem  |  January 23, 2015
The Saudis are conniving with the US to play politics with oil price, period.
Husnain Khan  |  December 26, 2014
Extremely good article giving a balanced view on the possible reasons of falling oil prices. A lot of people now a days seems to believe that there is some sort of conspiracy behind the falling oil prices but the writer has very correctly said that there are no proofs to substantiate this and even if this is the case, the final outcome most likely will be determined by many complex market scenarios which cannot be controlled.
Philippe  |  December 24, 2014
Very interesting article well thought of article. None the less the power of Saudis Arabia is based on the oil, not so much gas. Undeniably the power of Saudis Arabia, within the Islamic world is the guarantors of the Muslim faith, the Sunni interpretation of the Muslin faith. The Saudis competition within the Muslim world is the Shia theology, Iran been the propagandist of this interpretation. We as outsiders do not understand the confrontation at hands. The leverage Saudis Arabia has over Iran is it oil production. Should Iran be a nuclear power, Saudis Arabia will lose any leverage on OPEC; the Iranian would dictate the OPEC production policy by just having a nuclear threat understood. Iranian leader are much more fanatic and power hungry, the Middle East and Israel will never be the same. For the US, the crash of oil price is welcome. It is another economic problem Iran has to deal with. For the Russians the same, they have chosen the wrong side of this religious war. The Russian have placed an important strategic place in keeping their naval base in the Mediterranean Sea in Syria. The Russians have limited access outside, the Pacific north, Vladivostok, the artic sea, shut down 5 month a year an ice, and the Black sea. For the present US government this situation means dealing with two enemies without lifting a finger. The Saudis are not primarily having their sight on the US fracking producers, it is a collateral gain.
bert stahr  |  December 23, 2014
The top 10 biggest oil fields in the world contain an ESTIMATED 312,300,000,000 bbls. World daily usage is 92,000,000 bbls/day=9.25 years of supply at the current rate. Then what with about half the worlds existing known supply gone? Check replacement cost/bbl. for conventional oil. This oil punch up is 100% political. Saudi needs between $85-$95 to remain viable. At $50/bbl Russia is better placed and will last at least 5 years, Saudi maybe 3. If OPEC cut production by 10 million bpd there would be a savage oil shortage because the rest of the producing world doesnt have the infrastructure to deliver even if they wanted to. Prices would hit $200/bbl + and OPEC would make 3 times as much revenue by dropping production by a third. So its 100% political because only a lunatic would overproduce at a huge loss of a finite resource to keep "market share" and only an idiot would believe this story.
ABS  |  December 23, 2014
I think its rather naive to place your trust solely on evidence and assume everything else is pure speculation. It would be ideal to have motives and reasons spelt out about everything, however that is very rarely the case. Its rather perplexing you are prepared to accept the word of Yamani as evidence that his huge selling strategy in the 86 meltdown was not politically motivated. And in an increasingly complex world, especially with the heightened political tensions between the two Middle Eastern superpowers (Saudi and Iran), it is even more difficult to decipher the truth. It would be rather silly to just take the statements of the statesmen as the only valid form of evidence and not reflect on any deeper motives. There cannot be purely economic motives here, there must be political ones too. It is even more unhelpful to assume otherwise.