January 22, 2007


Iran being hit in the pocket (Amandeep Sandhu, 1/23/07, Speaking Freely: Asia Times Online)

Oil prices have fallen 17% over the past few months, now heading toward US$50 a barrel. Surprisingly, the Saudis are not interested in stemming the price drop. Ibrahim al-Naimi, the Saudi oil minister, during a recent trip to India said oil prices were headed in the "right direction". A close US ally, Nigeria, has Organization of Petroleum Exporting Countries chairmanship, and even though Venezuela and Iran have requested an early OPEC meeting, the Arab states of the Persian Gulf have all refused to schedule one to discuss oil prices.

This is in line with the Saudi plan laid out by Nawaf Obaid - a former special adviser to the Saudi ambassador in Washington - in the Washington Post a few months back in which Obaid outlined Saudi Arabia's course of action in the face of the growing conflict in Iraq and the probable US withdrawal from that country. The Saudis, Obaid stated, would act to lower global oil prices to weaken Iran and intervene in Iraq by supporting Sunni tribes.

The idea is to weaken Iran financially, because 85% of Iran's export income comes from oil and 40% of gasoline used in Iran is imported (even though it is the fourth-largest producer of crude oil) because of a lack of local refining capacity.

Financial-futures analyst Gary Dorsch reports that, contrary to analysis in the press that holds warm weather as the cause of falling oil prices, the real reason is that an excess of 700,000 barrels of oil is being produced by OPEC countries. Only Saudi Arabia has the spare capacity to bring market prices down.

Fortunately, the Sa'uds don't understand that oil price wars are ultimately fatal to their regime.

Posted by Orrin Judd at January 22, 2007 7:47 AM

They also don't understand that we have lots of options and they don't.

Posted by: erp at January 22, 2007 8:22 AM

Hold on. Oil price wars TODAY either have no long-run effect, or else discourage supply, by making exploration and development of new oilfields less profitable at the margin.

If oil price wars today discourage long-run supply, that will drive prices UP in the future, while reducing them today.

Which helps the future of the Saudi regime, as long as they can weather whatever economic difficulties they run into as a result of increasing supply today.

If Iran is a dangerous rival to Saudi Arabia, and if the Saudis can give the regime a good shake-up by slashing oil prices, that could be a smart move for them.

Posted by: Nathan Smith at January 22, 2007 9:18 AM

Oil has no long term future. We'll leave most of it in the ground.

Posted by: oj at January 22, 2007 12:45 PM

The price/bbl doesn't matter so much to the Saudis as net revenues. If prices go down, they'll pump even more to try to keep net revenues up. Remember, there's a growing royal class that must be supported by those revenues -- and an underclass that must be bought off. The House of Saud is a house of cards.

Posted by: kevin whited at January 22, 2007 5:35 PM

How does pumping more help?

Posted by: oj at January 22, 2007 8:52 PM

It only has the appearance of being helpful. A favorite saying around here is, when you're losing money, you don't make it up on volume.

Posted by: erp at January 23, 2007 7:19 AM