[On Dec. 10, the Saudi oil minister said his
country would keep pumping 9.7 million barrels per day into the global markets,
regardless of demand. For their part, the Iranians have shown alarm, if not yet
panic. Without naming names — he didn’t have to — President Hassan Rouhani
decried the “treacherous” actions of a major oil producer whose “politically
motivated” behavior was evidence of “a conspiracy against the interests of the
region…. Iran and the people of the region will not forget such conspiracies.”
The previous day, Vice President Eshag Jahangiri had described the rapid plunge
in oil prices as a “political plot … not a result of supply and demand.”]
By Andrew Scott Cooper
 |
| Saudi Oil Minister |
On January 2, 1977, the Shah of Iran made a painful
admission about his country’s economy. “We’re broke,” he confided bluntly to
his closest aide, court minister Asadollah Alam, in a private meeting. Alam predicted
still more dangers to come: “We have squandered every cent we had only to find
ourselves checkmated by a single move from Saudi Arabia,” he later wrote in a
letter to the shah. “[W]e are now in dire financial peril and must tighten our
belts if we are to survive.”
The two men were reacting to recent turmoil in the
oil markets. A few weeks prior, at an OPEC meeting in Doha, the Saudis had
announced they would resist an Iran-led majority vote to increase petroleum
prices by 15 percent. (The shah needed the boost to pay for billions in new
spending commitments.) King Khalid bin Abdulaziz Al Saud argued that a price
hike wasn’t justified when Western economies were still mired in a recession —
but he was also eager to place economic constraints on Iran at a time when the
shah was ordering nuclear power plants and projecting influence throughout the
Middle East. So the Saudis “flooded the markets,” ramping up oil production
from 8 million to 11.8 million barrels per day and slashing crude prices.
Unable to compete, Iran was quickly driven from the market: The country’s oil
production plunged 38 percent in a month. Billions of dollars in anticipated
oil revenues vanished, and Iran was forced to abandon its five-year budget
estimates.
A damaging ripple effect persisted: Over the summer
of 1977, industrial manufacturing in Iran fell by 50 percent. Inflation ran
between 30 and 40 percent. The government made deep cuts to domestic spending
to balance the books, but austerity only made matters worse when thousands of
young, unskilled men lost their jobs. Before long, economic distress had eroded
middle-class support for the shah’s monarchy — which collapsed two years later
in the Iranian Revolution.
Today, oil prices have again plummeted, from a high
of $115 per barrel in August 2013 to under $60 per barrel in mid December 2014.
Western experts, predictably, have seized the opportunity to ponder what
cheaper oil might mean for the stock market. As for why prices have dropped,
some analysts have suggested it has little to do with any manipulation of Saudi
spigots: A December essay in Bloomberg Businessweek credited the American shale
revolution with “breaking OPEC’s neck.”
There’s no doubt that shale has eroded Saudi
Arabia’s “swing power” as the world’s largest oil producer. But thanks to their
pumping capacity, reserves, and stockpiles, the Saudis are still more than
capable of crashing the oil markets — and willing to do so. In September 2014,
they did just that, boosting oil production by half a percent (to 9.6 million
barrels per day) in markets already brimming with cheap crude and, a few days
later, offering increased discounts to major Asian customers; global prices quickly
fell nearly 30 percent. As in 1977, the Saudis instigated this flood for
political reasons: Whether foreign analysts believe it or not, oil markets
remain important venues in the Saudi-Iranian struggle for supremacy over the
Persian Gulf.As in 1977, the Saudis instigated this flood for political
reasons: Whether foreign analysts believe it or not, oil markets remain
important venues in the Saudi-Iranian struggle for supremacy over the Persian
Gulf.
This isn’t the first time since the late 1970s that
Saudi Arabia has used oil as a political weapon against its rival. In November
2006, Nawaf Obaid, a Saudi security consultant connected to Prince Turki
al-Faisal, then Saudi Arabia’s ambassador to Washington, wrote an op-ed in the
Washington Post noting that if “[i]f Saudi Arabia boosted production and cut
the price of oil in half … it would be devastating to Iran … [and] limit
Tehran’s ability to continue funneling hundreds of millions each year to Shiite
militias in Iraq and elsewhere.” Two years later, at the height of the global
financial crisis, the Saudis acted: They flooded the market, and within six
months, oil prices had fallen from their record high of $147 per barrel to just
$33. Thus, Iranian President Mahmoud Ahmadinejad began 2009, an election year,
struggling with the sudden collapse in government oil revenues and forced to
slash popular subsidies and social programs. The election’s contested outcome
was accompanied by economic contraction and the worst political violence in
Iran since the fall of the shah.
Signals of a new flood emerged as early as June
2011. While addressing an audience of senior American and British officials at
a NATO operations base, Prince Turki warned Iran not to take advantage of the
regional unrest triggered by the Arab Spring. Paraphrasing some of Turki’s
comments, the Guardian noted that Iran’s economy could be squeezed hard by
“undermining its profits from oil, something the Saudis … were ideally
positioned to do.”
The Saudis understood, too, that the best time to crash
the markets would be when prices were already soft and consumer demand low. In
early December, just a few months after Saudi Arabia unleashed its latest oil
flood, Obaid wrote in a Reuters article that his government’s decision to
depress prices is “going to have a huge effect on the political situation in
the Middle East. Iran will come under unprecedented economic and financial
pressure as it tries to sustain an economy already battered by international
sanctions.” Around the same time, the Saudis were no doubt pleased to see bread
prices shoot up by 30 percent in Tehran. (Bread is a staple of the Iranian
diet, and its prices are a bellwether for the economy.)
On Dec. 10, the Saudi oil minister said his country
would keep pumping 9.7 million barrels per day into the global markets,
regardless of demand. For their part, the Iranians have shown alarm, if not yet
panic. Without naming names — he didn’t have to — President Hassan Rouhani
decried the “treacherous” actions of a major oil producer whose “politically
motivated” behavior was evidence of “a conspiracy against the interests of the
region…. Iran and the people of the region will not forget such conspiracies.”
The previous day, Vice President Eshag Jahangiri had described the rapid plunge
in oil prices as a “political plot … not a result of supply and demand.”
Riyadh’s real hope, if history is any indicator, is
that escalated production will force Rouhani’s government to implement an
austerity budget that will ultimately stoke underlying social unrest and once
again push people into the streets. If this happens, it might not lead to an
event as significant as the shah losing his grip on power — but it would
reinforce the Saudis’ faith in oil as a potent weapon in the battle to dominate
the Middle East. And oil floods, in turn, would likely continue their periodic,
dangerous rattling of both the markets and the region.
Andrew Scott Cooper is an energy analyst and the
author of The Oil Kings: How the U.S., Iran, and Saudi Arabia Changed the
Balance of Power in the Middle East. He can be followed on twitter @aascooper.
