Weaponized Oil

The Fuel and the Fury

Pump gun pic5_Headline
The plunging price of oil is changing global politics.
  • Why it matters

    Why it matters

    The low price of oil means once-powerful oil-rich nations face a loss of power, changing the balance of global politics.

  • Facts

    Facts

    • Tumbling oil prices could create economic disaster in countries such as Russia, where economists estimate a per barrel cost of $100 is needed for the country to meet current budget obligations.
    • Low prices for oil are bruising the currencies of oil-producing countries, especially in Russia, where the value of the ruble has dropped by 40 percent in recent months.
    • Conspiracy theorists believe the U.S. and Saudi Arabia are working together to punish other oil rich nations.
  • Audio

    Audio

  • Pdf

 

Saudi Arabia’s King Feisal was not normally one to receive unannounced visitors at his palace in Riyadh. But he made an exception for Anwar El Sadat, who was on a secret mission when he visited the king on August 23, 1973.

The Egyptian president was planning a surprise attack on Israel and sought assurances the Saudis would support his war effort, not with tanks or troops, but by turning off the oil supplies for Israel’s allies, first and foremost the United States.

Saudi Arabia not only transferred half a billion dollars into Sadat’s war chest, but the king also promised to keep the West under constant pressure with the power of his oil.

Two oil crises followed, leading to the realization that the elixir of life to the world economy was also one of its most dangerous weapons.

“That changed the world,” former U.S. Secretary of State Henry Kissinger said. “If you control the oil, you control the nations.”

Forty years on, the circumstances are reversed. This time, the weapon is the collapse in oil prices.

Now, Saudi Arabia and the United States are acting in unison, at least partially, and are primarily hurting other oil producers.

U.S. President Barack Obama and the Saudi sheiks allied against political rivals like Russian President Vladimir Putin? It’s a conspiracy theory that has reached European political leaders. Europe and especially Germany are profiting from the steep decline in energy prices.

“The Saudis are using oil to put political rivals under pressure, like in 1973,” says Mohammad Bazzi, a Middle East expert at the New York Council on Foreign relations. “Only this time, they are not driving the prices up, but the opposite.”

It’s a shock, even for rich Persian Gulf states like Oman. “We had hoped to keep politics and energy apart,” said Oman’s Oil Minister Mohammed al-Rumhy. “But it has become a nightmare.”

The price of oil has plummeted by more than half since September 2014, to under $50 per barrel. The price had generally been stable for the previous three years, hovering around $100. Now, oil exporters are absorbing enormous losses in revenues, forcing them to cut back on government services.

 

flames oil polaris
The old order is up in flames. Source: Polaris

 

Energy experts believe, for example, that Russia needs an oil price of about $100 to fulfill its current budget obligations.

Iran is even more heavily dependent on oil prices since sanctions by the West have worn down the country’s economy over the past years. Ten cargo ships reportedly have been waiting for weeks to unload in the southern Iranian port of Bandar Abbas because exporters want to be assured of payment before offloading the goods. Last year, the government in Tehran needed oil at $120 per barrel to avoid budgetary red ink, but this week Oil Minister Bijan Namdar Zanganeh claimed Iran currently needs just $72 per barrel for a balanced budget, largely because of low production costs of just $25. “We will also survive considerably lower prices,” he declared.

Oil producing countries are paying a steep price for their dependence on oil in other ways. Currencies are softening and economies are slipping into crisis.

Ultimately, it is the average citizens who feel the impact. The value of the Russian ruble has plunged by some 40 percent while the Iranian rial has also lost a massive amount of its value against the dollar in past weeks.

The International Monetary Fund, or IMF, now predicts a recession for Russia. Economic performance stagnated in 2014 and is expected to drop by three percent this year, putting Mr. Putin and his country under even more pressure as the economy is weakened further by sanctions imposed after Russian troops marched into the Crimea. The Russian economy needs its oil and natural gas revenues like a junkie needs a fix.

It’s a tough situation for the Russian president to explain and one that is feeding fears of a conspiracy against Russia. Mr. Putin attributes the fall in oil prices not simply to market forces of oversupply and lower demand, but to a political plot.

“Could it be the agreement between the U.S. and Saudi Arabia to punish Iran and damage the economies of Russia and Venezuela?” he recently asked. “It could.” He noted prophetically in October that oil prices are being manipulated by flooding the marketplace with much more oil than is needed.

Additionally, Mr. Putin fears history could repeat itself. Many Russian economists believe the United States, aided by Saudi Arabia, pushed oil prices below $10 in the 1980s, accelerating the demise of the communist regime of the former Soviet Union. When oil revenues collapsed back then, Mikhail Gorbachev, then-Soviet leader who was fighting to save the U.S.S.R. with reforms, was unable to even import more soap for his striking miners. The rest, as they say, is history, and it is now becoming a similar nightmare for Mr. Putin.

The Russian president isn’t alone in harboring suspicions. Venezuela President Nicolás Maduro also sees sinister forces at work and says America and its allies are forcing down oil prices to cause economic damage to Russia and his nation.

 

Sand oil mauritius
Bleak times? Source: Mauritius

 

No one in Washington confirms such conspiracy theories, of course. However, Barack Obama makes no secret of the fact that he welcomes the plunging oil prices: “Russia is isolated, its economy is in ruins,” the U.S. president said coolly in his State of the Union address last Tuesday.

Political commentators such as the conservative historian Arthur L. Herman from the Hudson Institute think tank are openly demanding that the United States use oil as a “weapon” to promote its geopolitical goals.

In other words, troublemakers like Mr. Putin and the nuclear bomb-seeking mullahs in Iran should be attacked indirectly. Wolfgang Ischinger, Germany’s former ambassador to Washington and the director of the Munich Security Conference, also believes that such a strategy could work.

“In the short term, the low oil price strengthens the impact of Western sanctions on Russia. Putin’s options would certainly be less limited if the price of oil was a lot higher,” he said.

On the other hand, the plunging price of oil was just as much of a surprise to Washington and the rest of the world. President Obama didn’t achieve a geopolitical coup but is profiting from a fortunate foreign policy coincidence.

But it’s also true that the drop in oil prices has tipped the balance of power in favor of America. The conditions for U.S. foreign policy have vastly improved, as have Mr. Obama’s opinion poll ratings. Cheap oil is the soothing balm against America’s fears of decline.

 

Tankstelle dpa
Happy days for drivers. Source: DPA

 

These days, U.S. drivers pay just over $2 per gallon of gasoline and the U.S. economy is gaining speed. Each American has roughly an extra $750 each year in his or her pocket thanks to the low energy prices.

The IMF reckons that falling oil prices could push global growth 0.7 percent higher in the coming years, with oil-importing economies profiting the most. “The winners are all those countries that need a lot of oil relative to their gross domestic product and don’t produce any themselves,” said István Zsoldos, chief economist of the Hungarian oil and gas firm MOL.

But the drop in oil also has a downside for America: Its previously booming fracking industry, which has squeezed ever-more oil and gas from shale deposits in recent years, faces ruin if oil drops much below $50 a barrel. And that’s a development welcomed by the Saudi oil sheikhs. The Saudis have refused to cut production so far, fuelling speculation that they are also using their oil as a weapon. Fracking has allowed the United States to become a production rival.

The new technology might have a questionable impact on the environment but it has freed Americans from decades of dependency on foreign oil. North America is on track to eliminate the need for energy imports by the end of the decade and become an oil producing “titan of unprecedented size,” according to a forecast by the International Energy Agency.

The United States has raised its oil production by half from 2008 to 2013, which is why there is an estimated oil surplus of 1.5 to 2 million barrels globally each day. That is depressing prices – and Saudi Arabians.

But it’s possible that the Arabs are playing a double power game with their cheap oil: On the one hand they hope to force their archrival Iran along with its ally Russia to their knees, while simultaneously destroying the U.S. fracking competition.

The cost of victory could be high: As OPEC’s largest producer, Saudi Arabia is also suffering from the oil glut. But the sheikhs have the advantage of being able to pump oil from their sandy country for a mere $6 a barrel. They also had hefty currency reserves of around $900 billion at the end of 2014.

Want to keep reading?

Subscribe now or log in to read our coverage of Europe’s leading economy.