“There is no such thing as a former KGB man.”
Introduction: Finally, a real conspiracy
Trust President Putin of Russia—steeped as he is in the KGB political culture–to sniff out the biggest cloak and dagger geopolitical story to emerge in quite a time: The Saudi-American collusion over the ever-falling price of oil. Increasingly, the Russian President has speculated in public that the dramatic downward trajectory of global energy costs have not been simply driven by market forces. Rather, Putin has come to believe that it is part of an orchestrated political campaign by his enemies—principally the US and Saudi Arabia–to destroy him. It would be easy to scoff at the Russian President as merely being a sore loser, a man whose political rise was luckily enabled by the rise of the global price of oil in the 2000s, and whose hold on power may be threatened by it’s fall; easy, but wrong.
For frankly when it comes to skulduggery the Kremlin has proven itself to be in a league of its own; as the American expression has it, you cannot kid a kidder. As such I’m with the Russian President’s analysis. At last I’ve found a conspiracy theory I can get behind: The recently whispered secret accord between the US and the Saudis over the geopolitics of energy policy seems to me to be the real deal.
While the whole affair has been handled with the usual Saudi talent for intrigue, their fingerprints on the tumbling global oil price are just visible. One thing is for certain; the Saudis are behaving decidedly oddly. While the price of oil has fallen off the map, settling for the moment at under $80 per barrel, a four year low (in late Spring 2014 it was perched at a lofty $115), they have done absolutely nothing. Equally interestingly given their masterly inactivity, until recently they have said absolutely nothing. Finally, Saudi Oil Minister Ali al-Naimi blandly intoned that Riyadh’s energy strategy was merely to follow the economic fundamentals.
But an economics-only energy strategy would instead dictate that the Saudis—still the crucial swing producer in OPEC—reduce pumping to stabilise the global price, what with markedly weakening demand in Europe and Asia, and the American shale revolution changing the face of the global energy market. Yet they have done nothing; Why?
The Rockefeller Gambit…
There are only two possible explanations as to what is going on here, both of which hinge on the kingdom’s vital—but fraught—relationship with the United States, long its chief ally and the traditional dominant power in the Middle East. Until the advent of the Arab Spring, American and Saudi structural interests were broadly the same: To preserve a status quo that left them part of the dominant constellation in the region, along with Israel and Egypt.
However, the two allies very divergent views regarding the rise and fall of the Arab Spring (with the Americans rather naively for it while the arch-reactionary Saudis viewed it as an existential threat) as well as the advent of the Shale Revolution (which America has hugely benefited from while the Saudis have nervously seen it as an unexpected major threat to their global energy dominance) have left the two old comrades on opposite sides of the fence regarding the most important economic and strategic issues facing the region. In such a scenario, Saudi actions can be explained by their realization that America has ceased to be an ally, and is now best thought of as an economic and even strategic competitor.
As such, the Saudi’s efforts to continue to pump oil whatever the price might be merely an effort to knobble America’s ever-growing energy challenge to Riyadh’s primacy. This alternative can be thought of as the John D. Rockefeller gambit, whereby the Saudis steal a trick from the old nineteenth century oil tycoon’s playbook. When confronted with a nimble if smaller adversary—well before modern anti-trust laws came onto the books—Rockefeller would continue pumping oil even at a loss, all the while knowing that the plunging price would finish off his weaker rival well before it really began to damage Standard Oil.
In the face of the American fracking challenge to its primacy, Riyadh may be both ruthlessly defending its market share, while crippling its great, emerging American rival in the process. For with the shale revolution the International Energy Agency (IEA) has predicted that the US is on course to astonishingly lead the world in oil production in 2015. Over the past 5 years, production has increased by a stratospheric 65%, to the point that shale-drilled energy now accounts for a full 55% of all US output. From the Saudi point of view, uncomfortably and out of nowhere an energy rival has come into view; worse yet, its new challenger is its most important ally. How to see off its challenge without totally destroying the vital US-Saudi tie must be the issue bedevilling the kingdom’s strategists at present.
Here the Rockefeller gambit emerges as a creative counter-stroke. Knowing that at $80 a barrel the economics of fracking begin to grow at least somewhat dicey–whereas given their colossal foreign reserves the Saudis can easily handle selling oil for years at well below its current subterranean market price—Riyadh may merely be pressing its innate economic advantage over the US without confronting Washington directly.
Given that its oil is easier to extract than via shale methods, and that Riyadh saved more of its oil windfall than it spent during the recent commodities boom, the Saudis are far better positioned than any other country in the world to withstand chronically lower oil prices. The break-even price for the Saudis to balance the books is $84 a barrel according to the IMF, not far from today’s lows. The economics of shale mean that American energy production has a more fragile economic context than that of Riyadh.
In addition, the Saudis have stockpiled a whopping $735 billion in foreign reserves, the equivalent to three full years proceeds of its oil production. If there is to be a siege of the world’s oil producers the Saudis—by far—are best placed to withstand it. Rather than a Saudi-American conspiracy explaining the descent of global oil prices, it may well be that it is merely the Saudis who are playing economic hardball on their own, skilfully seeing off their rising American energy competitor without causing a ruction in overall ties.
…Versus the Geopolitical Gambit
But knowing a little bit about Byzantine Saudi manoeuvring from my Washington days, I personally imagine the Rockefeller gambit amounts to a secondary, if important, reason for Riyadh’s puzzling actions. However, instead of aping Rockefeller, I would instead argue that Riyadh is hearkening back to the 1980s, when a then-secret deal to drive down the price of oil—negotiated between the Saudi monarchy and President Reagan—helped to economically destroy the Soviet Union. To answer Minister al-Naimi, here is one concrete example of where Saudis devised an energy policy for reasons other than merely just economics.
This much we know for certain. Secretary of State John Kerry was summoned to meet King Abdullah this past September 11th. It is being openly whispered that they struck a compact whereby the two largest oil producers in the world agreed to keep pumping jointly in an effort to cripple the Saudi’s mortal enemy Iran (for the Americans the differing but complementary interest involves pressuring Tehran to the point it does a nuclear deal with Washington in the near term).
In addition, both Riyadh and Washington have scores to settle with Vladimir Putin’s Russia, the Americans over Ukraine and the Saudis over his critical support for their great enemy, the murderous Assad regime in Syria. In essence, Putin has backed the Shia cause in the Syrian civil war–Hezbollah, Iran, and Assad (the dominant Assad clan are Alawites, an esoteric Shia offshoot)—while the Saudis as ever are looked to as the great Sunni champions.
Much as the oil card definitely worked when played against the USSR in the 1980s, it could change the geopolitical game just now as well. According to the IMF, the break-even oil price for both Iran and Russia to balance their books is considerably higher than for Riyadh: an astronomical $153 for Tehran and well north of $100 for Moscow. In other words, the Saudi’s enemies are running fragile states that will run into real economic trouble far before Riyadh begins hurting.
The final reason I believe in this particular conspiracy is that in acting the Saudis will have reminded the world—and especially the heretofore-exasperated Obama administration—that they remain both a force to be reckoned with, and one that delivers.
After finding themselves at odds over almost every major strategic and economic issue of the past few years, such a joint Saudi-American strategy has the potential to reinvigorate the imperilled alliance, which at the broadest level may be what the whole conspiracy is really about from the Saudi point of view.
Mending ties with America serves Saudi interests over three fundamental issues. First, the improved link means Riyadh can avoid being thrown under the bus in the event of an American-Iranian nuclear deal. If such as accord comes to pass, Washington will have to adopt a balance of power strategy, hedging between its old Saudi allies and its warming ties with Iran. Such a hedge is—in Saudi terms—better than Washington going over wholesale to the Iranian point of view.
For the uncomfortable fact remains that over fighting IS in Iraq, or the future of Afghanistan, US-Iranian interests are already more aligned than either is today with Saudi Arabia. So the Saudi-American oil play, in getting the Iranians to compromise at the nuclear negotiating table, knowing their economic prospects are decidedly grim without a deal, will be remembered gratefully by Washington as the gambit that broke the Middle Eastern strategic logjam. Despite the massive upheaval the accord would amount to, the Saudis would remain significant players in the new regional game.
Of course, the Saudis would be far more delighted if there is no nuclear deal at all. That is why their playing the oil card is such a creative strategy: It amounts to a win-win whatever the outcome of the US-Iranian nuclear talks. In the recriminations that would follow the collapse of talks, the Saudis would be leading the economic charge against their long-term rivals, through playing the oil card and tightening the economic noose as a defiant Iran rejects President Obama’s efforts at a genuine rapprochement. There is little doubt that in such a polarized atmosphere—the best outcome from the Saudi point of view—US-Saudi ties would become far more central. In either case, the Saudi oil card works as either a hedging strategy or a ploy to renew its long-standing ties with America, still the most important regional player.
Second, by illustrating that the Americans still have strong regional allies who deliver in the Middle East, the Saudis will blunt the prospects of a genuine Asia Pivot away from the region altogether, which is what the Obama administration would actually like to effect. Keeping America engaged in the region militarily—far more than it would otherwise be—suits Saudi interests to the ground. President Obama’s ‘Asia Pivot’ is in many ways shorthand for America’s growing disenchantment with a Middle East that takes up a vast amount of effort and wherewithal while seeming to produce few strategic rewards.
Asia on the other hand is seen as the economic future, and a region ripe for American strategic expansion, given blossoming relations with India, Myanmar, Indonesia, and the ASEAN states, and old and trusted ties with allies such as Japan, South Korea, and Australia. By jointly playing the oil card, Riyadh is reminding America that in Saudi Arabia Washington has an ally who amounts to one of the most important economic forces in the world, one well worth continuing to cultivate.
Third, the sway the oil gambit gives the Saudis may force Obama to do far more in Syria than he would like to. While the Saudis have rather grudgingly agreed to support the American-led campaign against IS (with Saudi fighter pilots flying F-16s striking IS targets), as is true with most of the putative local Syrian allies on the ground, Riyadh seems far more interested in fighting the Assad regime, nudging Washington in the direction of expanding its military mission in Syria, eventually to include embracing its allies’ priorities.
This is surely something the closet realist President does not want to do, but over time may amount to being the Saudi ‘ask’ for playing the oil card jointly with the US. At a minimum, the Saudis have correctly gauged their long-time American allies; only countries actively contributing to a common geopolitical initiative with the US tend to have any real influence over the direction the greatest power in the world moves in.
At last then, here is a conspiracy that makes sense. So there are major indications the Saudis have decided to play the oil card in earnest, both to strike back at their Iranian and Russian enemies, as well as to bolster their central (and troubled) relationship with America. The central question thus becomes: Will it work?
The Oil Card may simply not be enough
While an ingenious and bold gambit—as well as frankly speaking just about the only major card a one-dimensional power such as in Riyadh can truly play—it is an open question as to whether the joint Saudi-American playing of the oil card can work. First, the economics of the deal are fraught. If the price continues to head downwards the American shale revolution itself may be called into question, certainly not an outcome that the US would cherish. If this comes to pass, either there will be real pressure on Riyadh to let up and stop pumping, or America will see its shale bonanza scuppered. In either case, bad feeling and a cessation of the joint oil play would be the result.
Second, even if such an accord were to last—as it did throughout the mid- to late-1980’s—there is no certainty that it would bring either Russia or Iran to its knees. Economic power can certainly work as a lever in international relations, but rarely to a set timetable. Will Russia and Iran respond to real economic pain, as say, a western country would? Given that neither state can be defined as truly democratic in a western sense, they might well be able to ride out the pain for far longer than those in Washington expect. For example, up until now President Putin, despite the very real economic privations brought on by western sanctions, shows no sign of changing his policy over Ukraine. Indeed, with an approval rating of over 80% (the envy of any western leader) there is absolutely no internal political incentive for him to change course as of now.
Likewise, the Iranian Revolution—and the leaders it empowered—have based a good portion of their political legitimacy on standing up to ‘The Great Satan,’ defying an overly dominant America whatever the practical cost. To assume that either Grand Ayatollah Khamenei or Vladimir Putin will meekly and quickly change course—which in itself might well imperil their continued rule—due to the oil card being played simply does not jibe with reality.
Third, an Iranian-American nuclear accord would truly amount to a game changer in the Middle East. If the deal is done, as President Obama just made clear in a letter he recently sent to the Grand Ayatollah, the US and Iran could find much to do in common over fighting IS, stabilizing Iraq and Afghanistan, and on opening Iran itself to western investment.
Gratitude is no substitute in foreign policy for interest-based thinking. If such an outcome comes to pass, it is highly likely Washington’s overall policy in the region would quickly come to forget the Saudi role in economically compelling Iran to accept a deal over the nuclear issue. Instead, the US will increasingly be seen in the region as drifting over time from being a pro-Sunni power to a guarantor of a Sunni-Shia balance of power, to eventually adopting a pro-Shia outlook. For Washington, battling Al-Qaeda and IS—both Sunni offshoots—is the priority. An opening to Iran can help with both these initiatives, as well as the two countries sharing relatively common interests over stabilizing Iraq and Afghanistan. The Saudis—where so many of the 9/11 high-jackers came from—is peripheral to these primary American regional concerns.
This leads to the fourth and most damning point. As the Saudis themselves have recognized in jointly playing the oil card with America, Saudi-American interests just do not line up very well anymore. The Saudis want to depose Assad in Syria to relieve the agony of the majority Sunni population there whatever the cost or the timeframe; the Americans do not. The American administration wants very much to strike a strategically game-changing nuclear deal with the Iranians; the Saudis do not. The Americans want North America to be largely energy independent from the Middle East; the Saudis do not. The American administration wants to pivot to Asia, spending more time and effort concentrating on the most economically dynamic region in the world; the Saudis do not. In the end, the playing of the oil card may well be seen historically as the last gasp of the long-time Saudi-American concord, the final flowering of an alliance based entirely on shared interests, that is coming to an end as such interests are no longer held in common.
Conclusion: The Saudis only hope is chaos
So if the Saudi oil play is simply a variation of the John D. Rockefeller gambit– proving to be merely another case of Saudi-American interests diverging, this time over America’s surprising energy challenge to Riyadh’s dominance—it amounts to merely another nail in the coffin of the relationship as a whole. On the other hand, if the Saudis and the Americans are jointly playing the oil card to bring the Iranians and the Russians to heel, even so the prospects for the success of such a course of action are laden with uncertainty.
Ironically, the only outcome that just might save this dysfunctional relationship is the abject failure of Barack Obama’s Middle Eastern policy. Iran could well reject America’s high-risk nuclear blandishments, the talks would then fall apart and recriminations would abound, with an American or Israeli air strike (both cheered on by the Saudis) making its way back onto the agenda.
The Shia regime of Iraqi Prime Minister Abadi could well turn its back on national reconciliation with the Sunnis and the Kurds and like its Maliki predecessor morph into a Shia chauvinist government (with Tehran’s blessing). Iraq would then splinter, IS would prosper, and America would find itself backing the Kurds in a very dangerous neighbourhood, with Iran on the opposing Shia side.
Syria could well get more septic and Obama (or a far more hawkish President Hillary Clinton) could be drawn into war against Assad and Iran, a reality that would leave the Saudis gleeful.
In fact, just about the only way the Saudi oil ploy works is if the region goes up in flames. Given its doleful history, perhaps the Saudi bet isn’t such a hopeless gambit after all.
By Dr. John C. Hulsman, Limes Italy, December 2014