Saudi Arabia at the G20: Is it waging Econ War on Iran, Russia and N. Dakota?

By Juan Cole

The G20 is a conference of the world’s top 20 economies as measured by Gross Domestic Product. Some observers have slammed it as an unelected and arbitrary body that is doing some of the work the United Nations was intended to do– only in a much less egalitarian way. The official web site notes

“The G20 membership comprises a mix of the world’s largest advanced and emerging economies, representing about two-thirds of the world’s population, 85 per cent of global gross domestic product and over 75 per cent of global trade.

The members of the G20 are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Republic of Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the United Kingdom, the United States and the European Union.”

In other words, three of the G20 states are Muslim–Indonesia, Turkey and Saudi Arabia. What did Saudi Arabia have to say at the just-concluded conference?

Saudi Arabia maintained to journalists that Riyadh is not behind the recent fall in gasoline prices. The suspicion has arisen that Riyadh is “flooding the market,” a technique it has used in the past, of pumping a lot of oil even in the face of weakening market demand, thus driving the price down.

Saudi Arabia is annoyed at Russia over Moscow’s support for the Bashar al-Assad regime in Damascus. SA will support the US in the latter’s annoyance with Russia over Ukraine. Saudi is perpetually annoyed with Iran, its Shiite rival that also supports al-Assad and the civilian nuclear enrichment program of which it fears for its dual-use, weapons potential. And Saudi Arabia is threatened by the rise of hydraulic fracturing as a way to produce petroleum, which detracts from the centrality of the vast Saudi reserves.

Saudi Arabia is not hurt as much by falling oil prices as many other OPEC countries. In part, it has larger reserves than most such countries, and so can afford to be patient until prices recover. In part, it has relatively low extraction costs, so it keeps much more of the current $80 a barrel than many countries. Some proposed drilling projects in Norway and Britain don’t make any economic sense at $80 a barrel or less

Saudi Arabia, however, says it is no longer the world swing producer. It produces 9.5 million barrels a day or so, about ten percent of the world production of 90 million barrels a day. While it used to matter a lot whether Saudi did 8 mn barrels a day or 9.5 mn barrels a day, nowadays a small difference like that, Saudi Arabia says, would likely be made up by other suppliers, including new fields drilled via hydraulic fracking. The fact is that demand is soft, which is what is driving prices down despite substantial decreases in Libyan, Iranian, Syrian, Iraqi and South Sudanese exports. The softness in demand, in other words, is so great that prices have come down despite significant production shortfalls in some former producing countries. Saudi Arabia may be happy about idling some proposed North Dakota or Norwegian fields, reducing competition. But it denies responsibility.

I’m not so sure the Saudi role is as unimportant as the government says. Riyadh may well be flooding the market against Iran, Russia and North Dakota. It is hard to tell. Would prices really not rise if the Saudis went down to 8 mn barrels a day? (As a country of 23 mn citizens, they don’t need to pump as much oil as they do and could survive nicely on lower production and lower proceeds).

Related video:

The Saudis Dont Mind Low Oil Prices | CNBC

20 Responses

  1. While the average cost of most US production is now quite high, the average production costs in Russia and Iran are much less than the US and only slightly more than Saudi Arabia. As a result, only the high cost producers (US & Canadian shale oil, deep ocean drilling, etc.) are hurt by the probably short term decline in prices.

    Note also the decline in demand is caused by continuing global economic problems, such as massive inequality of wealth. If countries were to strip the wealthy of part of their wealth and infuse that wealth into the general population, overall economic activity (and therefore oil prices) would increase. Yes, socialism is good for everyone, including the wealthy.

    • You macro-economists are all alike.

      In a time of slack demand with low production costs, what would you do? Try to drive out higher cost competition and slow the development of high cost sources.

    • Russia is being seriously hurt by the combination of sanctions and lower oil prices. Even worse than the loss of tax revenue, which is significant, is that lower prices undermine the rationale and financing for projects aimed at harder-to-reach oil reserves.

  2. “The G20 membership comprises a mix of the world’s largest advanced and emerging economies, representing about two-thirds of the world’s population, 85 per cent of global gross domestic product and over 75 per cent of global trade.”

    And they want to keep it that way, except maybe rig control of a larger percentage of trade and reduce the qualified membership by half or more.

  3. Juan,

    One might not expect this, but in fact production in Libya has been up recently, amazingly enough. The estimable and very knowledgeable Jim Hamilton pointed this out recently on Econbrowser on a post about why oil prices have been declining, although he points at increasing US production and falling global demand as the major culprits. He did not finger the Saudis as being part of it one way or the other.

    • Libya used to do 1.7 mn barrels a day. They did 500,00 barrels a day in November, hence a lot was taken off the world market. US production can’t account for falling prices. The point is that Saudia doesn’t have to pump 9.5 mn barrels a day; it is choosing too, and that has an effect.

  4. Juan,
    Yes, way long ago. What is relevant is recent trends. In May Libya was at 200,000 bpd, but according to the WSJ it was at 1.2 million bpd at end of October. That is an increase in six months of a million barrels per day. You are right that such sums do not mean all that much now, but it is also a larger change in such a period of time than one generally sees.

    I would note that you are not alone in this claiming that Libya has had declining production, with many repeating more or less the same list you did. It certainly was true, but is not any more.

  5. After the undiplomatic and offensive treatment applied to Putin in Australia it will be interesting to see if he makes any retaliatory moves beyond his alliance with China.

  6. bits and bobs — from Patrick Cockburn: Independent.

    “” For 28 days people had no fresh water or mains electricity. They now rely on local generators. Crude oil from Mosul province goes to Syria where it is refined, but the fuel which comes back is poor quality and ruins the engines it is used to power. Some foodstuffs, such as tomatoes, are cheap because farmers have no customers aside from the markets in Mosul.””

    Daesh production is estimaed at 1.5 to 2 million barrels a month

    Our bombing runs in Syria were meant to crush Daesh oil industry … but since they apparently controlled nearly all of Syria’s oil production — it may just have made life all but unbearable for Syrians without electricity or possibly petrol. — not finding a progress report wrt Daesh oil revenues for — just conspiracy theory that we’re using Daesh as a pretext to harm Assad’s infrastructure and future

  7. An interesting question is if the reduced income of the Saudi Arabia Royal family means less $ to buy off the population. It would be an interesting turn of events if them trying to engage in economic warfare with Iran and Russia cause irreparable harm to the Royal Family’s long term survival.

  8. Increased mid East unrest combined with the unhinging of the US (aka US policy pivots) is increasing both long and short term efforts at oil market manipulation. There are a lot of entities wishing to influence oil power, and confusion and obfuscation are probably the goal of some of those efforts. Long and short term goals are in significant conflict, as far apart as Shell or BP predictions are from CIA annual reports for 2040. By far the most important long term reality is much more connected to the probability of major oil producers’ ability to pump oil for export at today’s adjusted price in 2030 or 2040 than the ability of any one producer to pump 10% more oil in 2014.

    The dark side of tar sand, oil shale, and fracking production is revealing itself at a faster rate than even its short term benefits. Water is just 18” around the corner as an endangered essential resource. California’s food production/cost as a bellweather counter to profligate use and abuse of water in the search for oil will rapidly become a much larger issue if 2014’s weather pattern repeats. If we have three years of equally low California rainfall, affordable food, and the other media-ignored topic– Inflation– may well vault into the forefront of hungry American minds. And that short term weather scenario of course does not begin to suggest future US form in the case of similar 7, 50, or 200 year weather patterns that the shortsighted say is entirely normal and beyond human concern.

    America is too eager to ignore the fact that alternatives to oil will take decades to implement, even with a war effort comparable to WWII, were modern Americans so inclined to permit themselves to be directed, which they show no personal willingness to be. Roosevelt needed Pearl Harbor to bring the US into consensus. It is hard to imagine a food or oil based Pearl that America won’t choose to morph into a war on some scapegoat. There is no such thing as partial success in national energy supplies. Partial success simply means system failure. Failure means you don’t eat, travel, or do physical trade outside your locale. America driving into its future utterly dependent on one energy source makes no more sense than setting off across the Sahara with one tank of gas and no spare tire.

  9. Expect Putin to eventually support the rebels taking the Donetsk airport and Mariupol, the seaport they previously held on the Black Sea. That would provide “Novorossiya” with air and sea transport linkages for a long term stable eoonomic viability, but this will have nothing to do with his “undiplomatic” treaqtment in Brisbane, which he fully deserved. He already showed what he thought of that by departing early.

  10. Yves Smith at Naked Capitalism has offered an extended version of this theory . . that Saudi Arabia is dropping the price to punish several disobedient targets, including the US for failing to get Assad overthrown on Saudi Arabia’s timetable. Also, if Saudi Arabia can keep oil at or under $80/barrel for long enough, they can drive enough frack-oil companies bankrupt enough that they won’t re-emerge even after oil goes back up. Then Saudi Arabia can reduce production and create a much higher price per barrel. If that theory is correct, how long would they need to keep oil under $80-barrel to shut down much unconventional production?

    And if that is their goal, and they achieve it; will the subsequent oil shortage and price rise lead to less oil-based carbon skydumping? If so, should we be mad or happy about what Saudi Arabia is doing?

  11. It’s great to hear Americans discuss a topic in a cool manner without extreme views either way of Russia and the US.
    The on-going low oil price has particularly affected Saudi Arabia.

    I was watching an Australian expert on oil prices and he too admitted like some people here, that it is inexplicable.

    I am an Australian and yes, Putin, left early but he intended to.
    He was schedule to fly out at approximately 3 pm but left at 1:15 pm. The only thing that was notable was that he missed the final communique which was as boring as watching paint dry as it involved the ^20 countries on corporate tax evasion. I too would have left.

    Prior to G20 Putin made recent deals with China (apparently around the $US400 billion mark) that will devastate our Australian economy. Gazprom will supply gas to China within 2 years as they switch to a greener approach,. The real reason is that China trust Russia with an economic and in these perilous times, strategic resource.

    Saudi Arabia’s pro-Western stance on “daesh” is for secular purposes. A persistent rumour appears that the south of The Kingdom openly supports daesh, as they do not have worry about revenue and weapons.

    Prsident Xi was in both Syria, Iran and Russia for an inexpolicablky long perid. Putin was in China for APEX for a lengthy spell also.

    The Russian’s are master chess players and think many moves ahead. The Russians and Chinese want their strategic priorities, energy and oil in their collective trusted hands.

    The Chinese are benefitting from the the oil price.

  12. Do high oil prices punish the US? If they do, and KSA is lowering oil prices now to bankrupt and shut in unconventional oil now so as to remove that as a long term price-competitor later, so that KSA can then raise oil prices later once there is no unconventional oil industry left to bring unconventional oil to market; then KSA price drops now to protect KSA price rises later will punish the US later. That is what Yves Smith is theorizing the Saudis to be doing.

    Then too, if a dropping oil price can drop other fossil carbon prices low enough long enough to bankrupt some alternative energy companies, those bankrupted companies are removed as future harbors of refuge when KSA re-raises the oil price later.

    That’s the theory as I understand it.

    • The US is a complex economy with its own petroleum but also a lot of automobiles and trucks. High oil prices are bad for commuters and add expense to trucked goods. But they are good for the hydrocarbon industries in Texas, Louisiana, N Dakota etc.

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