New Saudi King to Obama: Lower-price Oil Policy won’t Change

By Juan Cole | (Informed Comment) –

President Obama cut short his India trip to head off to Riyadh in the wake of the death last Thursday of King Abdallah of Saudi Arabia. Some 30 members of the Washington elite came along, of both parties, including Sen. John McCain and Rep. Nancy Pelosi. This love fest underlined the close relations between Saudi Arabia and the United States, which are nearly as important for US Middle East policy as Washington’s special relationship to Israel.

Saudi Arabia gets special treatment from the US, with its arbitrary, absolute monarchy and extensive human rights abuses never being openly condemned by the US government. Iran, which for all the extensive faults of its theocratic government, is substantially freer than Saudi Arabia, is constantly hectored about its authoritarianism and attempt to export a radical form of Islam. But Saudi Arabia is held harmless in D.C. simply by never being brought up in this context. When asked by Fareed Zakaria about this issue of Saudi human rights, Obama took refuge in the close security cooperation between the two countries. He also maintained that the US does pressure Riyadh behind the scenes. But the US routinely complains about invidious policies pursued by European allies out in the open. That Saudi Arabia is treated with kid gloves only has one explanation: It pumps over 10 percent of the petroleum produced daily in the world.

One issue they discussed was the plummeting of oil prices, which is badly hurting North Dakota, where expensive hydraulically fractured petroleum may not be viable at $50 a barrel or less. US oil companies sent stock prices down in the US today by declining to buy new equipment from companies like Caterpillar, which took a hit. Saudi Arabia could put at least some upward pressure on prices by simply pumping a bit less petroleum daily.

But King Salman refused to change the current policy, of allowing the price of petroleum to fall dramatically rather than giving up Saudi oil market share. Saudi Arabia can just cut back on its infrastructure projects and spend less, and it anyway has an enormous surplus of some $750 bn in foreign currency reserves and another equally large sum available for foreign investments. The Saudis may lose $100 billion this year from budget shortfalls, but that sum can be cut if the low prices last (they will probably be with us for at least 3 years).

Obama and Salman also talked about the collapse of Yemen, about Daesh (ISIL) in Iraq and Syria, and about US talks with Iran over its nuclear energy program. CCTV reports, below, that the US is playing down the links of the Zaidi Shiite Houthi movement in Yemen with Iran, while the Saudis see the Houthis as in Iran’s back pocket. As usual in Riyadh, the substance of the rest of what they said to one another could only be speculated on.

But one thing is clear: the Washington-Riyadh political alliance is extremely powerful.


Related video added by Juan Cole:

CCTV: “Obama honors late Saudi King Abdullah; meets with King Salman”

12 Responses

  1. Let’s see if I remember this correctly. We were close pals with the Shah of Iran when he was running an oppressive dictatorship, because Iran was a bulwark in the Middle East against Soviet influence. How did that work out?

  2. Are you suggesting the US pols use people for their benefit? And who is it that pays these pols for their judicial fore thought?

  3. I can’t be the only person who sees collusion at work between the US and the Saudis to keep oil prices low for a while in an attempt to wreck the Iranian and Russian economies, whatever the collateral damages or domestic concerns, which both partners believe they can absorb in pursuit of their greater goals. Low oil prices also hurt ISIL financing.

    • Research the secret deal between Reagan and an earlier Saudi king to collapse oil prices in 1986 to bankrupt the USSR. It was devastating for Texas, but it was deemed worth it.

      • Heh! I live in Texas (then and now) and remember those times! Same as it ever was…

    • While low prices do effect Russia and and Iran, they also severely effect Canada and USA production.

      The actual cost to pull oil from the ground in Iran is about the same as in Saudi Arabia, so they have about the same profit margin.(both are still profitable at $50/bbl – they just have less excess cash)

      The Saudis spend most of their money on the “high life” for the thousands of princes and to buy off the oppressed Shia and non-princes.

      Iran spends most of their money on designing and building defensive weapons because of their extreme paranoia since 1979 about the US attacking them.

      The cost of production in Russia is higher than Saudi Arabia, but not that much higher. If I remember correctly Russia can still make a profit at $50/bbl, but not as much as they need to fund their otherwise non-productive economy. Putin and his cronies have failed to invest the surplus cash over the years in new business ventures in Russia. Like the Saudis, a good portion of the cash went to the high life for the ruling class in Russia.

      The big losers in a prolonged low price are the producers in USA and Canad which have very, very high production costs and can not continue to develop new production at $50/bbl.

      BTW – As Russia, China and most of the world walk away from the sanctions on Iran, Iran will be in increasingly better shape even at $50/bbl. The sanctions will not continue no matter what congress does, so Saudi Arabia is not really doing itself any favors.

  4. Obama may be less bothered by the low oil prices than many think. After all, they help most US consumers and the US economy overall, if hurting oil producing states like Texas, OK, Louisiana, Wyoming, ND, AK, and some others so noted for their support of him (OK OK, CA is on the list, but oil not so important there).

    Also, I doubt these Saudi budget forecasts. In November the Saudis publicly declared they were planning their budget on oil prices being in a $45-$50 range, which they have been pretty much for the last three weeks since the price first fell below $50.

    Finally, I think a very important reason Obama went and got an hour wih Salman is that he personally wanted to check on the reports of Salman suffering from dementia and becoming incoherent after a few minutes of conversation. The main person publicly pushing these rumors has been Simon Henderson of the Near East Policy Institute in Washington. Why this Israeli-linked institute would want to spread such rumors is not entirely obvious to me, given the Saudi-Israeli sympathy on the Iran issue. But, I suspect Obama got his answer, which we are unlikely to hear of.

  5. Solaiman Fazel

    Is the end goal of Saudi’s low oil price policy to weaken Iran and Iraq? Is this all part of the wider Sunni-Shi’a geopolitical rivarly?

    • The end goals are to hurt the Russian economy for its support of Assad; discourage higher cost drilling in the U.S. to reduce our competition against Saudi oil; and, hurt the Iranian economy because of their support of Assad, their Shia beliefs and the threat of Iran becoming the hegemonic power of the middle east.

  6. As recently (?) as 1973, the Saudis were willing to use an oil boycott against the West to attack Israel and Israel’s pereceived allies. The Saudis were seen (by Westerners) as intransigent and hostile. Pundits discussed military operations to seize Saudi oil fields (I still have a board wargame on this topic, “Oil War”, 1975). But since about the late 70s, the Saudis seen to have slid into a basically pro-Western stance, at least on the part of the ruling dynasts. They’ve abandoned their stance against Israel — even ally with Israel, if not openly — and schmooze with American presidents, buy military toys from the US, participate in military exercises, support wars against Iraq — what gives with this? Did the Saudis become pragmatists, opportunists, or is this a demonstration of what the ruling class there will do to preserve its own power and interests, which have nothing to do with the cause of pan-Arabism, or pan-Islam, or being the guardian of Islam’s holy sites?

    It’s somewhat puzzling, how this change occurred and how the Saudis and US administrations since Nixon and Ford have been so cozy with each other. I’m sure there are Big Oil reasons involved. But is that all? Simple greed and money and economics?

    • Even the “religious” enjoy the good life of booze, women and music.

      The brutal reality is exactly zero humans are as “religious” as they pretend to be and Saudi princes are no different. Why cause a physical confrontation with the USA or Israel which would severely disrupt their good life, when they can spew some meaningless rhetoric and continue to enjoy their toys and mistresses..

      All humans are basically selfish and self-centered and Saudis are just more so because they have the wealth to be that way.

      Power and wealth does really corrupt all humans.

  7. super 390,

    The 1986 increase in Saudi oil production leading to a plunge in the price of oil was not driven by a desire to tank the USSR, although it did that. It was drven by internal factors and their annoyance with Iran and Iraq, who had been violating OPEC production quotas to buy weapons with cash to fight each other. The Saudis had kept the price propped up at $34 per barrel by repeated production cuts over a five year period. But these finally did begin to pinch the Saudi budget and particularly the part that funds the royal family perks. That is what led then King Fahd to pull the plug and crash the price.

    As it was, then VP Bush ran wailing to Riyadh to ask for a pullback as Savings and Loans crashed hard in Texas (ultimately costing US taxpayers billions), and Fahd did pull back. The price had fallen to $9 per barrel by July, 1986. Some small cutbacks put it back well into the teens, where it stayed for a long time.

    It is this and some other similar experiences that drive current policy. Oil Minister al Naimi has declared that Saudi Arabia is tired of saving the behinds of high cost producers by cutting their own production. As it is, Iran and Iraq are not the high cost producers this time who will be hit hard. Those include the US as well as parts of Venequela and Russia, although Russia also has some of theh lowest cost fields in the world outside the Persian Gulf, where the costs are indeed the lowest. Some production costs in KSA are as low as $4-$5 per barrel.

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