Sunday, October 30, 2011

The Crux of Saudi Power

Saudi oil minister Ali Naimi told reporters that this week’s meeting of the Organization of Petroleum Exporting Countries was “one of the worst meetings we have ever had.” But the meeting was not just a failure for OPEC, whose immediate power to influence the oil market seems to be on the wane. It is a huge failure for Saudi Arabia, one that has dangerous consequences and needs to be redressed quickly and decisively.

In past times, having OPEC ministers depart with oil production quotas in disarray and not so much as a simple communiqué to revisit the issue in three months would have meant a precipitous drop in oil prices. That would have suited Saudi purposes, leaving the kingdom with a victory and a means to punish Iran and Venezuela for being intransigent. Instead, oil prices are rising, the opposite result from what the kingdom wanted to accomplish. The Iranian regime, which badly needs high oil prices to keep itself and its regional agenda in power, has gotten its way.

In an important Washington Post op-ed directed at the United States, Saudi Arabia has warned the United States of a “tectonic shift” where the kingdom “intends to pursue a much more assertive foreign policy, at times conflicting with American interests.” The kingdom made clear it is pursuing its own security agenda in Bahrain, for example, and is gearing up for an additional $100 billion in military spending.

But Saudi Arabia does not get its power from the renowned prowess of its armed forces. The kingdom projects power by its ability to dump oil prices, a capability it does not seem to currently possess. President Obama intuitively understands this since minutes after the Saudi failure at OPEC, he put the US Strategic Petroleum Reserve on the table. This was smart.

For the past decade, Saudi Arabia has failed to commit to a sufficient program of oil field expansion and that lack of foresight is now coming home to roost. The kingdom declared in the Washington Post that the United States doesn’t get what’s at stake but maybe the kingdom itself that is not understanding how its problems arose.

The biggest tool Saudi Arabia had to influence Iran’s policies was its ability to dramatically lower the price of oil. Iran is dependent on oil revenues for over 65 percent of government revenues. The kingdom, with its plentiful foreign financial reserves, could have been in a position to withstand a period of low oil prices to diminish Iranian power in the region. But it is currently unable to use this strategic weapon against Tehran because oil markets both do not believe in Saudi’s market power now nor in its power in the future. The market is convinced that Saudi Arabia is running out of oil under the ground and therefore prices will remain high.

Saudi Arabia’s power inside OPEC comes from its ability to threaten to ruin the economies of other member states by flooding the market with oil. Sheikh Ahmed Zaki Yamani wielded that tool effectively in the 1980s during the Soviet invasion of Afghanistan. Hisham Nazer used it during the Iraq-Iran war. Ali Naimi himself threatened OPEC into an incredible streak of unity after wielding the oil price dagger over Venezuela in 1998.

Now would be the perfect time for Riyadh to have the same tool. But project delays and problems in the kingdom’s upstream sector is thwarting its global power, with potentially dire consequences for Saudi Arabia and for the global community.

The kingdom needs to announce a major spending program on oil field production capacity and it needs to do it now. It needs to show the market and Iran that it is serious about its long term power to determine oil prices.

The announced expansion needs to be dramatic and not marginal. Like Iraq, which has announced a major program of millions of barrels a day, Saudi Arabia needs to roll out the full extent of its geology. Market share is not what is at stake. It is regional power. The kingdom is smart enough to know that. Saudi Arabia needs to turn this week’s failure into a success by understanding the true nature of this week’s OPEC deliberations. The crux of Saudi power is spare oil production capacity. In light of today’s dangerous world, the kingdom needs a bigger stick.

Original article

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