Syria is not only a civil war, a religious war, and a proxy war, it is now also an important factor in an oil war instigated in 2014 by Saudi Arabia. -- U.S. mainstream media were slow to call attention to this development, but that Saudi Arabia's decision to drive down the price of oil is an "oil war" was noted in the New York Post in Dec. 2014 by Ralph Peters the retired lieutenant colonel who became (in)famous in 2006 when he proposed redrawing the map of the Middle East in Armed Forces Journal. -- According to Peters, Saudi Arabia was "doing what the Obama administration lacked the guts to do: It’s smacking down our enemies," viz. Iran and Russia. -- A few months later, though, Berlin-based Leonid Bershidsky argued that Saudi Arabia's price war was aimed principally at the North American fracking industry. -- A Pakistani journalist observed that Saudi Arabia was in danger of falling into a trap of its own making. -- Saudi Arabia's effort to sustain its budget expenditures in the face of steeply declining oil revenues risks bankrupting the country: "[I]nstead of driving producers of expensive oil from the market and feasting on a recovery in oil prices, the expected addition of Iranian oil to the market will knock prices down further." -- A few weeks later, after Russia intervened militarily in Syria, Bershidsky argued that Saudi Arabia's oil price war was now aimed Russia, and the world could therefore expect "a more active shoving match between the world's two biggest oil exporters, which already are at odds over the Syrian conflict. . . . if the Chinese economy continues performing worse than expected, that market may become too small for the Russians and the Saudis. -- Both economies are oil-dependent and retaining market share is a matter of survival." -- Blogger Tyler Durden also believes that the price war was not going well for Saudi Arabia: "the kingdom is literally going broke as the budget deficit is set to come in at an astounding 20% of GDP and the current account plunges into the red as well. -- As for the Russians, not only did they not abandon their support for Assad, they in fact struck up a closer alliance with Iran, whose oil supply threatens to add to the global deflationary supply glut once sanctions are fully lifted." -- Thus the Saudi oil war has been "a miserable failure thus far." -- Last week, however, the London Telegraph reported that "Saudi Arabia has vowed to continue flooding the global market with oil despite the collapse in Brent prices to a 12-year low, insisting that it will not cut output until Russia and other non-OPEC countries agree to share the burden." -- Saudi Arabia, it seems, is still intent on "flushing out rivals." -- But if a piece published Saturday by Global Research is to be believed, the Saudi regime is more likely to be flushed out first. ...
SAUDI ARABIA'S OIL WAR AGAINST IRAN AND RUSSIA
By Ralph Peters
New York Post
December 14, 2014
This week, oil fell through the price floor of $60 a barrel and gas at my local filling station was $2.26 a gallon.
That’s great news for commuters and almost every business, but wonderfully bad news for our ugliest enemies.
If oil prices remain low through next year, the effect on rogue governments, from the Russian Federation to Venezuela, will go from damaging to devastating.
But Western economies (and China’s) stand to benefit, with cheap oil possibly tickling Europe’s snoozing markets awake. Even most underdeveloped states will get a welcome break.
This price plunge has been driven by Saudi Arabia, OPEC’s dominant power. While it’s true that part of Riyadh’s actions respond to the energy renaissance in North America, the greater motivation is breaking Iran’s will.
The Saudis believe they can no longer rely on the U.S. to contain Tehran’s imminent nuclear threat, so they’re out to do what our lukewarm sanctions couldn’t.
There’s no love lost between the Saudis and the Russians, either. The Saudis want the Assad regime in Syria to go. Moscow props it up.
The Saudis aren’t doing any of this to help us, but it helps us just the same. Now the key issue is: How long will prices stay low?
Markets can be unpredictable, but an emerging global glut of oil, decreasing demand, and greater efficiencies suggest that petroleum products should remain relatively cheap -- with fluctuations -- for the next few years.
That’s good news for democracies and free markets, but a nightmare for dictators everywhere.
Here are the key losers -- and winners.
Tehran had learned to live with Western sanctions. But oil has been its lifeline. And to balance the books, oil has to sell between $135 and $140 dollars per barrel. Good luck with that, Supreme Leader!
With the barrel price at barely 40 percent of Iran’s requirement, the economy’s going to hemorrhage. Iran’s leaders will be under far greater pressure to compromise on the nuclear weapons -- unless we keep easing sanctions for nothing in return. This is the last chance for negotiations to bring results.
The fascinating angle here is that Saudi Arabia’s doing more for Israel’s security than the Obama administration’s been willing to do. Common enemies generate unexpected -- if unadmitted -- alliances.
The price collapse could not have come at a worse time for Bad Vlad Putin. The Russian president needs an oil price around $100 a barrel to prop up what’s become a wartime economy.
Oil and gas provide up to a third of budget revenue and compose two-thirds of exports.
Sanctions imposed over Putin’s aggression have gnawed at Russia’s economy, but this price drop bites deep: The ruble has crashed, Russian bonds are pathetic, and foreign reserves are bleeding.
While Russians will put up with harder times than Westerners will, Putin’s made extravagant commitments (bet he’d like to have back the $50 billion he squandered on corrupt Olympic construction).
The world’s fave bare-chested bully had embarked on a massive arms buildup, with a hi-tech $5 billion command center just unveiled. But Putin’s visions of military resurgence are becoming unaffordable.
He also made election promises to improve Russia’s wretched health-care system. Instead, he’s firing health-care workers and shuttering hospitals.
He promised higher living standards, but now the average Ivan’s feeling squeezed. And Putin faces enormous costs in Crimea and eastern Ukraine, two booby-prize welfare states, with the latter shot to ruins.
Putin’s popularity remains high. For now. The gravest worry is that, with his back to the wall, he’ll play the Mother Russia card and attack again.
Iraq has nothing to offer the world but oil. And Baghdad needs to fund a survival struggle against Islamic State militants.
The Saudis don’t like the Islamic State caliphate claims, but they have no sympathy with Baghdad’s Shia-dominated, Iran-aligned government, either. Don’t expect price rises for Iraq’s sake.
The problem is that we’ll end up paying more of the battle bill for Baghdad’s pretense (and our State Department’s fetish) that Iraq can be kept intact. The conquests made by Islamic State terrorists aren’t the cause of Iraq’s troubles, just one more symptom.
Although some energy players will suffer from lower prices and we’ll see a wave of corporate consolidation, the oil-price drop’s great news for American consumers, businesses, and even, in the longer term, our military.
An economy that had begun to recover -- despite Washington -- is getting another vitamin shot, while working-family budgets get a break.
The Saudi strategy also aims to hurt our burgeoning energy industry, such as the shale oil extraction in North Dakota. But it won’t derail it. And the overall effect on our economy will be positive.
Perhaps the greatest benefit, though, is that the oil-price plummet is doing what the Obama administration lacked the guts to do: It’s smacking down our enemies.
Former Secretary of State Hillary Clinton didn’t reset relations with Moscow, but bargain-basement oil prices might. Iran may have to give up its dreams of nuclear hegemony in the Middle East.
And with the exception of China, almost every major state that benefits from lower oil prices, from Japan to India, is either an ally or neutral.
Pursuing its own interests, Saudi Arabia may have rescued our failed foreign policy.
The world’s second-largest energy consumer (after the USA) and dirt-poor in domestic oil and gas reserves, China had been on track to spend half a trillion dollars a year on oil-and-gas imports.
If petroleum-product prices remain low, that figure could be cut in half. Cheaper oil and gas also offer China another path to reduce its massive pollution, much of which comes from low-quality, internally produced coal. China’s fantastic growth rates had been slipping, but lower oil prices will help soften any fall.
The drop in energy-import costs comes as a timely blessing. Once-robust growth rates have fallen by 60 percent and India must spend massively to import three-fourths of the oil it consumes.
Lower energy costs should help New Delhi sustain GDP growth, if at a less torrid pace than in the past decade. And the drop in prices makes the gas pipeline Russia wants to foist on the region less attractive.
A decade ago, such a price collapse would have devastated Mexico’s then-oil-dependent economy. But diversification, deregulation, and smart contracting on options markets should see Mexico’s economy through at least the next year without a major impact from lower oil prices.
If, however, oil prices remain low for years to come, Mexico’s economy will suffer. A full third of government revenue comes from petroleum sales and, even now oil accounts for 15 percent of exports (behind assembled goods).
A sharp downturn in Mexico’s economy while our own economy booms guarantees more illegal immigration.
“Woe, Canada?” Or just, “Whoa, Canada!” Sharply lower oil prices make the exploitation of Canada’s tar-sands deposits less viable -- a grave disappointment to budget wonks in Ottawa -- but Canada’s diversified and robust economy should weather the sectoral crisis: One industry’s loss is the gain of several others.
Some localities will be hit hard (just as in the “lower 48”), but North America still looks a great deal brighter economically than leftists around the world have warned for a century.
Even before the oil-price crash, Venezuela’s economy was literally wiped out -- with no toilet paper on sale. There are shortages of everything from flour and milk to diapers. Once the richest South American country on a per capita basis, a decade and a half of socialism has wrecked Venezuela’s oil industry and left its economy gasping.
Capital flight, party cronyism, crippling price controls, and the staggering corruption that always marks leftist utopias have left the state with a single functioning institution -- the secret police (trained and bolstered by Cubans).
Heir to the late President Hugo Chavez’s “Chavismo” (the real voodoo economics), hapless President Nicolas Maduro’s as incompetent as his mentor, but lacks his charisma. Naturally, he blames everything on the Yanquis.
If oil prices stay down, the government in Caracas will go down. But it won’t be pretty. And the economy will take decades to rebuild.
With its big, diversified economy, Brazil should be able to weather the loss of oil revenue. But the current socialist government’s hooked on energy income to shore up creaking social programs and cushion the economy from the effects of massive corruption.
And the country’s energy industry is a mess. Brazil will survive, but not thrive, while oil prices stay low.
With reform efforts crumbling and Boko Haram rampaging in the north, Nigeria now faces a looming budget crisis. In Africa’s most-populous country, three-fourths of government revenue, a full third of the economy and 90 percent of exports flow from oil.
The price collapse is terrible news for a country that never made sense, with its desolate Muslim north and oil-endowed Christian south. If there’s one nominal ally we should worry about with oil prices so low, it’s Nigeria.
--Ralph Peters is Fox News’ Strategic Analyst and a former Military Intelligence officer.
SAUDIS ARE WINNING THEIR WAR ON SHALE OIL
By Leonid Bershidsky
September 11, 2015
If you believe all the recent stories about how Saudi Arabia is losing the price war it started against U.S. tight oil producers last year, the new Oil Market Report from the International Energy Agency offers a reality check. The Saudis are winning, though they're paying a heavy price for it.
The narrative about U.S. shale's resilience in the face of the Saudi decision to drive up production, prices be damned, centers on the American industry's ability to cut costs and use innovative technology to repel the brute force onslaught. There is a kind of David versus Goliath charm to this story, but the data don't bear it out. The IEA, the world's most respected independent source of information about the oil market, has changed its methodology for measuring U.S. output: It now polls producers, instead of relying on data from states. And the switch has caused the agency to revise production data for the first half of 2015, showing a noticeable slowdown.
The U.S. is still pumping more than it did last year, but the output is declining.
IEA data show monthly contractions of 90,000 barrels a day in July and almost 200,000 barrels a day in August. Output is dropping for all seven of the biggest U.S. shale plays. The IEA predicts that the U.S. production of light tight oil -- the type pumped by frackers -- will go down by 400,000 barrels a day next year, about as much as Libya currently produces. That drop will account for most of the 500,000 barrels a day drop in production outside the Organization of Petroleum Exporting Countries that the agency predicts for 2016. Production is also dropping in Canada: It's below 4 million barrels a day for the first time in 20 months.
The IEA doesn't believe shale oilers' incantations about drastically lower marginal cost of producing oil from already drilled wells. It points out that tight oil wells dry up much faster than traditional ones: Recent data show that output drops 72 percent within 12 months of startup and 82 percent in the first two years of operation. "To grow or even to sustain production levels requires continuous investment," the IEA report says. Low oil prices reduce frackers' access to the capital they need, and rig counts are falling again -- in early September the drop was the steepest since May.
The number of active rigs has fallen by 40 percent from a year ago. They are far more productive, because they are only being used in the most profitable locations, but that tactic has largely exhausted itself. A steeper production decline cannot be staved off for much longer.
None of this should come as a surprise. If there is one thing the Saudis know about, it's oil. They know all about the new technology used by U.S. shale, too: They work with the same international service companies and attend the same conferences. They did not make a dumb mistake gambling with their only economic advantage. The IEA reported: "On the face of it, the Saudi-led OPEC strategy to defend market share regardless of price appears to be having the intended effect of driving out costly, 'inefficient' production."
The perception that Saudi Arabia is losing the oil war is based on the absence of a spectacular rout in the U.S. -- the shale industry hasn't collapsed, right? -- as well as the Saudis' own fiscal difficulties. The kingdom is certainly running through its foreign currency reserves faster than shale oil output is falling.
So what, price wars are costly. And victory in them doesn't usually mean the complete destruction of the losing side. Rather, the Saudis seek submission.
The IEA notes an increase in demand for oil at the current low prices. Much of that increase is in developed countries, including the U.S., where people are more willing to take long drives now gasoline is cheaper. It will be the Saudis, pumping at near record levels, who meet this extra demand -- not U.S. frackers. OPEC has 2.27 million barrels a day of spare capacity, with 86 percent of that in Saudi Arabia's hands.
The Saudis are teaching the market that they are the go-to suppliers at any price level and that they're always going to be there, unlike those fly-by-night American operators. They're also teaching investors in U.S. shale that as soon as they plow more money into the sector, they, the Saudis, will boost output and drive prices lower, ruining the economic models on which the investment decision was based. That's a lesson they want to sink in, because there's still a lot of talk about shale's nimbleness in responding to changing price conditions.
Leaving purely financial speculation aside, oil prices cannot go up for any extended period while the Saudis are teaching their oil class to the frackers. So long as the U.S. shale industry reacts to price rises with production increases, prices will keep falling back. They will stabilize at a level acceptable to petrostates only once that response becomes muted. No victory announcement will be needed: Things will just look peaceful again.
OIL WAR: IS SAUDI ARABIA WALKING INTO ITS OWN TRAP?
By Salman Rafi
September 16, 2015
While Saudi Arabia is busy pursuing a covert alliance with Israel, the “oil war” it’s started with other producers, including the U.S., is already impacting the kingdom and the rest of the world. What Riyadh’s doing on the oil front will create more repercussions as the “war” drags on into next year -- most of them economically bad for Saudi Arabia.
The Saudis are certainly not happy with the U.S. due to the Iran-nuke deal. This is adding to their eagerness to ensure that U.S. shale oil companies go bankrupt. However, Saudi policy seems to be falling short of its “grand” objectives.
The scenario that appears to be developing goes something like this: Production of shale oil is on the rise in the U.S., and with the U.S. maintaining current levels of production, the Americans would be in a position to further cut its dependence on Saudi oil imports and other OPEC countries. Hence, the U.S. will definitely be able to follow a more relaxed financial policy, and much more relaxed foreign policy, especially with regards to the Middle East.
As a matter of fact, according to the data provided by the U.S. Energy Information Department (EIA), U.S. oil imports from OPEC have already fallen to a 28-year low. The U.S. is pumping more oil and relying less on OPEC imports than at any time since 1987.
While the U.S. imported 45.62 million barrels of oil every month from Saudi Arabia in 2005, the figure dropped to as low as 25.42 million in January 2015. In June 2015, the import figure went slightly high again, reaching 32.32 million barrels of oil per month. The overall trend for oil imports is certainly showing a heavy decline, thanks to the extra pumping of crude oil as well as increased production of shale oil.
Overall production by the U.S. jumped by 1.2 million barrels per day in 2014, to 8.7 million barrels per day. This has been called the biggest expansion in the U.S. oil production since record-keeping began in 1900. Even after oil prices fell by more than 50% last year, the U.S. boom continued. Production will increase 8.1% this year and 1.5% next year, according to the EIA.
With OPEC not ready to cut production and with low oil prices not affecting the U.S. economy as much Saudi Arabia’s, it seems that the Saudis are walking straight into the very trap they set for the non-OPEC oil countries, including U.S. shale oil companies.
There’s no way the Saudis could have directly manipulated production of oil in the U.S. The only way they could make an impact was to increase production and knock oil prices further down. With the Saudis depending on 90% of their budget collections on revenue collected from oil production sector, low prices were eventually going to hurt them.
Notwithstanding that the cost of Saudi Arabia’s oil production is the lowest and that oil shipments are much more convenient because of close proximity of seaports to oil wells, the low prices have already started to blowback on them.
With oil prices continuously falling, Saudi Arabia’s national budget is certainly going to suffer because of a high reduction in the annual revenue earned. For instance, the kingdom earned almost 1.05 trillion riyals in 2014. The 2014 budget was prepared based on an estimated oil price of $103 per barrel. However, the 2015 budget was based on an oil price estimated at $80 per barrel. Hence, the total revenue earned in 2014-2015 stood at 715 billion riyals. With this fall in revenue earned, Saudi Arabia’s budget deficit may rise this year to 20% of GDP, or $140 billion. Highly reduced oil revenues have already forced the Saudi authorities to issue two series of government bonds in a row this summer.
The Saudis were forced to tighten down to make up for the reserves they had used to the tune of $65 billion. These two series of bonds would help the Saudis earn $27 billion by year’s [sic]. But this is far from adequately recovering their monetary loses.
With global oil production set to increase following the lifting of sanctions against Iran, oil prices are expected to fall by another 21% from their current level next year, according to World Bank. With Saudi Arabia set on pursuing its key strategy and unwilling to reduce its spending, especially on defense, it seems that its foreign exchange reserves will soon run out. This would cause Riyadh to fall a victim to the trap it was trying to for its two main rivals: Iran and U.S. shale-oil producers.
According to Saudi Minister of Petroleum and Mineral Resources Ali al-Naimi, lower oil prices in the short term will lead to higher prices in the long term because of reduced investments in the sector. He was speaking about the U.S. The kingdom’s officials also have been expressing confidence that the country’s substantial foreign exchange reserves would help counter the effects of falling oil prices. Keeping prices low for an extended period seemed to be a good idea at one point, on the expectation that producers of more costly oil would be squeezed from the market. Production was expected to shrink and prices to recover.
However, instead of driving producers of expensive oil from the market and feasting on a recovery in oil prices, the expected addition of Iranian oil to the market will knock prices down further. This is will create a “between the devil and deep sea” situation for the Saudis. Their economic situation will deteriorate further as a result.
Due to Saudi Arabia’s direct and indirect involvement in various wars across the Middle East and beyond (funding right-wing religious parties in Pakistan, for instance), its defense spending is also reaching an all-time high. Saudi Arabia is now the world’s largest importer of defense equipment. Its spending is expected to reach $9.8 billion in 2015.
The Saudis are also keen on maintaining their expenditures in other sectors outside of defense areas. Despite the catastrophic decrease in oil revenues, they will not cut government spending on domestic sectors and will continue to subsidize health care and education. If the trend continues (which all indications suggest) the Saudis will soon see their $672 billion in foreign reserves begin to evaporate.
To recapitulate, this is due to Saudi Arabia’s miscall about how non-OPEC oil producers would react to low oil prices. With the contract price of the U.S. crude oil for delivery in 2020 still set at almost $62 per barrel, OEPC countries face hard times ahead. If nothing else, it certainly implies a drastic change in the economic landscape of the Mideast petro-states.
According to a recent claim in a Bank of America report, OPEC is now “effectively dissolved.” The fear of the “oil war” backfiring was also clearly stated by a recent Saudi central bank stability report. It said: “It is becoming apparent that non-OPEC producers are not as responsive to low oil prices as had been thought, at least in the short-run.” It added: “The main impact has been to cut back on developmental drilling of new oil wells, rather than slowing the flow of oil from existing wells. This requires more patience.” It’s not clear what the Saudis can do to make “patience” a worthwhile policy option.
The one thing the Saudis also can’t do at the moment is reduce their own oil production. If they cut production, shale oil producers from the U.S. will replace them, dealing them a huge loss. A further loss to the Saudi economy will also have serious repercussions for Saudi adventurism in the Mideast and beyond.
With time running out, the Saudis, are running out of options. The question is how long can they continue to play the “oil game?”
SAUDI ARABIA'S OIL WAR WITH RUSSIA
By Leonic Bershidsky
October 16, 2015
As President Vladimir Putin tries to restore Russia as a major player in the Middle East, Saudi Arabia is starting to attack on Russia's traditional stomping ground by supplying lower-priced crude oil to Poland.
At a recent investment forum, Igor Sechin, chief executive of Rosneft, Russia's biggest oil company, complained about the Saudis' entry into the Polish market. "They're dumping actively," he said. Other Russian oil executives are worried, too. "Isn't this move a first step toward a redivision of Western markets?" Nikolai Rubchenkov, an executive at Tatneft, said at an oil roundtable Thursday. "Shouldn't the government's energy strategy contain some measures to safeguard Russia's interests in its existing Western markets?"
European traders and refiners confirm that Saudi Arabia has been offering its oil at significant discounts, making it more attractive than Russian crude. And, even though most eastern European refineries are now technologically dependent on the Russian crude mix, Russia's oilmen are right to be worried.
In the 1970s, Saudi Arabia sent half of its oil to Europe, but then the Soviet Union built export pipelines from its abundant West Siberian oil fields, and the Saudis switched to Asian markets, where demand was growing and better prices could be had. The Saudi share of the European crude market kept dropping; in 2009, it reached a nadir of 5.9 percent. Russia's share peaked at 34.8 percent in 2011. In recent years, Saudi Arabia slowly increased its presence, reaching a 8.6 percent share in 2013, but it had never tried its luck in Poland.
Like most of central and eastern Europe, Poland has long been a client of Russian oil companies. Last year, about three-quarters of its fuel imports came from Russia, with the rest from Kazakhstan and European countries. Poland, however, is at the center of efforts to reduce the European Union's dependence on Russian energy. Since Putin annexed Crimea from Ukraine last year, Poland, Ukraine's neighbor, has increased military expenditures and other efforts to shore up its security. It's working with its smaller neighbors, too. On Thursday, it announced an agreement with Lithuania, Latvia, and Estonia to build a natural gas pipeline to and from the Baltic States, ensuring their future independence from Russian gas supplies.
In this context, a new and reliable supplier is a godsend. As for the Saudis, they need to expand outside Asia where demand is falling.
The Kremlin and Russian oilmen have long sensed Europe's appetite for energy diversification and have sought new markets. Until the 2000s, almost all Russian oil exports were to Europe. By last year, that share had shrunk to less than two-thirds:
[INSET: RUSSIA'S OIL DIVERSIFICATION. Exports of Russian crude oil by destination. E.U. 62%, China 14%, Belarus 9 %, Japan 6%, South Korea 2%, Other 7%. Source: U.S. Energy Information Administration.]
In the Asian markets, Russia became a serious competitor to the Saudis. In May, Russian crude supplies to China even temporarily surpassed those of Saudi Arabia. Now that the Saudis are involved in a ruthless price war for market share -- not just with U.S. shale oil producers but with all suppliers who are not members of the Organization of Petroleum Exporting countries -- they are moving into Russia's traditional market.
This could turn into a more active shoving match between the world's two biggest oil exporters, which already are at odds over the Syrian conflict. So far, OPEC and the International Energy Agency predict modest demand expansion next year, but if the Chinese economy continues performing worse than expected, that market may become too small for the Russians and the Saudis. Both economies are oil-dependent and retaining market share is a matter of survival.
Oil competition is a dangerous undercurrent in Putin's Middle Eastern policy. The Russian leader hopes that when its ally Iran re-enters the global oil and gas market, Russia will somehow share in the profits, perhaps through new pipelines across Syria. He also wants to stop the Saudis from establishing export routes in Syria. Now that Russian energy supremacy in Europe also is at stake, Putin's determination to resolve the Syrian conflict on his terms can only grow.
SAUDIS POKE THE RUSSIAN BEAR, START OIL WAR IN EASTERN EUROPE
By Tyler Durden
October 18, 2015
"Any weakening of Russian support for Mr. Assad could be one of the first signs that the recent tumult in the oil market is having an impact on global statecraft. Saudi officials have said publicly that the price of oil reflects only global supply and demand, and they have insisted that Saudi Arabia will not let geopolitics drive its economic agenda. But they believe that there could be ancillary diplomatic benefits to the country’s current strategy of allowing oil prices to stay low -- including a chance to negotiate an exit for Mr. Assad."
That’s a quote from a New York Times article that ran in February of this year.
At the time, we pointed to the piece as evidence that yet another conspiracy “theory” has become conspiracy “fact” as it effectively served to validate (to the extent the *New York Times* is validation) the thesis that at the end of the day, this is all about energy.
If the Saudis could use oil prices to force Moscow into ceding support for Bashar al-Assad in Syria, then the West and its regional allies could get on with facilitating his ouster by way of arming and training rebels. Once Assad was gone, a puppet government could be installed (after some farce of an election that would invariably pit two Western-backed candidates against each other) then Riyadh, Doha, and Ankara could work with the new government in Damascus to craft energy deals that would not only be extremely lucrative for all involved, but would also help to break Gazprom’s iron grip on energy supplies to Europe.
Those are the “ancillary diplomatic benefits” mentioned in the Times piece.
Only it didn’t work out that way.
Instead, Russia just kind of rolled with the economic punches (so to speak) and while there’s probably only so much pain Moscow can take between low oil prices and Western sanctions, Putin has apparently not yet reached the threshold.
Meanwhile, the Saudis have found that it’s taking longer than expected for Riyadh to realize another expected benefit from driving crude prices into the floor. Bankrupting the relatively uneconomic U.S. shale space would go a long way towards solidifying Saudi Arabia’s market share, but thanks to wide open capital markets, Riyadh has effectively gotten itself into a war with the Fed. The longer ZIRP ( https://en.wikipedia.org/wiki/Zero_interest-rate_policy ) persists, the longer otherwise insolvent U.S. producers can stay in business. In short: until the cost of capital starts to rise, there will likely still be investors of some stripe willing to finance some of these drillers.
Additionally, Riyadh decided to fight a proxy war with Iran in Yemen and combined with the necessity of maintaining the status quo in terms of the lifestyle of the everyday Saudi, the kingdom is literally going broke as the budget deficit is set to come in at an astounding 20% of GDP and the current account plunges into the red as well.
As for the Russians, not only did they not abandon their support for Assad, they in fact struck up a closer alliance with Iran, whose oil supply threatens to add to the global deflationary supply glut once sanctions are fully lifted (by the way, Sunday is “Adoption Day” for the nuclear deal), on the way to restoring the Assad regime in an all-out military invasion.
Adding insult to injury (or “energy” as it were), Russia briefly topped the Saudis as the top supplier of crude to China in May.
[INSET: CHINA'S OIL IMPORTS, Jan. 2010-May 2015.]
In other words, the Saudi gambit has been a miserable failure thus far and although they may be able to outlast the U.S. shale space, the battle is nearly lost in Syria. All of this helps to explain why now, Riyadh is looking to muscle in on Moscow’s crude market share in Eastern Europe. Here’s Bloomberg with more:
"As President Vladimir Putin tries to restore Russia as a major player in the Middle East, Saudi Arabia is starting to attack on Russia's traditional stomping ground by supplying lower-priced crude oil to Poland.
"At a recent investment forum, Igor Sechin, chief executive of Rosneft, Russia's biggest oil company, complained about the Saudis' entry into the Polish market. 'They're dumping actively,' he said.
"In the 1970s, Saudi Arabia sent half of its oil to Europe, but then the Soviet Union built export pipelines from its abundant West Siberian oil fields, and the Saudis switched to Asian markets, where demand was growing and better prices could be had. The Saudi share of the European crude market kept dropping; in 2009, it reached a nadir of 5.9 percent. Russia's share peaked at 34.8 percent in 2011. In recent years, Saudi Arabia slowly increased its presence, reaching a 8.6 percent share in 2013, but it had never tried its luck in Poland.
"Like most of central and eastern Europe, Poland has long been a client of Russian oil companies. Last year, about three-quarters of its fuel imports came from Russia, with the rest from Kazakhstan and European countries. Poland, however, is at the center of efforts to reduce the European Union's dependence on Russian energy.
"A new and reliable supplier is a godsend. As for the Saudis, they need to expand outside Asia where demand is falling.
"This could turn into a more active shoving match between the world's two biggest oil exporters, which already are at odds over the Syrian conflict.
"If the Chinese economy continues performing worse than expected, that market may become too small for the Russians and the Saudis.
"Oil competition is a dangerous undercurrent in Putin's Middle Eastern policy. The Russian leader hopes that when its ally Iran re-enters the global oil and gas market, Russia will somehow share in the profits, perhaps through new pipelines across Syria. He also wants to stop the Saudis from establishing export routes in Syria. Now that Russian energy supremacy in Europe also is at stake, Putin's determination to resolve the Syrian conflict on his terms can only grow."
Note that this reinforces everything we've been saying about the conflict in Syria from the beginning and even serves to underscore the suggestion that in addition to supplanting Washington as Mid-East superpower puppet master, Moscow has likely also struck some manner of deal with Tehran on future energy projects in Syria. Recall what we said late last month:
"What Putin’s role ultimately would be in the Iran-Iraq-Syria line isn’t entirely clear but the project would compete with the Southern Gas Corridor, which is obviously good for Russia and it seems likely that in one way or another, Moscow, via its influence in Tehran and Damscus, would end up benefiting. Indeed, the fact that Assad signed an MOU for the Islamic Pipeline shortly after citing Gazprom's interests in rejecting the Qatar-Turkey line certainly seems to suggest that Russia had already negotiated for a piece of the pie."
More, from Reuters:
"From global majors such as Shell and Total to more modest Polish energy firms, oil refiners in Europe are cutting their longstanding use of Russian crude in favor of Saudi grades as the world's top exporters fight for market share.
"Russia has for years been muscling in on Asian markets where Saudi Arabia was once the unchallenged dominant supplier. But now Riyadh is retaliating in Moscow's backyard of Europe with aggressive price discounting.
"This is likely to complicate further a dialogue between Moscow and the OPEC exporters' group on tackling the global oil glut, with joint production cuts already looking elusive.
"Trading sources told Reuters that majors such as Exxon, Shell, Total and Eni have been all buying more Saudi oil for their refineries in Western Europe and the Mediterranean in the past few months at the expense of Russian oil.
"'I'm buying less and less Russian crude for my refineries in Europe simply because Saudi barrels are looking more attractive. It is a no brainer for me as Saudi crude is just cheaper,' said a trading source with one major, who asked not to be named because he is not allowed to speak to the media.
"Two trading sources said Saudi Arabia was looking at storing crude in Gdansk so that it can supply eastern European customers more quickly, just as it has done for years for western European clients from ports in the Netherlands or Belgium.
"One trader said supplies from Gdansk could be sent to Germany to compete with Russian crude sent down the Soviet-built Druzhba (Friendship) pipeline.
"The competition is likely to intensify in the next few months as Iran, which supplied between five and 10 percent of Europe's crude before 2012, is set to return with large volumes if and when Western sanctions on Tehran are lifted.
"'The Saudis want to secure the market share before Iran comes back,' said a trading source with an oil major."
And here's Sputnik with the Russian point of view:
"Saudi Arabia has started delivering oil to the Polish market at a discount in an attempt to boost its market share, Rosneft boss Igor Sechin told a forum in Moscow on Tuesday.
"'Returning to the competition, I want to say what we are seeing at the moment. Saudi Arabia has for the first time entered even the Polish market, delivering oil to Gdansk. They are actively dumping [the price].'
"'The battle for the market is one of the factors that affect the price of oil,' said Sechin, who promised to 'make every effort to prevent a decrease in our share of supplies.'
"Speaking at the 'Russia Calling!' annual investment forum, Sechin explained that Rosneft is able compete with competitors in terms of production prices, which average at around $4 a barrel, in part thanks to the weak ruble.
"According to reports, Saudi Aramco began the deliveries on September 21, in order to gain access to a new market in Europe before Iran returns to the market in the wake of sanctions being lifted from its oil exports. Last month Saudi Aramco cut all prices for October deliveries to Northwest Europe and the US, and reduced the premium on its main Light grade to Asia by 30 cents per barrel."
As you can see, all of this is inextricably connected. The above represents the intersection of i) energy, ii) geopolitics, iii) the global economic slowdown as exemplified by China's hard landing, and iv) monetary policy.
Now that Russia and Iran have cemented their alliance and look set to control the future of Syrian politics, the Saudis are rushing to establish a foothold in traditionally Russian-dominated markets. Both Moscow and Riyadh will suffer if Chinese demand doesn't rebound swiftly or worse, continues to decline. Meanwhile, as long as the cost of capital is zero, at least some uneconomic US supply will likely remain online, pressuring prices further and perpetuating the entire dynamic.
The question now, is how long it will be before Riyadh gets desperate enough to attempt to turn the tide in Syria in favor of the Sunni extremist groups battling Moscow and Tehran.
Should the Saudi-UAE-Qatar coalition fighting Iran's proxy army in Yemen decide to get involved in Syria in a last ditch effort to protect their energy interests and counter what will likely morph from a Russia-Iran military nexus into a Russia-Iran energy nexus once the war is over and sanctions on Tehran lifted, then the fireworks will begin in earnest.
NO END TO OIL ROUT AS SAUDI ARABIA PLAYS TOUGH
By Ambrose Evans-Pritchard
** Kingdom's oil chief says Saudis can withstand the price collapse, vowing to keep production at record levels **
January 21, 2016
Saudi Arabia has vowed to continue flooding the global market with oil despite the collapse in Brent prices to a 12-year low, insisting that it will not cut output until Russia and other non-OPEC countries agree to share the burden.
"We're not going to withdraw our production to make way for others," said Khalid Al-Falih, the chairman of the giant Saudi oil producer Aramco.
"If other producers are willing to collaborate, Saudi Arabia is willing to collaborate. But Saudi Arabia will not accept the role, by itself, of balancing a structural imbalance," he told the World Economic Forum in Davos.
"We can take whatever the market serves us. If prices stay low, we will be able to withstand it for a long time. We have the lowest cost of production on the planet by a big margin, and Saudi Aramco has zero debt on its balance sheet," he said.
The tough words came as Brent crude hovered at the once unthinkable level of $28 a barrel, with a plethora of warnings that prices could fall even further as Iran elbows its way back into the market after the lifting of sanctions.
Fatih Birol, the head of the International Energy Agency, said the Iranians are likely to dump an extra 300,000 barrels a day (b/d) on an already saturated by the end of March, rising to 500,000 by the end of the year. "There will be further downward pressure on prices," he told *The Telegraph*.
Yet Mr. Birol said the collapse of investment is setting the stage for a powerful spike in prices later. "There was a 20% fall in investment in upstream oil last year and that is the largest drop we [have] ever seen in one year," he said.
"We expect a further 16% fall next year. This is unprecedented: we have never seen two years in a row of falling investment. Don't be misled, anybody who thinks low oil prices are the 'new normal' is going to be surprised," he said.
For now, all attention is on how far the price can fall. Aramco's Mr. Al-Falih said the market has "overshot on the low side" and will prices will inevitably recover soon as the high-cost drillers are forced out of the market.
Ibe Kachikwu, Nigeria's oil minister and outgoing OPEC president, said the cartel cannot sit back and let market forces "dictate" wild gyrations without storing up huge problems for the future. "Non-OPEC and OPEC members need to talk. We need to put more effort into talking to the Russians," he said.
Mr. Kachikwu said there ought to be an emergency meeting of the cartel before the next scheduled gathering in June to sort out what OPEC's purpose still is at this point.
"That conversation is going to take place soon. There are a lot of concerns about this," he said, speaking at a panel hosted by CNN in Davos.
One by one, the non-OPEC states are quietly edging towards a deal with the Saudis.
"We're ready to do it. We need to co-ordinate large non-OPEC producers and OPEC ," said Azerbaijan's president, Ilham Aliyev. His country produces 800,000 b/d.
Mr. Aliyev revealed that Azerbaijan has been preparing for a "post-oil era" within twenty years but was caught off guard by the sudden crash last year.
"Every day we think this is the bottom, and then we see lower prices. Frankly it is a little bit exhausting, from a psychological point of view, not to mention that countries need to balance their budgets," he said. Azerbaijan's currency collapsed by 30% last month after its fixed peg broke.
Kirill Dmitriev, head of Russia's sovereign wealth fund, said it is still too early for a deal with OPEC. "Agreement is possible, but at the right time," he said.
Mr. Dmitriev said there are too many conflicting agendas at the moment. "Some players believe that in 15 to 20 years, there won't be much need for oil because of electric cars. 70% of oil is consumed in transport, and 42% of that is in cars," he said.
"I don't think renewables or pressures from climate change are going to significantly reduce the long-term demand for oil."
He said others want to "punish" U.S. shale, or aim to block the entry of newcomers. "When all this has played out in a year, it will be much easier to sit down and reach an agreement," he said.
Aramco's Mr. Al-Falih brushed aside the threat from renewable energy and the COP21 deal to cut carbon emissions.
"I don't think renewables or pressures from climate change are going to significantly reduce the long-term demand for oil. If electric vehicles take over, where does the electricity come from?"
Mr. Al-Falih said the current circumstances are entirely different from past episodes when the Saudis stepped in as the world's "reserve bank" for the oil markets, traditionally cutting output to smooth over short-term shocks such as the Lehman crisis. The problem of oversupply is now structural, he said.
An additional 4.5m barrels a day (b/d) of U.S. shale and rising production in Brazil and other parts of the world change the global balance.
Mr. Al-Falih said Saudi output -- currently 10.3m b/d -- would be down to zero by now if the country had continuously trimmed to make way for others.
Most experts agree that cheap oil is a net stimulus for the global economy and should lift growth, even if the initial shock for energy companies and oil exporters is so intense that it is negative at first.
The much greater danger is that global spare capacity has dropped to wafer-thin levels as Russia and OPEC fight for market share, as projects are shelved across the world, and as old wells are depleted.
It is not the price collapse that worries the IEA: it is the prospect of a global shock when the Saudis have flushed out rivals and the market springs back violently.
IS SAUDI ARABIA ON THE BRINK OF REGIME CHANGE?
By Petr Lvov
January 23, 2016
It seems that Saudi Arabia has started to undergo the transformation various experts predicted. Those became obvious when the sitting king Salman bin Abdulaziz Al Saud replaced his deceased elder brother Abdullah bin Abdulaziz Al Saud in January 2015, and made a number of quite unusual arrangements within the ruling elite, appointing the head of the Ministry of Interior Muhammad bin Nayef from Abdullah’s clan the Crown Prince, while his 33-year-old son Mohammad bin Salman Al Saud from the Sudairy clan received the appointment of Deputy Crown Prince.
Even back then it was clear that within a short period of time the king would try to hand over all power in the country to his own son by sidestepping Muhammad bin Nayef, while he himself would retire due to Alzheimer’s disease, becoming sort of a “king-father” with no real power, but with the right to an advisory vote on important decisions. Needless to say, it’s a direct violation of the tradition of succession to the throne from brother to brother that has been in place in Saudi Arabia, that is going to be replaced by the father-to-son succession. To make such a transition one should be able to carry out a coup d’état or win the approval of the succession board, which is formed according to different sources by 7 or 11 members of the Al Saud dynasty.
Now it seems that the wheels of the political machine are moving again.
Last week reports from Riyadh indicated that his disease is taking a toll on the king and he wants to renounce his reign in favor of the Crown Prince. But then neighboring states, especially Qatar and the United Arab Emirates, started hinting that the members of the Saudi royal family, along with the sheikhs of the strongest tribes, which are the foundation of Al Saud’s rule, are extremely dissatisfied with the sharp deterioration of the economic and social situation in the country, leading to a major drop in their personal incomes.
It is no secret that Riyadh increased the volume of oil production to weaken the positions of its main competitors -- Russia, Iran, and Venezuela. But the kingdom had to take a punch as well, it was forced to unseal its reserve fund and cut the funding of numerous social programs.
And then came the execution of 47 Shia public figures, including the popular human rights activist Nimr Baqir al-Nimr. The executions were designed as a form of retaliation to Iran and Hezbollah for the help they have provided to the Syrian people in the fight against pro-Saudi militants. This step provoked massive unrest in the Shia areas of the kingdom, the areas that produce the better part of all Saudi oil.
The country has found itself on the brink of a civil war and a military conflict with Iran at the same time, which has also provoked major discontent in the West. After all, the West needs a politically loyal Iran, a country in which huge investments can be made, especially in oil and gas sectors, in order to push Russian out of the European gas market and the international oil markets at the same time. In this context Tehran is forced to carry on relying on Moscow in the confrontation with Saudi Arabia to ensure its safety and continue providing military assistance to Syria, Iraq, and Shia rebels in Yemen.
Now the highly respected Institute for Gulf Affairs is stating that the king of Saudi Arabia Salman bin Abdulaziz Al Saud is preparing to renounce the throne in favor of his son Mohammad bin Salman Al Saud, and has since brought his country to the brink of a disaster.
It means that the 80-year-old Salman is trying desperately hard to persuade his brothers on the succession board to allow him to change the principle of succession of the Saudi throne, since he’s ready to leave, but not so ready for his nephew Mohammad bin Salman Al Saud to rule the country. What the king has been doing is allegedly done “only for the sake of the stability of the kingdom.” The reality of the situation is clear, though -- should Salman retain his position, the disintegration of the kingdom is imminent, with certain Shia areas breaking away, while the regions on the border with Yemen which are mostly populated by Yemeni tribes, more than happy to return home. Moreover, the Minister of Interior used to be a habitual cocaine user, so he was only able to “produce” two daughters, and now he’s somewhat incapable of producing more children. Should the king manage to carry out the above-described scheme, he will become the first Saudi monarch to leave the throne to his son.
And the fact that there’s a growing crisis in Saudi Arabia was evident from the cuts in subsidies and bonuses that king Salman started at the beginning of this year to reduce the country’s total dependence on oil. After decades of extensive use of oil revenues to subsidize companies’ payment of generous salaries and providing enormous social benefits, falling oil prices struck Saudi Arabia at its heart.
It’s enough to say that revenues from oil exports in 2015 alone dropped by half. Ultimately it’s hard to say which country suffers the most from these oil wars -- Russia or Saudi Arabia, since the latter has virtually no other sectors to support the economy. Saudi economist Turki Fadaak believes that Saudi Arabia is exiting the policy of “universal welfare,” so there’s an ongoing psychological shift in the minds of the ruling elite of the state. Fadaak is convinced that the ultimate aim of king Salman’s measures is to eliminate the Saudi dependency on oil. But is it really? According to leading international experts -- the answer is a resounding “No,” with all the arguments to the contrary nothing more than fantasy.
Initially, though, it seemed that Salman, who came to power after the death of his brother, King Abdullah, would continue his course, after assuming the throne Salman generously spent over 30 billion dollars from the budget on bonuses for civil servants, military personnel, and students. Additionally, prices for basic goods and services, including fuel, electricity, and water prices, were kept at extremely low levels due to government subsidies from oil revenues. However, due to falling oil prices, under the pressure of such costs the budget started to rupture.
The most important thing now for the kingdom is to execute the transition from the extremely lavish social security system to a productive economy, but then the subjects of the king will be forced to cut their costs, and it looks that they do not agree with this notion. And accusations in the imminent economic collapse will go Salman’s way, so it is better for him to leave now, before protests even start.
It is curious that Saudi Arabia has been rather realistic about its budget for the year 2016, since it was based on the average price of oil keeping at the level 29 dollars per barrel. Last year, the Saudi budget deficit amounted to almost 98 billion dollars and expenditures were considerably higher than originally planned due to bonuses for civil servants, military personnel, and retirees. In 2016 the authorities decided to put up to 49 billion dollars into a special fund to provide funding for the most important projects, in case oil prices drop even further. But it was Saudi Arabia back in 2014 that proposed new tactics for OPEC that implied that there would be no cuts in the level of production, tactics that drove oil prices to today’s levels.
So we are to learn pretty soon should Riyadh choose the path of the utter and complete collapse of the kingdom, or the path of giving power to the young and pragmatic technocrats who are going to pursue a comprehensive oil policy. Either way, Saudi Arabia will be forced to put an end to the costly military adventures in Syria and Yemen as well as its confrontations with Russia and Iran.