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September 27, 2008

Saudis using oil as a weapon against Iran?

Ed Lasky
A Business Week article on Saudi Arabia portrays a kingdom eager to pump oil far above its OPEC quota despite a rapid decline in the price of oil on the world markets. This places them in an adversarial relationship with Iran and Venezuela - two allies. Why might the Saudis engage in this practice? One, is they want to prevent a collapse in demand that might bring about a harsher collapse in prices.
However, there might be another reason: to destabilize Iran, an arch-foe of Saudi Arabia. Iran is a Shiite power intent on achieving hegemony throughout the Middle East. Saudi Arabia sees itself as the leading Sunni power and a protector of two of the holiest sites of the Sunni branch of Islam (Mecca and Medina).
The article states that the Saudis would like to see oil at $90 a barrel:
OPEC has been growing because Saudi Arabia has been pumping almost 10% more than its OPEC quota of 8.9 million barrels per day. The Saudis and other Persian Gulf states believe a price of $90 per barrel is about right, while the hardliners don't want to see anything less than $100 per barrel. "The current market is not balanced; it is oversupplied," Iranian OPEC representative Mohammad Ali Khatibi told Reuters.
Coincidentally or not, that is the price per barrel of oil that experts believe would destabilize the Iranian economy:
 From Dow Jones:

Iran's break-even price is $90 a barrel," Khan said. "If prices dip below $90 a barrel... then they would have to tighten their public expenditure policy, and probably cut subsidies."
Are the Saudis engaging in economic warfare against Iran-a nation already beset by an economic crisis and with an election coming up in a few months?
The past may be prologue. The Saudis engaged in overproduction to collapse the price of oil during the Reagan presidency in order to weaken the Soviet Union that had invaded Afghanistan and threatened stability in the Muslim world.

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