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It’s Time for the United States to Start Worrying About a Saudi Collapse

As if there weren’t already enough problems to worry about in the Middle East, Saudi Arabia might be headed for trouble.

From plummeting oil prices to foreign-policy missteps to growing tensions with Iran, a confluence of recent events is mounting to pose some serious challenges for the Saudi regime. If not properly managed, these events could eventually coalesce into a perfect storm that significantly increases the risk of instability within the kingdom, with untold consequences for global oil markets and security in the Middle East.

Here are some of the percolating problems that could throw the country off kilter.

Fissures Within the Royal Family. Last week, the Guardian published two letters that an anonymous Saudi prince recently circulated among senior members of the royal family, calling on them to stage a palace coup against King Salman. The letters allege that Salman, who ascended to the throne in January, and his powerful 30-something son Deputy Crown Prince Mohammed bin Salman have pursued dangerous policies that are leading the country to political, economic, and military ruin. In an interview with the Guardian, the prince insisted that his demand for a change in leadership not only had growing support within the royal family but across broader Saudi society as well. “The public [is] also pushing for this very hard,” he claimed. “They say you have to do this or the country will go to disaster.” The article, which includes the letters, written in Arabic, has been shared more than 15,000 times.

The Yemen War. The longer it drags on, the greater the risk that the Saudi intervention against Houthi rebels could become a serious source of internal dissension. In its story on the prince’s letters, the Guardian reported that “many Saudis are sickened by the sight of the Arab world’s richest country pummelling its poorest.” Particular blame is attached to Prince Mohammed bin Salman, who also serves as the kingdom’s defense minister and by all accounts has been the driving force behind the war effort. Tagged with the unofficial nickname “Reckless,” Prince Mohammed bin Salman has been accused of rushing into Yemen without a clear strategy or exit plan, resulting in mounting costs in blood and treasure, an ever-expanding humanitarian crisis, and growing international criticism.

Economic Problems. Thanks largely to Saudi policy, oil prices plummeted by more than 50 percent in the past year. Facing a market glut due to the U.S. oil boom, Saudi strategy has been to maintain high production, fight for market share, allow prices to collapse, and wait for higher cost producers, particularly in America, to be driven out of business. With cheaper oil spurring increased demand and squeezing out excess supply, the theory was that higher prices would return before the kingdom ever felt any real economic pinch.

But it hasn’t quite worked out that way — at least not as quickly as the Saudis anticipated. Indeed, Saudi Arabia’s 2015 budget was based on the assumption that oil would be selling at about $90 per barrel. Today, it’s closer to half that. At the same time, the Saudis have incurred a rash of expenses that weren’t planned for, including those associated with King Salman’s ascendance to the throne (securing loyalty for a new king can be expensive business) and the war in Yemen.

The result is a budget deficit approaching 20 percent, well over $100 billion, requiring the Saudis to deplete their huge foreign exchange reserves at a record rate (about $12 billion per month) while also accelerating bond sales. The Saudis have reportedly liquidated more than $70 billion of their holdings with global asset managers in just the past 6 months.

While there’s no danger that the kingdom will run out of money anytime soon, the longer this trend of large budget deficits, lower oil prices, and declining foreign exchange reserves continues, the more nervous international markets will become — with potential implications for key indicators like credit rating and capital flight. Adding to long-term concerns is the fact that Saudi net oil exports have been in slow decline for years as internal energy consumption rises dramatically. Indeed, analysts now suggest that rapidly expanding domestic demand could render the kingdom a net importer of oil by the 2030s. It goes without saying that such a development poses a mortal threat to the kingdom, where oil sales still account for 80 to 90 percent of state revenues. More

 

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Lebanon, Hezbollah Cut off from Iran

Juan Cole writes ‘With the alleged fall to the Islamic State of Iraq, and [in] Syria of Qa’im on Saturday, and of Talafar a few days ago, the border between Iraq and Syria has now been effectively erased.

A new country exists, stretching from the outskirts of Baghdad all the way to Aleppo.

The first thing that occurred to me on the fall of Qa’im is that Iran no longer has its land bridge to Lebanon. I suppose it could get much of the way there through Kurdish territory, but ISIS could ambush the convoys when they came into Arab Syria. Since Iran has expended a good deal of treasure and blood to keep Bashar al-Assad in power so as to maintain that land bridge, it surely will not easily accept being blocked by ISIS. Without Iranian shipments of rockets and other munitions, Lebanon’s Hizbullah would rapidly decline in importance, and south Lebanon would be open again to potential Israeli occupation. I’d say, we can expect a Shiite counter-strike to maintain the truck routes to Damascus.

He goes on to say ‘Syrian jets bombed eastern positions of ISIS near the Iraqi border, perhaps signalling a likely alliance of Damascus and Baghdad to put the Sunni radical genie back in the bottle’.

From a petro-political perspective I find myself asking the following questions;

  • What will be the reaction of Saudi Arabia with the Sunni forces in Iraq having both Damascus and Baghdad allied against them?
  • What will Iran now do to support Bashar al-Assad?
  • What will Iran do to keep their supply route to Hezbollah open?

The answer to these three questions will inform the price of oil going forward. According to Reuters Libya’s oil output has sunk back to a current 1.16 million barrels per day of oil due to disruption at fields and terminals, a senior industry source told stated on Tuesday. Iran put OPEC on notice of its plans to raise output swiftly with the help of foreign investors immediately after any lifting of sanctions imposed over its nuclear programme. Oil Minister Bijan Zanganeh said Iran could increase oil exports by 500,000 barrels per day immediately after any lifting of sanctions. “Very quickly we can increase by half a million and after a couple of months we can increase it to 700,000 barrels per day,” he told reporters ahead of OPEC’s Wednesday meeting. He said Iran could pump 4 million bpd in less than three months after any lifting of restrictions. When sanctions may be lifted is the unknown factor.

For those of us living on Small Island Dveloping States (SIDS) and other states dependant on fossil fuel, the path towards alternative energy, i.e. solar, wind, OTEC and ocean current technologies looks more attractive with every passing day. Editor

 

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Saudi Arabia – America’s Real Strategic Petroleum Reserve?

As oil prices ticked above $115 per barrel last week, a White House leak revealed that President Barack Obama may dip into the Strategic Petroleum Reserve (SPR), the United States' 695 million barrel stockpile of emergency fuel supplies.

The leak might have been a signal that Washington wants Gulf countries to take action to lower oil prices. It might also have been an attempt to wring the risk premium out of current prices by reassuring the market that America won't let a potential war with Iran shut off the spigot. The one thing we can say for sure is that the announcement highlights two interrelated problems with U.S. energy policy: that every president since Ronald Reagan has used Saudi Arabia as his de facto SPR and that there exist no clear standards for when to dip onto the actual SPR. Both problems have the potential to bite us — badly.

Over the years, the United States has been surprisingly reluctant to release SPR during times of crisis, preferring instead to let Saudi Arabia handle the problem by simply increasing its production. For decades, in fact, U.S. presidents have been able to count on the Middle Eastern petro giant to pre-release oil in anticipation of times of war. For example, Riyadh flooded the market ahead of the first Gulf War and, though many do not remember, it also put extra oil on the market ahead of the U.S. invasion of Iraq in 2003. Saudi Arabia even increased its oil production after the 9/11 attacks, which badly strained U.S.-Saudi relations. Likewise, this spring, when the Obama administration was debating whether or not to release the SPR ahead of the tightening of sanctions against Iran, Saudi Arabia helpfully boosted its production above 10 million barrels per day, causing oil prices to fall more than $10 a barrel and eliminating the need for the White House to make a firm decision.

But relying on Saudi Arabia, while politically convenient, is not without risks. The most obvious is that the Saudis have come under increased pressure — both internal and external — as a result of their longstanding oil-for-security alliance with Washington. Iran has warned its fellow Gulf producer not to make up the slack resulting from American and European sanctions, threatening direct retaliation if it does. Saudi Arabia isn't taking any chances. In recent months, it has arrested prominent Shiite dissidents — always suspected of possible ties to Iran –and doubled the number of Saudi National Guard forces in the Eastern Province, home to the vast majority its 2 million-plus Shiite citizens as well as the close to 90 percent of its oil production.

America's ability to fall back on the Saudis is further imperiled by the inherent instability of the kingdom's political and economic system, and is the elephant in the desert that no one talks about.

Oil markets might have taken solace in Saudi preparedness until rumors surfaced of an assassination attempt aimed at the kingdom's intelligence chief, a move purported to be a revenge killing by Iranfor similar assassinations of senior military leaders in Syria. The rumors proved to be false, but like much of the region's murky political intrigue, it moved markets and served as a reminder that a tit-for-tat game of high level assassinations is not out of the realm of possibility. The oil implications of this unpredictability are clear: It will be hard to keep global oil markets calm in the coming weeks and months. Deaths of rulers can change dynamics overnight virtually anywhere in the region, and Israel's defense policy remains an ever-present black swan. Saudi Arabia's own rumoredpursuit of new nuclear-style ballistic missiles from China adds an additional layer of uncertainty about a nuclear arms race in the region.

America's ability to fall back on the Saudis is further imperiled by the inherent instability of the kingdom's political and economic system. Saudi Arabia is going to need more and more oil revenue just to keep its population from growing restive. Riyadh-based Jadwa Investment predicts that Saudi Arabia will be forced to run budget deficits from 2014 onwards, even at a break-even price forecast of $90.70 per barrel in 2015. Other forecasts are even bleaker in the medium term, estimating the breakeven price at $110 a barrel in 2015. Either way, the kingdom's thirst for cash is likely to mean that U.S. and Saudi interests diverge. The oil-for-security deal between the two countries has destabilized the kingdom in the past by igniting support for al Qaeda in the Arabian Peninsula and it could be used again by agents of internal opposition groups. Moreover, the recent pro-democracy upheavals in Egypt, Syria, and above all Bahrain are bound to influence U.S.-Saudi relations over time in ways that are hard to predict. More

 

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