Saudis Using Oil Prices to Get Russia Out of Syria?

The New York Times has a fascinating article about how the Saudis are using oil prices to put pressure on Russia to pull back on their support for Syrian strongman Bashar Assad. It’s been obvious that they’re pushing prices down to hurt the Russians, but it hasn’t been clear what they expected to gain by it.

Saudi Arabia has been trying to pressure President Vladimir V. Putin of Russia to abandon his support for President Bashar al-Assad of Syria, using its dominance of the global oil markets at a time when the Russian government is reeling from the effects of plummeting oil prices.

Saudi Arabia and Russia have had numerous discussions over the past several months that have yet to produce a significant breakthrough, according to American and Saudi officials. It is unclear how explicitly Saudi officials have linked oil to the issue of Syria during the talks, but Saudi officials say — and they have told the United States — that they think they have some leverage over Mr. Putin because of their ability to reduce the supply of oil and possibly drive up prices.

“If oil can serve to bring peace in Syria, I don’t see how Saudi Arabia would back away from trying to reach a deal,” a Saudi diplomat said. An array of diplomatic, intelligence and political officials from the United States and the Middle East spoke on the condition of anonymity to adhere to protocols of diplomacy.

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.

Mr. Putin, however, has frequently demonstrated that he would rather accept economic hardship than buckle to outside pressures to change his policies. Sanctions imposed by the United States and European countries have not prompted Moscow to end its military involvement in Ukraine, and Mr. Putin has remained steadfast in his support for Mr. Assad, whom he sees as a bulwark in a region made increasingly volatile by Islamic extremism.

This is really fascinating and it will be interesting to see how it plays out. Iran is another target of this strategy of bottoming out oil (Syria and Iran are Shiite, Saudi Arabia is Sunni and Iran is the biggest threat to Saudi power in the region). Having oil at $50 a barrel is hurting Saudi Arabia too, of course, to the tune of about $35 billion a year in revenue, but they have huge reserves — almost $800 billion — that neither Russia nor Iran have to let this go for a year or two. The Russian and Iranian economies are crashing because of this, giving Saudi Arabia a good deal of leverage. How that leverage is used and what kind of reaction it prompts will have a huge effect on American interests in the region.

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  • Reginald Selkirk

    It’s been obvious that they’re pushing prices down to hurt the Russians, but it hasn’t been clear what they expected to gain by it.

    I assumed they did it at at the request of the US. Who else is being hurt by low oil prices, besides Russia? Iran, Venezuala. Both not on our BFF list. And what do we have to offer the Saudis in return? They oppose the Islamic State (when it comes to Sunni theocratic nations in the Middle East, “There can be only one”), but Allah forbid they soil their own royal, oil-soaked hands by picking up weapons and fighting themselves. And they want us to negotiate tough with Iran to keep that country from getting nuclear weapons.

  • moarscienceplz

    Russians are fiercely proud of their ability to withstand hardship. I’m not sure this strategy can work. I worry it will just make Putin even more popular, but I guess this is the best option available.

  • http://twitter.com/#!/TabbyLavalamp Tabby Lavalamp

    Who else is being hurt by low oil prices, besides Russia?

    Canada, but the Harper government will likely use it as an excuse for ideological budget cuts, just as the provincial government in Alberta is doing.

  • dingojack

    Dear Mr Harper — see Tony Abbott, Campbell Newman & etc.

    Dingo

  • Pierce R. Butler

    In my more conspiratorially-minded moments, I look at ~$2/gal gas prices and suspect that the US (with considerable help from Kings Abdullah & Salman) is crashing the petroleum market to weaken Russia as part of its strategy to move Ukraine to the “western” side of the table in the New Great Game.

    Then I think about the case against that argument, which is, ummm…, and regret that gasoline has a limited enough “tank life” that I can’t buy a stash now and hoard it until the inevitable price pendulum swing.

  • David C Brayton

    Yes, it is fascinating to see how this is playing out. And it warms the cold, dark cinder of my soul to know that one totalitarian regime is getting screwed over by another slightly more totalitarian regime.

  • Johnny Vector

    Here’s a contrarian point of view, that may also be in play. The basic proposition is that the Saudis see the end game of fossil fuels, as various countries finally begin to do something about it. The result being a strategy of “pump it out now”, because every barrel you sell, even with low prices, is better than a barrel you leave in the ground, and someone’s going to be leaving a lot in the ground. (Note that this only works if your production costs are low; Saudi Arabia has some of the lowest, according to the article.) And hey, if you harm your competitors economically in the bargain, who’s to complain?

    I don’t know enough about this to judge its likelihood, but it sounds economically sensible (if morally repugnant).

  • abb3w

    @5, Pierce R. Butler

    Then I think about the case against that argument, which is, ummm…, and regret that gasoline has a limited enough “tank life” that I can’t buy a stash now and hoard it until the inevitable price pendulum swing.

    Without recommending, I’d suggest you might look at the My Gallons service, which pretty much lets you do just that. Note, they do charge some significant overhead costs — $30 annual membership, and something around 6% plus 6 cents/gallon in transaction fees. So, if gas is $2.00/gallon, you may pay effectively $2.18 to purchase gas at that point in advance for use later (paying $2.12 up front and $0.06 at time of redemption); which leaves you feeling smug if prices hit $3 within the year, but foolish if they fall down to $1.50. However, if you’re filling a 20 gallon SUV tank twice weekly, and if gas swings back over the next sixth months to where it was six months back, it might easily be worthwhile.

    I fill up a ten gallon tank about once every three weeks, at which point it’s less worth it.

  • http://www.ranum.com Marcus Ranum

    And it warms the cold, dark cinder of my soul to know that one totalitarian regime is getting screwed over by another slightly more totalitarian regime.

    …. at the behest of a third. It’s totalitarian regimes all the way down.

  • http://www.pandasthumb.org Area Man

    Sounds unlikely. Saudi production is up only slightly over the last decade and that’s been offset by higher consumption, so net exports have stayed flat and are roughly where they were in the early 1990s. While they could probably cause oil prices to go back up by cutting production, they can’t really make them go down by increasing production. They’re already pumping as much as they can.

    The recent drop in prices is mostly on the demand side, which Saudi Arabia has almost nothing to do with.

  • iangould

    “Having oil at $50 a barrel is hurting Saudi Arabia too, of course, to the tune of about $35 billion a year in revenue, but they have huge reserves — almost $800 billion — that neither Russia nor Iran have to let this go for a year or two.”

    They also have a per barrel production cost of $2-3 a barrel. They’re still profitable at the wellhead. Te only question is whether they make enough to cover their budget.

    Iran also has low production costs although much of their industry infrastructure is badly rundown which means they aren’t operating at peak efficiency.

    On the other hand, much of Russia’s new production comes from Arctic fields and underwater fields in the Caspian and that has much higher production costs.

  • Pierce R. Butler

    abb3w @ # 8 – Thanks for a look at an intriguing project – but playing the commodities futures market, without any way to lay hands on the materials being transacted, strikes me as Yet Another Shell Game (one thing, at least, our economy does very well at manufacturing).

  • lorn

    I doubt that Putin will capitulate to economic pressures. But those pressures are being felt by the Russian people, and the oligarchs, and it might not take a lot to cause cracks in Putin’s macho facade that may sour the Russian people on his style of bluster and bullying.

    If the Russian troops ‘vacationing’ in Ukraine start taking significant casualties that might take some of the shine off. But I doubt even that would be enough. Knowing how nations fight and how weak states deal with strong ones I suspect there is another shoe to drop. When pro-Ukrainian guerrillas start exploding bombs in Moscow the Russian people’s tolerance for what had previously been low-cost adventurism will be strained. The loss of relative domestic security could be too high a cost to pay. If this comes on top of economic hardship it may be the one-two punch that shifts Putin’s focus from international adventurism to domestic stability and staying in power.

    Putin will reflexively want to double down and eliminate Ukrainian resistance by occupying the country but this would most likely be a mistake. It would remove any doubt as to who the aggressor is and it would bring Russian troops into intimate contact with Ukrainian loyalists. Occupying armies are always vulnerable to guerrilla actions.

  • iangould

    Currently – and after a concerted offensive – the “rebels” control less than half the territory they claim.

    The Ukrainians are either fighting them to a standstill or making a slow, fighting withdrawal that’s costing both sides dearly.

    At this point, it should be obvious to Putin’s advisorts, if not to Putin himself that militarily occupying all of the Luhansk and Donestsk Oblasts, much less seizing a land bridge to Crimea, much less taking the whole Ukraine would be hugely, insanely expensive. That’s especially true because, since the September “ceasefire”, Ukraine has largely refrained from the use of airpower. Before that, the Ukrainians had retaken about half the territory of the two Oblasts and were threatening both major cities, Donetsk and Luhansk, resulting in a renewed Russian offensive.

    Unless he’s prepared to risk everything, Putin needs a facesaving deal.

  • caseloweraz

    Johnny Vector: The basic proposition is that the Saudis see the end game of fossil fuels, as various countries finally begin to do something about it. The result being a strategy of “pump it out now”, because every barrel you sell, even with low prices, is better than a barrel you leave in the ground, and someone’s going to be leaving a lot in the ground.

    I think that this premise could just as well dictate the opposite strategy: Hold on to as much oil as you can while others pump their fields dry. At the end of the day you’ll be sitting on a very valuable commodity.

  • Dunc

    The recent drop in prices is mostly on the demand side, which Saudi Arabia has almost nothing to do with.

    True, but what they’re not doing this time is maintaining prices by throttling their output in response to that reduction in demand, which they have done in the past.

    Who else is being hurt by low oil prices, besides Russia? Iran, Venezuala.

    Also many high-cost (e.g. shale or tar sand) US and Canadian operations, British and Norwegian North Sea operations… Basically everybody with high production costs – which is most people these days.

    Everybody’s got a theory about what the Saudis are up to. Most of them are plausible, and it’s entirely possible that more than one of them is correct. But I wouldn’t like to put a lot of money on which…

  • abb3w

    @12, Pierce R. Butler

    Thanks for a look at an intriguing project – but playing the commodities futures market, without any way to lay hands on the materials being transacted, strikes me as Yet Another Shell Game (one thing, at least, our economy does very well at manufacturing).

    I’ll also note they’ve been around since at least 2008 or so, which is I think when I heard about them on NPR, based on this passing mention here. This doesn’t appear to be any more of a fly-by-night nor shell game than a stock broker… which may be praising with faint damnation.