By Ben Hubbard and Clifford Kraus, The New York Times, October 15, 2014
BEIRUT, Lebanon — With global oil prices plunging at a pace not seen since the 2008 financial crisis, Saudi Arabia is emerging as a central player, accused by some of deliberately depressing the market to weaken rivals like Iran but looked to by others as the only hope of ending the rout. Still others say that the oil colossus is merely struggling to deal with its diminished position in an industry it once dominated.
For their part, Saudi officials have signaled that they are prepared to endure reduced profits rather than slash production in an effort to prop up prices, as they did to their later regret in the early 1980s.
Yet the Saudi acceptance of lower prices has even touched off a controversy inside the kingdom. This week, the billionaire investor Prince Alwaleed bin Talal released an open letter to the Saudi oil minister, Ali al-Naimi, criticizing him for saying that lower oil prices were no cause for alarm.
In the letter, Prince Alwaleed called the price drop a “catastrophe that cannot go unmentioned” and suggested it could harm the kingdom’s budget.
Some analysts say Saudi Arabia runs few risks in letting oil prices remain low because the government has large financial reserves and low debt that could help it ride out budget deficits. But there are dissenters, like Badr H. Jafar, a senior oil executive from the United Arab Emirates, who thinks Saudi Arabia will need higher oil prices eventually to support high levels of social spending.
He says the immediate strategy of the Saudis is to discourage high-cost producers in the United States and Canada and to “serve as an inherent warning to other producers in advance of an OPEC meeting next month that they will all need to make production cuts together if they are to curb this bearish trend.”
Others say the kingdom is facing lower prices no matter what it does because it cannot control the causes of the price dive, which include the drilling frenzy in North America and falling demand in Europe, Japan and much of the developing world. So it makes sense for the Saudis to defend their share of the global market, oil experts say.
“This is a war of economic necessity,” said Philip K. Verleger, president of PKVerleger, an energy consulting company.
That necessity primarily is a product of a 70 percent increase in United States oil production since 2008, which has cut imports from OPEC producers in half. Suddenly, Saudi and Nigerian crude that once flowed freely into the United States is competing for market share on Asian markets, where buyers are demanding lower prices. To make matters worse, the United States could be poised to become a major exporter over the next decade and cut further into Saudi markets.
Gary N. Ross, the chief executive of PIRA Energy Group, a New York-based consulting company, said that Saudi Arabia appeared to be applying lessons learned in the early 1980s, when it responded to a similar glut in the market by cutting production to keep the price up. That cost it valuable market share it later struggled to win back, he said.
This time, he said, Saudi Arabia is doing the opposite: accepting lower prices to keep its share of the market. And if that policy also happens to harm the kingdom’s rivals, so much the better.
“It is convenient that this is happening at a time when Iran is getting stronger and when Russia, a huge oil exporter, has been a thorn in the side by supporting Assad,” Mr. Ross said, referring to President Bashar al-Assad of Syria. “But I don’t think you need a political motivation here.”
The drop in the world oil price could cut into Saudi Arabia’s growing effort to use its economic might and religious credentials as the home of Islam’s holiest sites to expand its influence across the Middle East.
It has recently supported campaigns against political Islamists in Egypt and elsewhere, bankrolled rebels seeking to topple Mr. Assad and sent tanks to help quell a political uprising in Bahrain lead by that kingdom’s Shiite majority against its Sunni rulers.
Saudi Arabia has also joined the American-led military coalition to fight the Islamic State, the jihadist group that has seized territory in Iraq and Syria.
Underpinning many of Saudi Arabia’s struggles is its rivalry with the Shiite powerhouse Iran for influence across the Arab and Muslim worlds.
Lower oil prices would increase the economic strain on Iran, which is already struggling under international sanctions aimed at persuading it to give up its nuclear program. They are also likely to hurt Russia, which has proved to be among Mr. Assad’s most powerful foreign allies and his greatest defender in the United Nations, and which is also feeling the pain of economic sanctions over its Ukraine policies.
Such considerations cannot be far from the minds of Saudi decision makers, said Jean-François Seznec, a political economist at Georgetown University.
“It is really Iran who is getting hurt, and I am wondering to what extent the Saudis are not pursing the lower price to bring Iran to the bargaining table,” Mr. Seznec said.
Others, however, said that although lower prices may serve Saudi Arabia’s political ends, they were not driving its oil policy.
“I don’t think that Saudi Arabia is in the business of trying to manage global politics through oil policy,” said Sadad Ibrahim al-Husseini, the former executive vice president of Saudi Aramco. “That is a fiction.”