Saudis using oil to constrain Tehran?

The front page of today’s WSJ Europe had an interesting article entitled, “Can Russia, Iran endure oil pinch” highlighting the difficulties that the governments in Russia, Iran, and Venezuala are facing with oil down from a high of around USD 77 in August. More interesting, today’s International Herald Tribune contains an article entitled, “Saudi Arabia’s cryptic signals,” (from yesterday's NY Times) with a key passage:

Oil traders have been buzzing in recent weeks about whether Saudi Arabia was actively seeking to depress oil markets in the hope of crippling the Iranian economy, as a Saudi analyst — albeit not one from the government — suggested in an opinion article in The Washington Post last year. The Saudis quickly dismissed the suggestion, but given the tensions in the Middle East, oil and politics remain closely linked.

Though not reported in the NY Times article, the analyst in question, Nawaf Obaid, was the director of the Saudi National Security Assessment Project in Riyadh, an adjunct fellow at the Center for Strategic and International Studies in Washington, and a consultant to the Saudi Embassy in Washington. After publishing the article in question, Prince Turki, the Saudi ambassador, terminated the embassy contract with Obaid, ostensibly to distance himself from the policy outlined in the article.

The buzz is that the former Saudi Ambassador and long-time friend of the Bush family, Prince Bandar, is advocating the policy outlined by Obaid in the Washington Post article: namely that the Saudis will fund the Iraqi sunnis in the event of a premature US withdrawal from Iraq -- and also that the Saudis will increase the supply of oil on the market in order to push the price low enough to hurt the Iranians and to limit their ability to fund the Shiite insurgency in Iraq and Hezbollah in Lebanon. It's understood that Prince Turki advocates another policy – one involving a regional dialogue to include the Iranians -- and that his resignation was in protest to Bandar’s continuing contacts with the US Administration. (Bandar and Turki are both said to be maneuvering to replace Turki’s ailing brother, Prince Saud al-Faisal, as Saudi Foreign Minister.)

Besides Saudi efforts to pressure Iran, there are of course numerous other reasons offered for the decrease in the oil price since August of last year, including:

• A milder-than-expected hurricane season in the Atlantic;
• Milder-than-expected December temperatures in the northeastern US and in Europe; and
• Oil exporter concerns over the investment in alternative energy.

Also mentioned have been global slowdowns in the US and in China, but recent data suggest growth has actually been more robust than had been expected in both economies.

My longer-term expectation had been that oil prices would decline from their highs, as oil producing nations try to head off the large investment that could help develop alternative energy sectors. My understanding was that this hadn’t taken place yet because years of underinvestment had left the Saudis and others with little ability to dramatically increase production. In that light, my near-term expectation was that oil prices would increase as global growth continues apace.

But recent articles about the Saudis moving to increase production so as to lower the oil price and cripple Iran have given me cause to reconsider. If the Saudis have been able to increase production – and have an ability to increase production still further – their interest in restraining Tehran and in slowing the growth of alternative energy sources are two good reasons for them to attempt to engineer still further price declines.

So – a few key questions to research:

• Have the Saudis increased production by a meaningful amount in recent months?
• Do they have the ability to increase production significantly going forward?
• Which Saudi faction will win the debate about Middle East policy, particularly as it pertains to the use of oil prices as a lever vis-à-vis Iran?
  

The answers to these questions may be as important to discerning trends in oil prices these days as any analysis of the demand side.