Saudi Arabia’s economy has been on shaky ground in recent years due to continuous drops in oil prices. But new U.S. airstrikes in Syria have sent oil prices climbing, which will prove to be a boon for the U.S.’ Saudi ally both economically and geopolitically.
MINNEAPOLIS– While the geopolitical implications of Trump’s recent airstrikes against the Syrian government have dominated both mainstream and alternative news outlets, what has been largely overlooked thus far is their economic impact. Soon after the strikes took place, crude oil prices jumped, reaching a one-month high on Friday by surpassing 55 dollars per barrel.
Though analysts were divided over whether the geopolitical uncertainty in Syria would impact oil markets or was merely speculative, the strike came at a very interesting time for oil markets, one that has pitted United States allies, most notably Saudi Arabia, against its arch-rival Russia.
The oil market has been in unusual territory since 2014, when oil prices began to plummet dramatically, moving from over 115 dollars per barrel in June 2014 to 58 dollars per barrel less than a year later. Though many speculated over the possible causes behind the move, the Wall Street Journal reported that the price drop was the direct result of a meeting between former Secretary of State John Kerry and Saudi King Abdullah.
Allegedly, the Saudi king agreed to help artificially decrease oil prices in exchange for increased U.S. support for regime-change efforts in Syria. The price drop itself was also intended to change the situation in Syria, largely by targeting Assad’s oil-producing allies in Iran and Russia and cause them to lose their economic footing.
In order to keep oil prices from plunging, production cuts have sporadically been agreed upon to keep prices from dropping to record lows. Though initially content to brave low oil prices for geopolitical gain, Saudi Arabia has started to realize it may have gotten the short end of the deal.
Since the beginning of April, the tightening of the global oil market has made itself known, as recent production cuts that were established this past December between the Organization of Oil Exporting Countries (OPEC) and non-OPEC countries have largely ensured that oil supplies will be constrained despite increasing demand – a phenomenon intended to drive oil prices higher and prevent them from plunging to catastrophic lows, as they did in 2015.
However, not all of OPEC’s countries are obeying the production cuts, notably Iraq – the oil bloc’s second-largest oil exporter – which recently announced plans to significantly increase its oil output. Iran also began to drastically increase production early last month, threatening the production cut’s ability to keep oil prices from plunging.
This uncertainty has likely caused great concern in Saudi Arabia, OPEC’s largest and most powerful exporter. The production cuts that the Saudis continue to follow have only exacerbated the major economic fallout that low oil prices have caused. Most notable has been the drastic decrease in the Saudi government’s revenues. Saudi Arabia has lost 30 percent of its foreign reserves since 2014, as they have been forced to compensate for the budget deficit caused by declining oil revenue. Needless to say, low oil prices are not attractive for the Saudis.
Saudis reluctant to continue production cuts
Evidence is also mounting that the Saudis are no longer content to continue bearing the brunt of the production cuts they helped create. This has been particularly true in European oil markets, where the Saudis are seeking to challenge Russia’s long-held dominance. Recently, the Saudis announced their plans to re-price their oil for European buyers, making their exported oil more attractive.
This has led Russian oil giant Rosneft to accuse the Saudi state-run oil company Saudi Aramco of “dumping oil” in Europe. As oil analyst Dr. Cyril Widdershoven noted, this move by the Saudis to threaten Russia’s stake in the European oil market could be “the main threat to a successful extension of the OPEC production cuts in the coming months.”
While the Saudis could, in theory, continue to tolerate low oil prices and production cuts, they can’t do so forever. The way things stand currently, Saudi Arabia is set to run out of reserves and go bankrupt in less than seven years if prices and production continue to stay low. That doesn’t mean that the Saudis are interested in taking themselves to the brink either, especially considering that the U.S.-Saudi collusion to lower oil prices was done mainly to challenge U.S. political rivals, with the weakening of the Saudi’s oil-exporting competitors a bonus to that effect. Yet, with weaker oil-exporting nations like Venezuela and Ecuador near collapse, the Saudis stand to gain little from continuing the current arrangement.
If the Saudis are no longer content with the current arrangement, it is almost certain that the U.S. government is well aware. The U.S. government has a major interest in keeping the Saudis happy, largely due to the petrodollar system. In this system, the Saudis’ commitment to trading their oil exclusively in dollars creates artificial demand, which keeps the dollar afloat despite decades of disastrous Federal Reserve policy.
Essentially, Saudi Arabia has the ability to crash the dollar if provoked. The U.S. government’s desire to appease the Saudis was made clear at a recent meeting between President Trump and Saudi Deputy Crown Prince Mohammed bin Salman. In their meeting, Trump announced a 200-billion-dollar investment in the Saudi economy that is intended to help it diversify.
Though it remains to be seen if the jump in oil prices will stick, the recent airstrikes in Syria have been a big win for the Saudis. The strikes not only help to advance their geopolitical goal of seeing Assad ousted and replaced with a Saudi-approved regime, but are also mitigating the suffering of its oil-dependent economy.
The promise of increased conflict in the region, specifically due to the greater likelihood of continued U.S. intervention in Syria, is likely to keep oil prices climbing.