Saudi Arabia's Oil Pricing Power Makes It The Country To Watch In 2015

2014 was the year of the great oil crash. The price of a barrel of crude, which was higher than $90 in January, fell under $55 in December, a five-year low. While the crashing oil prices severely hurt many oil-producing nations, consumers in the U.S. benefited from gas prices that had not been this low since May 2009. The futures of both producers and consumers now depend largely on the actions of one country: Saudi Arabia. The second-biggest oil producer in the world after the U.S., it will likely use its position in the global oil market to make political gains in 2015, especially in the Middle East.

The Saudi kingdom may not have enjoyed this much power since the oil crises of the 1970s, when the nations of the industrialized world found the Organization of the Petroleum Exporting Countries, dominated by the Saudis, had the power to bring their economies to a halt.

Oil makes up the largest piece of the total world energy consumption pie at 34 percent, followed by coal and gas. And Saudi Arabia controls the global oil market because it not only pumps a lot of crude every day but also has the financial ability to absorb the shock of lower oil prices -- in stark contrast to its chief regional adversary, Iran. And so, the leading oil producer in OPEC, which accounts for about 73 percent of the world’s proven oil reserves, is once again a hugely relevant global player.

Saudi Arabia’s refusal to cut OPEC production in the face of an oil-supply glut this year hit hard Venezuela, Russia and Iran, but the Saudis had the means to take low prices. And they have a clear political reason to keep them low.

“As long as [Saudi Arabia] decides not to cut production, the price will stay pretty low,” said Thomas Lippman, an expert on Saudi Arabian affairs at the Council on Foreign Relations. “They have deep pockets, and they can handle it for a while. If it inflicts damage on Iran and Russia … then that is OK for them.”

The Saudis are doing this to punish Russia and Iran for supporting Bashar Assad’s presidential regime in the Syrian Civil War, said Alex Vatanka, an expert at the Middle East Institute in Washington. Like its ally the U.S., Saudi Arabia has invested substantial amounts of financial and political capital to train and equip the moderate rebels who are fighting against Assad.

That level of involvement may come as a surprise to observers used to seeing the kingdom punch in the international arena far below its economic weight. But today’s Saudi Arabia is changing.

“Saudis are supreme realists; they are immune to the call of great, risky endeavors. They guard their home turf, but, for the most part, steer clear of the quarrels of others,” the late Fouad Ajami, a professor of Middle East affairs at Stanford University, wrote this year. “They have wealth, and they rightly suspect that foreign entanglements will be a drain on them. But a new activism came to the Saudi realm of late. There were contests over Iraq, Syria, and Lebanon they could not ignore.”

Saudi Arabia has the money to sustain any newfound activism -- almost $1 trillion of it. Saudi Arabia can withstand low oil prices for years to come because it has enough financial reserves to cushion the effect of lost revenue, in the area of $780 billion, said Mohamed Aly Ramady, a professor of economics at King Fahd University of Petroleum and Minerals in Saudi Arabia.

“If Saudi wants to see this through for the next few years, it will,” Ramady said, adding that the country will cut nonessential spending to balance its budget.

One area it’s not cutting is military spending. Saudi Arabia has the fourth-largest defense budget in the world, as reported by the Stockholm International Peace Research Institute. It stood at $67 billion in 2013 -- a staggering 118 percent increase over its level 10 years earlier. As a percentage of its gross domestic product, the country spends more than any of the 15 biggest defense spenders in the world: It dedicated 9.3 percent of GDP to buying weapons in 2013. The result is that Saudi Arabia is better armed than anybody else in the Middle East, with a bigger army than France or Great Britain and an air force that flies hundreds of sophisticated American- and European-made planes.

And, for the first time since the 1991 Gulf War, Riyadh is using those planes to flex its muscle in the region. This year, Saudi F-15S Eagle fighter-bombers took part in strikes in Syria against the Islamic State group as part of the U.S.-led coalition, as CBS News reported. It was the first time the Saudi military fired in anger in 23 years, and it demonstrated its ability to hit far away from home.

For the kingdom, the bombings also represented the moment when its involvement in the wars in Syria and Iraq came out of the shadows. Riyadh has quietly supported the rebels in Syria by sending money for weapons and providing the funds for humanitarian aid in refugee camps, and it has provided support for the U.S.-led coalition fight against the Islamic State group. But now it’s openly using its military and oil-producing might.

The regional target of the Saudis isn’t really Iraq or Syria, though. It’s Iran, said the Middle East Institute’s Vatanka.

“Saudi Arabia is nervous about what it perceives to be Iran’s return to the global community and more specifically about the trajectory of U.S.-Iran relations,” Vatanka said. “The U.S. interventions in the Middle East ... all of them from the Saudi perspective have aided making Iran a bigger power than before 2001.”

The two neighbors have been sharply divided since the Islamist revolution in 1979 handed the government of Iran to a hardcore Shiite theocracy, directly opposed to Sunni Saudi Arabia. But the fear of a warming between Washington and Tehran is irrational, according to the Council on Foreign Relations’ Lippman.

“They really don’t think straight about Iran. They assume that any lessening of tensions between the U.S. and Iran is at their expense. It’s a zero-sum game to them,” Lippman said.

Iran isn’t alone in suffering the consueqences of Saudi oil-based maneuvers. Russia, which rounds out the list of the top three biggest oil producers after the U.S. and Saudi Arabia itself, was already suffering from American and European Union sanctions, as was No. 6 oil producer Iran. But other OPEC members will suffer, too. The Gulf countries within the organization -- including Kuwait, Qatar and the United Arab Emirates -- have enough currency reserves to cushion the blow.

However, others, such as Venezuela, Libya and Nigeria, as well as Saudi Arabia’s northern neighbor Iraq, may soon be in serious fiscal trouble.

Venezuela may be the hardest hit by Saudi insistence on keeping the oil flowing as prices fall: Its welfare state could soon become unsustainable. “If you have been subsidizing people … then you have a problem,” said Jenik Radon, an oil expert and professor at Columbia University. The Venezuelan government is spending more than $12 billion a year to subsidize domestic gasoline sales, energy officials have said, according to the Guardian. Riots may break out if the government cuts the subsidies, letting gasoline prices rise.

But Saudi Arabia won’t cut its production, according to King Fahd University’s Ramady, and not only for geopolitical reasons. Its domestic demand for oil is increasing, he said, and the country’s petrochemical industry is reliant on it to stay afloat. That vast flow of crude from the Saudi oil fields, and its consequences all over the world, are the reason that Saudi Arabia is one country to watch in 2015.