- - Monday, December 15, 2014

ANALYSIS/OPINION:

ANALYSIS/OPINION

Conventional wisdom in Western capitals holds that Saudi Arabia has held firm in sessions with its OPEC partners against lowering production — which would restore higher prices — in order to maintain its market share in countries belonging to the Organization for Economic Co-operation and Development and to dissuade investors from pouring more money into growing North American shale and tar sands production.

Those same circles conclude, however, that the strategy will fail as the sharp decline in Saudi oil revenue — which amounts to $225 million a day, or $75 billion annually — will lead to deficit spending and Saudi domestic unrest that will prove intolerable to the royal family and force it to yield to OPEC colleagues’ pressure for lower production throughout the cartel.

There is logic to this argument. Proponents, including the International Monetary Fund, point to the sharp run-up in Saudi domestic spending since the onset of the Arab Spring — notably in higher salaries, increased subsidies for consumer staples such as gasoline and ambitious spending on infrastructure. The Saudi government also has had to fund huge unplanned loans and grants to threatened governments such as Egypt. According to the IMF, when those measures are taken into account in the context of Saudi foreign exchange reserves of “only” $750 billion, the government could exhaust more than half those reserves in five years. While that may sound alarming in banking circles, fiscal concerns pale when compared with more compelling challenges facing Saudi Arabia and its Arab colleagues in OPEC.

Put yourself in the place of Saudi King Abdullah and consider his other priorities. Saudi grand strategy, like that of all sovereign states, begins with survival, identifying threats to be overcome, and devising a strategy to do so. The royal House of Saud is being challenged from several quarters — notably, by the Islamic State, al Qaeda and affiliates in the Arabian Peninsula, which have branded the royal family as illegitimate apostates and an early target to be overthrown. Saudi Arabia does not have sufficient trained forces, an understanding of how to wage counterterrorism warfare, or the military leadership to tackle a challenge of this magnitude. The kingdom has relied on the United States for defense against strategic threats under a pact between President Franklin Roosevelt and Saudi King Abdul Aziz al Saud in 1945. Saudi confidence in that relationship has been shaken severely as President Obama has pursued a policy of engagement with Iran, King Abdullah’s Shiite rival and competitor for leadership in the Muslim world. Yet only the United States is capable of organizing a coalition force capable of overcoming the threat posed by radical Islamic forces in the Middle East. That reality must loom large indeed at meetings of the Saudi national security council. American leadership and power offer their only hope. Mr. Obama and the American people welcome low oil prices. Keeping them low constitutes an essential, if not sufficient, basis for securing sustained and substantial American involvement in countering the jihadi threat.



A separate but related matter that bears on how Saudi Arabia views the price of oil is its effect in helping or hurting Iran. Iran has achieved considerable success in advancing its 35-year-long theocratic crusade not only to expel Western presence from the Middle East but also in outflanking Sunni dominance of the region. It has established a prevailing influence in Iraq and Syria and can rely on potent surrogate terrorist forces in Hezbollah and Hamas. Further, it is in a position to stimulate turmoil in the Shiite-majority Eastern Province of Saudi Arabia where most of Saudi oil production is centered. In short, Iran poses an existential threat to Saudi Arabia — even without nuclear weapons. Iran’s strength is undermined, however, by its economic weakness. Today, its ability to sell its oil is severely circumscribed by U.S., European Union and United Nations sanctions related to Iran’s nuclear weapons program. In order to have any hope of breaking even, Iran needs to sell oil at $140 per barrel. This point is surely not lost on Saudi Arabia. Keeping the price of oil at $70 per barrel will have a devastating effect on the Iranian economy and, before long, will lead to unrest and violent protest.

These two threats — well-armed, well-trained and determined jihadi forces bent on expanding their control over ever-larger portions of the Middle East and their intentions to bring down the Saudi monarchy, plus Iran’s venomous hatred of the Saudi royal family — will continue to have a disproportionate influence over Saudi decision-making. Any hope of countering both of them is enhanced by cheap oil. Given the stakes, Saudi Arabia will insist on — and tolerate — low prices for as long as it takes to relieve the threats on its horizon.

Robert McFarlane served as President Reagan’s national security adviser and is a co-founder of the U.S. Energy Security Council.

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