The International Monetary Fund recently published figures suggesting that whereas the ‘break-even’ oil price was higher for the Saudis than for Iran, the fiscal buffer the Saudis have is smaller. If true, these figures portend an acceleration of the power shift already underway in the Middle East.
The break-even price is the cost of producing a barrel of oil. If for instance, it costs US$105 (including infrastructure maintenance, salaries, logistics, etc) for a particular country or company to produce a barrel of oil, it won’t make a profit unless the price of oil is above $105 per barrel.
$105 is, according to the IMF, the break-even price for Saudi Arabia. Oil is currently priced at about $50 per barrel. The Saudis have been purposefully keeping the price down (by keeping supply up) for years, as a way to weaken Iran, which has a break-even price – according to the IMF – of about $80 per barrel. *
(Some argue that the Saudis are keeping prices low to squeeze US shale oil producers into bankruptcy and thereby regain market supremacy. While this might be a factor, I believe Iran was the principal target. I also believe the US was in favour of the low prices – it has forced technological innovations to create efficiencies, has helped its still-struggling economy and has also wounded another of the US’s global competitors, Russia, whose economy, unlike the US, but like Iran, also relies on a high oil price.)
Bleeding money to hurt competitors is fine if you’ve got lots of it (and the Saudis do). But the Saudis have had increased expenses in recent years – they have increased social spending to ward off Arab Spring-like protests, are keeping Egypt afloat, conducting an aerial war in Yemen and sponsoring militias in Syria, as well as losing $50 for each of the millions of barrels they produce.
Much of this increased expenditure is to prevent or slow the increasing influence of both the Resistance Bloc (led by Iran) or the Sunni Islamist Bloc.
According to the IMF, the Saudis only have enough cash reserves to keep up current spending rates for five years (assuming the price of oil remains the same). This means the Saudis will have to decrease its spending or allow an increase in the price of oil (likely both).
The Saudis might be more willing to absorb continued financial pain if they were confident that Iran was not on the ascendancy, or, to put it differently, if the Saudis’ financial pain was an important part of a global effort to thwart the Iranians. However, the Saudis perceive that their previous partner in this endeavour – the United States – has all but left the field. And the Saudis know they can’t stop Iran by themselves. If and when Saudi Arabia comes to see that Iran’s ascendancy is inevitable, then it will likely change its policy so as to put and keep more money in the bank – money it will need to limit malfeasant Iranian activities.
The ironic ramifications are clear – Iran (and Russia) get more money for the oil and gas they produce, and with more money comes a greater ability to pursue their interests. This is an unfortunate outcome for everyone, including America. And since the Saudis have traditionally pursued their own interests by spending money (as opposed to putting troops on the ground), it would indicate that the Saudis will be less able to prosecute their interests.
Rising oil prices as a result of an easing of Saudi production, or a lessening of Saudi largesse in the region, will be a clear sign that the Saudis have concluded that Iran’s rise is inevitable.
This post was inspired by this article.
* I might add, the analysis above is entirely dependent on whether the IMF has got its figures correct. Different analysis, sourced from Deutsche Bank, suggests Iran’s break-even price is $130 per barrel – higher than the Saudis’. This would enable the Saudis to increase the price of oil to around $110 and still hurt Iran.