Did The Saudis And The US Collude In Dropping Oil Prices?

Did The Saudis And The US Collude In Dropping Oil Prices?


By Andrew Topf | Tue, 23 December 2014 23:40 | 36

The oil price drop that has dominated the headlines in recent weeks has been framed almost exclusively in terms of oil market economics, with most media outlets blaming Saudi Arabia, through its OPEC Trojan horse, for driving down the price, thus causing serious damage to the world's major oil exporters – most notably Russia.

While the market explanation is partially true, it is simplistic, and fails to address key geopolitical pressure points in the Middle East.

Oilprice.com looked beyond the headlines for the reason behind the oil price drop, and found that the explanation, while difficult to prove, may revolve around control of oil and gas in the Middle East and the weakening of Russia, Iran and Syria by flooding the market with cheap oil.

The oil weapon

We don't have to look too far back in history to see Saudi Arabia, the world's largest oil exporter and producer, using the oil price to achieve its foreign policy objectives. In 1973, Egyptian President Anwar Sadat convinced Saudi King Faisal to cut production and raise prices, then to go as far as embargoing oil exports, all with the goal of punishing the United States for supporting Israel against the Arab states. It worked. The “oil price shock” quadrupled prices.

It happened again in 1986, when Saudi Arabia-led OPEC allowed prices to drop precipitously, and then in 1990, when the Saudis sent prices plummeting as a way of taking out Russia, which was seen as a threat to their oil supremacy. In 1998, they succeeded. When the oil price was halved from $25 to $12, Russia defaulted on its debt.

The Saudis and other OPEC members have, of course, used the oil price for the obverse effect, that is, suppressing production to keep prices artificially high and member states swimming in “petrodollars”. In 2008, oil peaked at $147 a barrel.

Related: OPEC Ministers Decry Price War Conspiracy Theories

Turning to the current price drop, the Saudis and OPEC have a vested interest in taking out higher-cost competitors, such as US shale oil producers, who will certainly be hurt by the lower price. Even before the price drop, the Saudis were selling their oil to China at a discount. OPEC's refusal on Nov. 27 to cut production seemed like the baldest evidence yet that the oil price drop was really an oil price war between Saudi Arabia and the US.

However, analysis shows the reasoning is complex, and may go beyond simply taking down the price to gain back lost marketshare.

“What is the reason for the United States and some U.S. allies wanting to drive down the price of oil?” Venezuelan President Nicolas Maduro asked rhetorically in October. “To harm Russia.”

Many believe the oil price plunge is the result of deliberate and well-planned collusion on the part of the United States and Saudi Arabia to punish Russia and Iran for supporting the murderous Assad regime in Syria.

Punishing Assad and friends

Proponents of this theory point to a Sept. 11 meeting between US Secretary of State John Kerry and Saudi King Abdullah at his palace on the Red Sea. According to an article in the Wall Street Journal, it was during that meeting that a deal was hammered out between Kerry and Abdullah. In it, the Saudis would support Syrian airstrikes against Islamic State (ISIS), in exchange for Washington backing the Saudis in toppling Assad.

If in fact a deal was struck, it would make sense, considering the long-simmering rivalry between Saudi Arabia and its chief rival in the region: Iran. By opposing Syria, Abdullah grabs the opportunity to strike a blow against Iran, which he sees as a powerful regional rival due to its nuclear ambitions, its support for militant groups Hamas and Hezbollah, and its alliance with Syria, which it provides with weapons and funding. The two nations are also divided by religion, with the majority of Saudis following the Sunni version of Islam, and most Iranians considering themselves Shi’ites.

“The conflict is now a full-blown proxy war between Iran and Saudi Arabia, which is playing out across the region,” Reuters reported on Dec. 15. “Both sides increasingly see their rivalry as a winner-take-all conflict: if the Shi’ite Hezbollah gains an upper hand in Lebanon, then the Sunnis of Lebanon—and by extension, their Saudi patrons—lose a round to Iran. If a Shi’ite-led government solidifies its control of Iraq, then Iran will have won another round.”

The Saudis know the Iranians are vulnerable on the oil price. Experts say the country needs $140 a barrel oil to balance its budget; at sub-$60 prices, the Saudis succeed in pressuring Iran's supreme leader, Ayatollah Ali Khamanei, possibly containing its nuclear ambitions and making the country more pliable to the West, which has the power to reduce or lift sanctions if Iran cooperates.

Adding credence to this theory, Iranian President Hassan Rouhani told a Cabinet meeting earlier this month that the fall in oil prices was “politically motivated” and a “conspiracy against the interests of the region, the Muslim people and the Muslim world.”

Pipeline conspiracy

Some commentators have offered a more conspiratorial theory for the Saudis wanting to get rid of Assad. They point to a 2011 agreement between Syria, Iran and Iraq that would see a pipeline running from the Iranian Port Assalouyeh to Damascus via Iraq. The $10-billion project would take three years to complete and would be fed gas from the South Pars gas field, which Iran shares with Qatar. Iranian officials have said they plan to extend the pipeline to the Mediterranean to supply gas to Europe – in competition with Qatar, the world's largest LNG exporter.

“The Iran-Iraq-Syria pipeline – if it’s ever built – would solidify a predominantly Shi’ite axis through an economic, steel umbilical cord,” wrote Asia Times correspondent Pepe Escobar.

Global Research, a Canada-based think tank, goes further to suggest that Assad's refusal in 2009 to allow Qatar to construct a gas pipeline from its North Field through Syria and on to Turkey and the EU, combined with the 2011 pipeline deal, “ignited the full-scale Saudi and Qatari assault on Assad’s power.”

“Today the US-backed wars in Ukraine and in Syria are but two fronts in the same strategic war to cripple Russia and China and to rupture any Eurasian counter-pole to a US-controlled New World Order. In each, control of energy pipelines, this time primarily of natural gas pipelines—from Russia to the EU via Ukraine and from Iran and Syria to the EU via Syria—is the strategic goal,” Global Research wrote in an Oct. 26 post.

Poking the Russian bear

How does Russia play into the oil price drop? As a key ally of Syria, supplying Assad with billions in weaponry, President Vladimir Putin has, along with Iran, found himself targeted by the House of Saud. Putin's territorial ambitions in the Ukraine have also put him at odds with US President Barack Obama and leaders of the EU, which in May of this year imposed a set of sanctions on Russia.

As has been noted, Saudi Arabia's manipulation of the oil price has twice targeted Russia. This time, the effects of a low price have hit Moscow especially hard due to sanctions already in place combined with the low ruble. Last week, in an effort to defend its currency, the Bank of Russia raised interest rates to 17 percent. The measure failed, with the ruble dropping another 20 percent, leading to speculation the country could impose capital controls. Meanwhile, Putin took the opportunity in his annual televised address to announce that while the economy is likely to suffer for the next two years and that Russians should brace for a recession, “Our economy will get diversified and oil prices will go back up.”

He may be right, but what will the effect be on Russia of a sustained period of low oil prices? Eric Reguly, writing in The Globe and Mail last Saturday, points out that with foreign exchange reserves at around $400 billion, the Russian state is “in no danger of collapse” even in the event of a deep recession. Reguly predicts the greater threat is to the Russian private sector, which has a debt overhang of some $700 billion.

“This month alone, $30-billion of that amount must be repaid, with another $100-billion coming due next year. The problem is made worse by the economic sanctions, which have made it all but impossible for Russian companies to finance themselves in Western markets,” he writes.

Will it work?

Whether one is a conspiracy theorist or a market theorist, in explaining the oil price drop, it really matters little, for the effect is surely more important than the cause. Putin has already shown himself to be a master player in the chess game of energy politics, so the suggestion that sub-$60 oil will crush the Russian leader has to be met with a healthy degree of skepticism.

Related: OPEC Calls For Widespread Production Cuts

Moscow's decision on Dec. 1 to drop the $45-billion South Stream natural gas pipeline project in favor of a new pipeline deal with Turkey shows Putin's willingness to circumvent European partners to continue deliveries of natural gas to European countries that depend heavily on Russia for its energy requirements. The deal also puts Turkey squarely in the Russian energy camp at a time when Russia has been alienated by the West.

Of course, the Russian dalliance with China is a key part of Putin's great Eastern pivot that will keep stoking demand for Russian gas even as the Saudis and OPEC, perhaps with US collusion, keep pumping to hold down the price. The November agreement, that would see Gazprom supply Chinese state oil company CNPC with 30 billion cubic meters of gas per year, builds on an earlier deal to sell China 38 bcm annually in an agreement valued at $400 billion.

As Oilprice.com commented on Sunday, “ongoing projects are soldiering on and Russian oil output is projected to remain unchanged into 2015.”

“Russia will go down with the ship before ceding market share – especially in Asia, where Putin reaffirmed the pivot is real. Saudi Arabia and North America will have to keep pumping as Putin plans to uphold his end in this game of brinksmanship.”

By Andrew Topf of Oilprice.com

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Leave a comment

  • Robert on December 24 2014 said:
    Did The Saudis And The US Collude In Dropping Oil Prices? NO.
  • Jake Ashworth on December 24 2014 said:
    If the U.S and Saudi Arabia are manipulating the price of oil down, good on them. The actions of Russia and Iran in Ukraine and Syria have caused thousands of lives to be lost and they should pay the price. What I find more compelling is that if the price can be lower it can also be maniplulated higher, and the consumer through no fault of their own is enriching places like Iran (so they can fund their nuclear program) and Russia (so they can meddle in the affairs of a foreign sovereign nation)....and that's what the real tragedy is.
  • Bob on December 24 2014 said:
    "Blame" or credit? This is a very good thing .. and gasoline should never be more than a dollar a gallon.
  • Maria on December 24 2014 said:
    Anything that is bad for the likes of Russia, Norway and Iran is good for the rest of the world.
  • Barney on December 24 2014 said:
    That was my first thought when I finally recognized the continued slide. Although I'm not so sure collusion is the right word and would tend to believe the Saudi's have much greater control over the US than anyone really wants to admit.
  • Reality on December 24 2014 said:
    The Fed ended QE. The banksters were channeling the "easing" into oil and other comms. Glass Steagal was long gone, but Bernanake decided to enrich the banks under outdated theory they would "loan" the money. Dems and Repubs. all got their cuts.
  • Ron Gosling on December 24 2014 said:
    Great conspiracy theory article but I don't believe anyone inside the Obama Administration is intelligent or trustworthy enough to concoct a plan of this magnitude and make it work and keep it quiet. Can you imagine John Kerry keeping a secret while Iran is screwing the US?
  • David Vallaire on December 24 2014 said:
    Ukraine is on the Russian border not the U.S. border. The U.S. backed a coup to overthrow a democratically elected government in Ukraine. NAto is being used as a mercenary force to impose the economic will of the U.S.
    and the EU.
    Plan was to take over Ukraine via proxies, kick Russia out of Crimea, use to port to bring in LNG and use the Ukrainian pipelines to sell it to Europe. U.S. companies bought 49% of the U.S. energy transit lines in Ukraine and Joe Biden's son was made the director of a Ukrainian energy company. Does Biden's kid even speak Ukrainian?
    The U.S. is the aggressor in Ukraine.
  • bluesky on December 24 2014 said:
    Saudi Arabia does what Britain tells them to. Of course it's
    a setup. If they would just tell us where oil is made we
    wouldn't have this problem.
  • bob j on December 24 2014 said:
    The oil price drop is payment from the Saudis to the United States for the war in Iraq.
    We sent in our military to stop Hussein in return the Saudis promised us the price drop. Now that the war is over, payment is being made.
    Think big picture.
  • Mark on December 24 2014 said:
    Robert, don't be so sure. While I am no fan of the administration or Kerry whatsoever, I LONG suspected a co-op to force the price down. It only hurts exactly those oil revenue dependent countries on the naughty list. Saudi is dependent but they haven't been stupid with their money. So yea,. It appears there indeed was a plan and it's not to run Fracking out of business.
  • mike_matthews on December 24 2014 said:
    In addition, As a result of the sudden, but temporary, low price of oil, Obama vetoes the XL pipeline with little resistance. US\Canadian shale oil producers go out of business. When its all over, Saudi Arabia and OPEC cut production running the price to $150 plus giving Obama his much desired $5 per gallon gasoline and reviving his dead green energy plans, cap and trade, and increased regulation nation.

    Or not. Just a thought.
  • Ibrahim on December 24 2014 said:
    Unfortunately there are more theories than facts mentioned in this article. First of all, those "experts" calling out numbers about how much an oil producing country needs for break-even or balanced budget have all proven to be wrong. Despite this low prices, US-producers keep on.
    But the point I wonder most is, that there is no single reference to the fact, that since shale-boom, US-oil-imports from Saudi Arabia shrank every year. And this fact is the most likely reason for Saudi Arabia trying to push down prices, so the "inefficient" producers leave the marketplace, as the Saudi Oil Minister says. They want market share BACK. Another fact is OPEC's actions pushed prices lower since Nov. 27, but we should not ignore the fact that prices have already fallen since July '14.

    So what could be the reason for people to believe in such theories while ignoring the obvious facts? The reason must be hope, that prices, once the "bad guys" lose, will rise again. But that would be again ignoring facts like oversupply plus supply rising in a higher rate than demand.
  • Andylit on December 24 2014 said:
    The problem here is two-fold.

    1. The least complex, most logical explanation is almost always correct. The theory above is a grossly complex conspiracy that has the risk of severely imploding in the faces of the players. Further, the goal of the current US administration is HIGHER energy prices, not lower.

    2. The price drop is a direct result of American private sector activities that run contrary to public policy. If the administration could find a way to shut down shale production, it would do so in a heartbeat.

    Beyond these ideas, the simple fact is that the current administration is essentially incapable of formulating or carrying out any foreign policy beyond photo op hand shakes.
  • Dan on December 24 2014 said:
    Unfortunately I think there absolutely is collusion between the Saudis and this administration to make the price of oil plummet. It is a win-win for the Obama administration because it serves several of their goals at once. They do not like the success that fracking has had on private land in the US. They are anti-oil and this will cause many of those in the fracking industry to go belly up due to the debt they have created and cannot repay with oil at $40 a barrel. It also creates a problem with those wanting to build the Keystone XL or deepwater rigs in the gulf......all things they hate. It also punishes Russia and Iran. The advantages to the Saudis are obvious as well. This will destroy energy production not only in the US, but Canada, Venezuela, Russia and Mexico just to name a few. We will be back to the unstable Middle East supplying most of the oil with it's inexpensive production.
    What people do not realize is that most of the private job growth in this country has been in energy. If the oil price stays suppressed we are going to lose many of those companies and the jobs they have created. You make think it is great to have $2 a gallon gas for now, but the rebound effect and going back into recession are going to hurt the seriously impact the country for a long time.
    This is NOT good.
  • geoff on December 25 2014 said:
    And..lets add the latest wrinkle to the conspiracy. Warmer US/Cuba relations. Venezuela can no longer subsidize Raul, nor can Vladimir. So in steps the US, after 50 some yrs, to further poke a finger in Putin's eye. He has been getting a touch arrogant in the world, and needs to be "slapped upside the head" to remind him goodwill has it's limits. I may be way off, but I don't think so.
  • Thomas Murphy on December 25 2014 said:
    Did they collude? DUH!
  • scf on December 25 2014 said:
    Maybe the US and many other countries like to pay less for oil? Maybe people like to pay less for everything, which is how to increase your standard of living.
  • Snigglewhip on December 25 2014 said:
    On the demand side, are Millennials even taking up the car-driving habit? A lot of them are still living with their parents, can't find decent-paying jobs and can't afford a car. On top of that, auto insurance has become prohibitively expensive in places. You can't get rid of a glut if you lose your most enthusiastic customers.
  • JH on December 25 2014 said:
    So, what cash is Putin going to use to continue drilling in order to maintain production?

    I guess we are not hearing any more about Russian threts to freeze out Europe this winter? Vlad needs the cash.
  • Jack Everett on December 25 2014 said:
    I don't believe the Saudis are colluding with Obama. It would have been possible with Bush and we all know how close and friendly Bush was with Terrorist Saudi Arabia.
  • Dennis Wingo on December 25 2014 said:
    The only problem with this theory is that John F. Kerry (who served in Vietnam) is not smart enough to figure out how to do something like this.

    Both the Russians and Saudi's have stated multiple times that the biggest threat to them is fracking. Watch protests against fracking ramp up and if the producers start going bankrupt watch for the Saudi's to swoop in and buy the assets.
  • Jon on December 25 2014 said:
    Funny how the author never mentions the fact that the brick countries that are being pressured, are the ones that are trading out of the petrodollar system. I do not doubt that there are other factors involved, but you can't tell me this isn't a major influence.
  • Chris on December 25 2014 said:
    Ha funny oil price was my captcha answer, oh your all so smart. As far as I am concerted, us 200 million Americans who are not doing very well in this multicultural suicide pumping millions and millions of job pirates across our border being plotted on American workers who are also forced to pay for the invasion. We can use all the help we can get even though we know none of those people who made this happen care about the 'cheaper' part of the equation. Just one of those rare times when the side effects are good for the little guy struggling right now.
  • Kortney Dunkle on December 25 2014 said:
    no one saw this coming except the oil bugs and not even this this sudden
    Nose dive. Obama working with the Saudis on THIS conspiracy ??? ha ha ha

    This admin. Doesn't have a foreign policy. They detest oil and hate cheap gas as
    It creates individual mobility and kills green initiatives.

    It's supply and demand and yes, U.S. Fracking was the trigger for the oversupply.

    It will end at 40 per barrel.
  • john70 on December 25 2014 said:
    And another thing: The Obama regime really wants to shut down the shale oil phenomenon.
  • Derek on December 25 2014 said:
    Great article. Very speculative, but aroused the conspiracy nut inside me... Long live cheap oil!
  • Brad Arnold on December 25 2014 said:
    Instead of focusing on oil producers as the reason why current oil prices are declining, I suggest looking to new competing energy technologies:


    "There are many companies now racing to bring Low Energy Nuclear Reaction products to the marketplace. One notable company is Solar Hydrogen Trends, which claims to have accidentally discovered a way to use LENR to produce hydrogen gas from water at the energy equivalent of producing pollution free oil for about $5.00 a barrel. Their hydrogen gas producing reactor has been independently tested by two well known companies, AirKinetics, Inc. and TRC Solutions. Both companies found that the reactor works as promised, and the TRC Solutions PDF report is quite shocking."
  • Jay on December 25 2014 said:
    Interesting to note that the countries that are being affected by this are pushing to get away from a petro-dollar exchange and are pushing other ways to pay. This offers a better explaination than an ISIS for Assad quid pro quo. Saving the U.S. economy for Assad and Iran is more likely the reason. Just a thought given Syria's desire to bypass the petrodollar as well.
Brophy Thursday 25 December 2014 - 11:18 am | | Brophy Blog

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