Jump to Main ContentJump to Primary Navigation

The plummeting oil prices reveal why Saudi Arabia fears for the wealth and stability of the Gulf

    No-one who runs a car or business can be unaware of the hefty fall in the price of fuel at the pumps. What is extraordinary about this is that the history of the past four decades would suggest the opposite effect - surging prices and frustrating queues at the forecourts.

    The combination of the aerial war against Islamic State (Isil) in Syria and Iraq and the intense conflict between Ukraine and Russia, itself of the world's biggest exporters of energy, might have been expected to send oil prices sky high.

    After all, this is what happened as a result of the OPEC oil embargo at the time of the Yom Kippur war in 1973, at the time of the first Iraq war when Saddam Hussein invaded Kuwait at the end of 1990 and during George W Bush's invasion of Iraq after 9/11.

    As a rule, conflict in the Middle East generally has sent oil and gas prices soaring and kept them high. Indeed, the International Monetary Fund predicted such an outcome in its normally authoritative World Economic Outlook report released in October of this year. In the event, the opposite has happened. Oil prices have plunged to their lowest levels for five years and Brent crude, the most watched measure has plunged through the $70-a-barrel barrier and could be heading to $60-a-barrel.

    So why the reverse effect when the Middle East is in flames and Israel has just emerged from Operation Protective Edge the lengthiest of its Gaza campaigns?

    As a rule, conflict within the Middle East has generally sent oil prices soaring

    The main reason initially cited by oil watchers is the rampant development of oil and gas shale in the United States (fracking as it is often called). This has rendered the US self-sufficient in natural gas and sent prices plunging. It clearly has changed the supply situation.

    But the more important reasons are largely strategic.

    This became clear after the most recent meeting of the major oil producers in Vienna, once dominated by the famed Saudi Arabian oil minister Sheikh Yamani who for decades held the advanced world to ransom.

    At the latest OPEC meeting Saudi Arabia was leaning in the opposite direction despite pressure from other weaker oil producers including Libya, Iraq and Iran.

    Saudi Arabia is concerned about the reliability of all these states because of past or present support of Jihadist and extremist groups across the region from Islamic state to Hezbollah and Hamas. It fears for the stability and wealth of the Gulf nations.

    Behind all of this is the hidden hand of the United States. It is taking the battle to Isil in Iraq and Syria, through air war and technical and other assistance to forces on the ground.

    As a price for its involvement, it has persuaded Saudi Arabia, as the cheapest and most important oil exporter, to keep the spigots open.

    The policy has other strategic advantages. It helps to keep Iran at the bargaining table in the 5+1 with Iran involving the five permanent members of the UN Security Council (the US, China, Britain. France and Russia) together with Germany.

    So even though some $700 million of Iranian financial assets are being unfrozen each month, under the interim agreement with President Rouhani, the pressure is still being exerted because Iran is getting less cash for its oil.

    An added strategic advantage is that it keeps intense economic pressure on Russia that is also highly dependent on energy exports.

    The result has been the biggest collapse in the Rouble since Russia went through a debt crisis in 1998. In an effort to keep funds inside Russia and prevent capital flight the central bank has raised official interest rates to 9.3 per cent - compared to the range zero 0.5 per cent in the US, Britain and the eurozone.

    It is possible that at some point even Saudi Arabia's patience will be tested should wholesale oil prices head towards $50-a-barrel. But at present the very real possibility of medieval style Islamic caliphate, with eyes on capturing Saudi holy sites, far outweighs the economic costs of low prices.

Alex Brummer

Who will save your savings?

Alex Brummer

Who will save your savings?
Alex Brummer

Smart boys behind payday loans

Anonymous

Smart boys behind payday loans
Alex Brummer

There is much more to Israel’s economy than hig...

Alex Brummer

There is much more to Israel’s economy than hig...
Alex Brummer

M&S may just have done it

Alex Brummer

M&S may just have done it
Alex Brummer

It’s time for the Serious Farce Office to get s...

Alex Brummer

It’s time for the Serious Farce Office to get s...
Alex Brummer

Independent Scotland must work with Bank of Eng...

Alex Brummer

Independent Scotland must work with Bank of Eng...
Alex Brummer

The store that defeated Mr Retail

Alex Brummer

The store that defeated Mr Retail
Alex Brummer

Facebook deal is a sign of technology values go...

Alex Brummer

Facebook deal is a sign of technology values go...
Alex Brummer

Recovery, jobs and exports - a 2014 economic fo...

Alex Brummer

Recovery, jobs and exports - a 2014 economic fo...