New Eastern Outlook
by Petr Lvov
There is an old saying that still remains true to the present day: “when you plot mischief for others, you’re preparing trouble for yourself.” This saying describes perfectly what has happened to Saudi Arabia and a number of its GCC allies that agreed to support the strategy of predatory pricing on the international oil markets put forward by Riyadh, which has inflicted huge financial damage to the national interests of each of those states. After all, more than 70% of these states’ budgets comes from the profits generated by oil exports. Moreover, when money stopped pouring in they found themselves unable to fund social programs or pay “offerings” to the leaders of tribal formations that preserve the stability within those states. Due to 50 years of breathtaking oil profits the population of the GCC states feel little need to work to earn their living, handing over all jobs to guest workers from Asia and the Arab world, mostly immigrants from India, Pakistan, Sri Lanka, Nepal, Bangladesh, the Philippines, etc. Work went to those who are willing to perform the most exhausting tasks for salaries that are 5-7 times lower than what local residents are getting, while Arabs are allowed to occupy more respectful positions in the banking, oil and gas sectors. Therefore, the citizens of the GCC found themselves occupying high-ranking positions both in the civil word and in the army.
But then in 2014, Saudi authorities decided it might be possible to try and push Russia out of the European and Asian oil markets by dropping oil prices. The same idea was particularly dear to Washington since the Obama administration wanted to hurt Russia’s economy as bad as it possibly could due to Moscow’s position regarding Ukraine and Syria, since the illegal sanctions the West was imposing against Russia were not producing their desired results. To a certain degree this plan succeeded, reducing revenue for Russia’s budget by nearly half and crippling the economy that had otherwise been on the rise. However, along the way, Riyadh has virtually destroyed the shale oil industry in the United States, perhaps perceived as “collateral damage” for their Western masters. The Al Sauds decided that it has no equals in a position to punish Moscow for its persistent support of the Syrian people and its striving to develop bilateral relations with Iran and even Iraq, the states which could form a Shia arc capable of challenging, even destroying the tyranny of the Saudi regime.
And now we can take a look at the results of this strategy. Russia took a severe blow but has remained standing tall, even though it will take years to bring its economy back to the level it was on in 2014. But what’s much more important, it learned a useful lesson – it cannot depend on the export of hydrocarbons anymore. Yet, it proved to be more resilient that Saudi Arabia which produces nothing else besides hydrocarbons, and is fully dependent on cheap labor from Asia. Moreover, in the year 2016, Riyadh found out that it has no money to pay working migrants and its population has forgotten long ago how to fix cars, operate power plants or even sell things at marketplaces. They are now the ‘new rich,’ fully dependent on oil revenue distributed to them through the budget. They enjoy free education, free health care, free food, etc. But the time of excessive profusion is all but over now. And if Kuwait and Qatar still can sustain the illusion of prosperity by digging deep in their state funds, the KSA and the UAE have already begun doing so for a while now. These two states have been spending excessive amounts of money on the wars in Yemen and Syria every month, exhausting even the largest of treasuries.
To make matters worse, migrant workers are becoming increasingly frustrated with the Persian Gulf states. They have become accustomed to making decent money working for the rich, now their contracts are getting reworked and extended. Many prefer to stay in the states that employ them illegally while waiting for better times, therefore becoming a destabilizing factor given the proportion of local populations versus migrants. In Qatar, there’s seven migrant workers for every one native, while in the UAE this level hovers at a level of six to one. And it’s safe to say that the army or police will find themselves helpless if hundreds of thousands of people take to the streets. In fact, a threat of ‘revolution’ hangs in the air.
But the funny fact is that the ruling elites are hardly any happier, especially in Riyadh, where rumors are that King Salman is going to abdicate in favor of his son Mohammed who is only 34 years old. And what would he do? After all, Salman had crossed all those who preserved the regime for decades. It’s about time to buy the loyalty of tribal leaders to stabilize the country, but the House of Saud has no money left to do that.
The GCC states are helplessly witnessing their economies collapse since their oil export revenues have decreased by 360 billion dollars. If a barrel of Bren oil was way above 100 dollars in 2014, today it’s being sold at the price of 38 dollars. In these circumstances, governments are forced to cut all costs. According to International Monetary Fund director for the Gulf region, Masood Ahmed:
2015 has been a difficult year, but this is just the beginning of a multiyear adjustment process: 2016 will be just as tough, and then there is 2017 and 2018. Next year the slowdown is not going to ease up.
It’s hard to blame local and foreign investors for increasingly depressed moods, since tighter fiscal and monetary policies are inevitable, and the markets are preparing for negative consequences of those. The sharp decline in government spending is going to cripple the private sector, and the GCC states used to keep them at a high level in order to prevent massive social unrest.
Under these circumstances, the state-owned Saudi Aramco began raising prices for its clients both in Asia and Europe. The Saudis have finally decided to end the price war and turn their back on dumping, putting an end to the era of record low oil prices. However, at any time, Saudi Arabia might change tactics again as it did last year. Much will depend on the meeting of oil-producing countries scheduled for March 20, which is expected to take place in Russia.
However, once the sanctions against Iran have been withdrawn, Tehran is going to fight for its share in the market by increasing its oil production and export levels. In February Iran was supplying up to 1.4 million barrels a day to international markets. The NIOC has predicted that in March its exports will grow to 1.56 million barrels a day. With international markets being oversupplied, experts fear that we may witness a new round of price dumping.
The idea of Saudi authorities to push market prices up now might have been affected by the statistics of oil production levels that came from the USA. This figure has been dropping for six consecutive weeks reaching 9.077 million barrels per day in late February. But it’s more likely that Saudis decided to come to grips with common sense once it reached an informal agreement with its main competitor in the market – Russia. So far the agreement between OPEC and Russia not to raise production levels has been purely formal, since Iran claims that it has been a victim of sanctions and that it needs favorable conditions for itself. But on March 2, Russian President Vladimir Putin has officially confirmed Russia’s intention to freeze the level of oil production at its current level.
Saudi Arabia can, for sure, start playing games again, but this time, it seems, it’s in no position to benefit from them since the very survival of the Saudi state is now at stake. So it will be forced to negotiate with Russia, even if the United States urges them not to.
Peter Lvov, Ph.D in political science, exclusively for the online magazine “New Eastern Outlook.”