US Foreign Policy(MENA War) and Saudi Arabia as US Strategic Petroleum Reserve – Saudi Arabia as ‘Spolier’

Saudi Arabia – America’s Real Strategic Petroleum Reserve?
27 August, 2012 – John Miller – The Energy Collective

As oil prices ticked above $115 per barrel last week, a White House leak revealed that President Barack Obama may dip into the Strategic Petroleum Reserve (SPR), the United States’ 695 million barrel stockpile of emergency fuel supplies. The leak might have been a signal that Washington wants Gulf countries to take action to lower oil prices. It might also have been an attempt to wring the risk premium out of current prices by reassuring the market that America won’t let a potential war with Iran shut off the spigot. The one thing we can say for sure is that the announcement highlights two interrelated problems with U.S. energy policy: that every president since Ronald Reagan has used Saudi Arabia as his de facto SPR and that there exist no clear standards for when to dip onto the actual SPR. Both problems have the potential to bite us — badly.

Over the years, the United States has been surprisingly reluctant to release SPR during times of crisis, preferring instead to let Saudi Arabia handle the problem by simply increasing its production. For decades, in fact, U.S. presidents have been able to count on the Middle Eastern petro giant to pre-release oil in anticipation of times of war. For example, Riyadh flooded the market ahead of the first Gulf War and, though many do not remember, it also put extra oil on the market ahead of the U.S. invasion of Iraq in 2003. Saudi Arabia even increased its oil production after the 9/11 attacks, which badly strained U.S.-Saudi relations. Likewise, this spring, when the Obama administration was debating whether or not to release the SPR ahead of the tightening of sanctions against Iran, Saudi Arabia helpfully boosted its production above 10 million barrels per day, causing oil prices to fall more than $10 a barrel and eliminating the need for the White House to make a firm decision.

But relying on Saudi Arabia, while politically convenient, is not without risks. The most obvious is that the Saudis have come under increased pressure — both internal and external — as a result of their longstanding oil-for-security alliance with Washington. Iran has warned its fellow Gulf producer not to make up the slack resulting from American and European sanctions, threatening direct retaliation if it does. Saudi Arabia isn’t taking any chances. In recent months, it has arrested prominent Shiite dissidents — always suspected of possible ties to Iran –and doubled the number of Saudi National Guard forces in the Eastern Province, home to the vast majority its 2 million-plus Shiite citizens as well as the close to 90 percent of its oil production.

Oil markets might have taken solace in Saudi preparedness until rumors surfaced of an assassination attempt aimed at the kingdom’s intelligence chief, a move purported to be a revenge killing by Iran for similar assassinations of senior military leaders in Syria. The rumors proved to be false, but like much of the region’s murky political intrigue, it moved markets and served as a reminder that a tit-for-tat game of high level assassinations is not out of the realm of possibility. The oil implications of this unpredictability are clear: It will be hard to keep global oil markets calm in the coming weeks and months. Deaths of rulers can change dynamics overnight virtually anywhere in the region, and Israel’s defense policy remains an ever-present black swan. Saudi Arabia’s own rumored pursuit of new nuclear-style ballistic missiles from China adds an additional layer of uncertainty about a nuclear arms race in the region.

America’s ability to fall back on the Saudis is further imperiled by the inherent instability of the kingdom’s political and economic system. Saudi Arabia is going to need more and more oil revenue just to keep its population from growing restive. Riyadh-based Jadwa Investment predicts that Saudi Arabia will be forced to run budget deficits from 2014 onwards, even at a break-even price forecast of $90.70 per barrel in 2015. Other forecasts are even bleaker in the medium term, estimating the breakeven price at $110 a barrel in 2015. Either way, the kingdom’s thirst for cash is likely to mean that U.S. and Saudi interests diverge. The oil-for-security deal between the two countries has destabilized the kingdom in the past by igniting support for al Qaeda in the Arabian Peninsula and it could be used again by agents of internal opposition groups. Moreover, the recent pro-democracy upheavals in Egypt, Syria, and above all Bahrain are bound to influence U.S.-Saudi relations over time in ways that are hard to predict.

For the time being, these risks have been at least temporarily mitigated. Recent leadership successions in the senior ranks of the Saudi security apparatus (defense, interior, and intelligence) and the common interest in containing Iran has brought Saudi oil policy closer in line with White House goals — at least for now. Saudi oil shipments to the United States have been on the upswing this year — a reversal of previous policy that favored sales to China — and the kingdom, together with Kuwait and the United Arab Emirates, has stockpiled oil in ships off the coast of Al-Fujairah, outside the critical shipping choke point of the Strait of Hormuz, and added emergency crude oil stocks in China, Japan, South Korea, and Rotterdam. This coordination helped keep oil prices from spiking when Western countries tightened the sanctions regime against Iran’s oil industry. The extra Gulf crude was aimed not only to wean Asian and European buyers off Iranian oil but also to give the United States (or even Israel) more economic leeway for a military strike against Iran’s nuclear facilities in the event that diplomatic negotiations stalled out. But as more and more Iranian oil comes off the market and the specter of military action intensifies, the impact of these significant moves is wearing off. …more