the saudi oil war against russia, iran and the us

Geopolitics of Energy The Saudi oil war against Russia,

Iran and the US

FrancescoLegnameJanuary2016

Author:FrancescoLegname 2

The House of Saud is applying a highly predatory pricing strategy, which aims at reducing

market share of its competitors, in the middle- to long-term. At least in theory, this could

make life miserable for a lot of players – from the US (e.g. fracking and deepwater drilling

become unprofitable) to producers of heavy, sour crude such as Iran and Venezuela. Yet the

key target, make no mistake, is Russia.

The House of Saud’s target of trying to bypass Russia as a top supplier of oil to the EU is

nothing but a pipe dream; EU refineries would have to be reframed to process Saudi light

crude, and that costs a fortune.

Geopolitically, it gets juicier when we see that central to the House of Saud strategy is to

stick it to Washington for not fulfilling its “Assad must go” promise, as well as the neo-con

obsession in bombing Iran. It gets worse (for the Saudis) because Washington – at least for

now – seems more concentrated in toppling Caliph Ibrahim than Bashar al-Assad, and might

be on the verge of signing a nuclear deal with Tehran as part of the P5+1 on November 24,

2015.

On the energy front, the ultimate House of Saud nightmare would be both Iran and Iraq

soon being able to take over the Saudi status as key swing oil producers in the world. Thus

the Saudi drive to deprive both of much-needed oil revenue. It might work – as in the

sanctions biting Tehran even harder. Yet Tehran can always compensate by selling more gas

to Asia.

So here's the bottom line. The House of Saud believes it may force Moscow to abandon its

support of Damascus, and Washington to scotch a deal with Tehran. All this by selling oil

below the average spot price. That smacks of desperation.


Russia, meanwhile, increasingly looks to East. China’s Vice Premier Wang Yang has neatly

summarized it: “China is willing to export to Russia such competitive products as agricultural

goods, oil and gas equipment, and is ready to import Russian engineering products.” Couple

that with increased food imports from Latin America, and it doesn’t look like Moscow is on

the ropes.

The central banks of China and Russia have just signed a crucial, 3-year, 150 billion Yuan

bilateral local-currency swap deal. And the deal is expandable.

This new deal, crucially, bypasses the US dollar. No wonder it’s now a key component of

the no holds barred proxy economic war between the US and Asia. Moscow cannot but

hail it as sidelining many of the side effects of the Saudi strategy.

The Russia-China strategic partnership has been on the up and up since

the “epochal” (Putin’s definition) $400 billion, 30-year “gas deal of the century” clinched in

May.

Moscow is progressively lifting restrictions and is now offering Beijing a wealth of potential

investments. Beijing is progressively accessing not only much-needed Russian raw materials

but acquiring cutting-edge technology and advanced weapons.

Presidents Putin and Xi, who have met no less than nine times since Xi came to power last

year, are scaring the hell out of the “Empire of Chaos”. No wonder; their number one shared

priority is to dent the hegemony of the US dollar – and especially the petrodollar - in the

global financial system.


The Yuan has been trading on the Moscow Exchange - the first bourse outside of China to

offer regulated Yuan trading. It’s still at only $1.1 billion (in September). Russian importers

pay for 8 percent of all Chinese goods with Yuan instead of dollars, but that’s rising fast. And

it will rise exponentially when Moscow finally decides to accept Yuan under Gazprom’s

$400 billion “gas deal of the century.”

Russia and China intend to increase the amount of trade settled in the Yuan, President

Vladimir Putin said in remarks that would be welcomed by Chinese authorities who want

the currency to be used more widely around the world.

Curtailing the dollar's influence fits well with China's ambitions to increase the influence of

the Yuan and eventually turn it into a global reserve currency. With 32 percent of its $4

trillion foreign exchange reserves invested in U.S. government debt, China wants to curb

investment risks in dollar.

The quest to limit the dollar’s dominance became more urgent for Moscow in 2014 when

U.S. and European governments started imposing sanctions on Russia over its support for

separatist rebels in Ukraine. Russia, third-largest oil producer, is now settling all of its crude

sales to China in renminbi, in the most clear sign that western sanctions have driven an

increase in the use of the Chinese currency by Russian companies. Russian executives have

talked up the possibility of a shift from the US dollar to renminbi as the Kremlin launched a

“pivot to Asia” foreign policy partly in response to the western sanctions against Moscow

over its intervention in Ukraine.

Gazprom Neft, the oil arm of state gas giant Gazprom, since the start of 2015 had been

selling in renminbi all of its oil for export down the East Siberia Pacific Ocean pipeline to

China. Russian companies’ crude exports were largely settled in dollars until the summer of

2014, when the US and Europe imposed sanctions on the Russian energy sector over the

Ukraine crisis. Gazprom Neft responded more rapidly than most, with Alexander Dyukov,

chief executive, announcing in April 2014 that the company had secured agreement from 95

per cent of its customers to settle transactions in euros rather than dollars, should the need

to do so arise. With that, the "Petro Yuan" has officially been born.


This is the way the multipolar world goes. The House of Saud deploys the petrodollar

weapon? The counterpunch is increased trade in a basket of currencies. Additionally,

Moscow sends a message to the EU, which is losing a lot of Russia trade because of

counter-productive sanctions, thus accelerating the EU’s next recession. Economic war does

work both ways.

The House of Saud believes it can dump a tsunami of oil in the market and back it up with a

tsunami of spin – creating the illusion the Saudis control oil prices. They don’t. As much as

this strategy will fail, Beijing is showing the way out; trading in other currencies stabilizes

prices. At the same time, Iran's re-entry to the market may cause a readjustment

of production targets, which would lead to a short-term decline in output as Iran grows its

output and waits for the lifting of sanctions on its oil. The only losers, in the end, will be

those who stick to trade in US dollars.

Meanwhile, Saudi Arabia is facing pressure from other OPEC members, as low oil prices are

beginning to hurt their fiscal budgets. The oil price collapse is having a devastating impact on

all of the worlds’ major oil producers. With its history of booms and busts, the oil industry, is

in its deepest downturn since the 1990s, if not earlier. It's not just a case of what is the

break-even price but the price necessary to finance government budgets that are now in

deep deficits, which has been triggering increasing global instability as the price has slid to

$30. In fact the budgets of virtually every major oil producer requires an oil price north of


$80 just to break-even. With several such as Russia requiring $100+. Furthermore the oil

price slump of 2015 has played a large part in sparking economic mass migration out of

African oil producers such as Nigeria whose government requires an oil price of $120 to

balance it's budget.

Russia's 2016 budget -- over half of which relies on revenues from oil and gas exports -- is

based on an oil price of $50 a barrel and a deficit of three percent, which President Vladimir

Putin has ordered must not be exceeded. But crude prices in mid January dipped below $30

a barrel for the first time in over 12 years and former finance minister Alexei Kudrin

estimated that deficit could grow to over five percent if they stay at their current levels.

Anton Siluanov, Russia’s Finance Minister, announced the oil price would have to rise to $82

to fully balance this year's budget.

Besides, the ruble has already fallen over 20%-25% percent since July 2015 against the US

dollar. By the way, the currencies of key BRICS members have also fallen; And Russia, unlike

the Yeltsin era, is not broke; it holds at least $455 billion in foreign reserves.

Thus Russia, the worlds third largest oil producer and second largest exporter, remains in

war mode so as divert the attention of the Russian people away from an economy in

meltdown as Czar Putin turns his military ambitions far beyond the Ukrainian war zone by

expanding his military operations into Syria under the cover of fighting jihadists. The truth is


that Russia's war in Syria is primarily concerned with doing damage to the European Union

and secondly undermining the U.S. presence in the region.

To illustrate the crisis that Russia faces is the fact that Russia requires an oil price of around

$105-110 to balance its finances and for every $1 below that range Russia loses an

estimated $2billion about in revenues, worst still is that the Russian industry needs an oil

price of $20 just to break-even which could be hit this year. With crude oil currently trading

at $30 that's a huge revenue loss of well over $160 billion per annum that has plunged the

Russian economy into recession for the whole of 2015 that looks set to further intensify

during 2016 as Russia's hard earned foreign currency reserves look set to have completely

evaporated before the end of 2016.

Most will be unaware that China is the world's fourth largest oil producer, though all of it is

for domestic consumption and even more is imported. The economic slowdown in China is

one of the primary drivers for the collapse in the global oil price, which is also making it felt

in the global stock markets. So whilst lower oil prices should act to support the Chinese

economy, other drivers such as over capacity far surpass the low oil price stimulus that

shows no signs of recovering for much of 2016. In fact low oil price will be hurting Chinese

producers and refiners just as badly as western oil majors, that likely are already being

propped up by the Chinese government which means despite being a heavy consumer,

China also needs an oil price floor of about $40 below which the pain tends outweigh the


gain. So China does not look set to spark a fundamental turn around in crude oil demand

for much of 2016. In terms of instability, a weak economy is likely to further encourage the

Chinese Empire emboldened by a new fleet of air craft carriers to continue to assert its

dominance over the Asian region the most evident example of which is the construction of

artificial islands on reefs in the South China Sea an area claimed by several other nations

including the Philippines and Malaysia that could prove a flash point between U.S. and

Chinese vessels.

The continuing thawing of Iran / U.S. relations implies the potential for an huge increase in

the supply of oil out of Iran which has the worlds’ fourth largest oil reserves and second

largest gas reserves. The OPEC member nation accounts for 10% of the global crude oil

reserves and 13% of OPEC’s crude oil reserves. Iran’s production peaked at 5.5 (million

barrels per day) during the late 1970s. However, war and lower investments in Iran led to a

drop in Iran’s crude oil production. Since 2011, crude oil production in Iran has fallen due to

Western oil sanctions. The easing of sanctions would therefore mean Iran could scale up

crude oil production by 0.5 MMbpd (million barrels per day) to 1 MMbpd in the next six

months to one year. Meanwhile, Iran produced 2.8 MMbpd of crude oil in November 2015.

Lifting of sanctions means that even if Iran does not actually turn on the taps, just the ability

to do so at anytime will be enough to keep oil prices depressed for virtually the whole of

2016. Especially given the internal and external pressures pulling on Iran to raise more

revenues such as the Iran's proxy wars against Saudi Arabia in Syria and Yemen whilst at the

same time retaining its influence and network of control over Shia Iraq.


Those who have been looking to Saudi Arabia for signs for a cut in production have been

greatly disappointed as instead Saudi Arabia has ramped up production to 10.2m b/d

compared to 9.6m b/d a year ago and thus further contributing to the worlds crude oil glut

that is seen by much of the media as part of a 'War on U.S. Shale oil industry' aimed at

annihilating competition such as that from the fracking industry.

However, despite $620 billion of reserves most of which is parked in its sovereign wealth

funds, Saudi Arabia is not immune to the instability triggering consequences of the oil price

collapse, which is seeing Saudi Arabia's wealth disappearing at the rate of about $100 billion

per annum as the Kingdom is reliant on oil exports for 85% of its revenues. In fact rather

than reigning in government spending, Saudi Arabia is engaged in two costly major proxy

wars against Iran in Syria and Yemen and each passing day brings increasing risks of a hot

war between Iran and Saudi Arabia that would probably trigger at least a temporary

speculator driven spike in oil prices. So rather than Saudi Arabia using oil prices to kill off the

competition the real story is more of a totalitarian state being destabilized by the oil price

collapse that is fighting multiple proxy wars and an internal insurgency, as it should not be

forgotten that Saudi Arabia is a family dictatorship that is only able to retain power by

means of terror and bribery of ordinary Saudi citizens with oil money that is fast running out

of. So in the grand scheme of things the U.S. shale industry is way down on the priority list

of worries for the Saudi totalitarian regime.


The reality of the Saudi Arabia is one of a regime that is rotten to its very core, that literally

has hundreds of wannabe Al-Saud Saddam Hussain types running around trying to stoke the

fires of sectarian conflict both in neighboring states and within Saudi Arabia itself, who are

increasingly wielding power against a fragile center that sows the seeds for what is

unthinkable today that of a revolution or even civil war, let alone the possibility of a hot war

against Iran. Given the fact that Saudi Arabia has not cut oil production to date is very telling,

in that it shows that the Saudi totalitarian Islamic fundamentalist state fears three things:

1. Its people

2. Its oil is becoming obsolete / worthless as a consequence of new renewable energy

sources prompted by climate change.

3. Anything Shia, which the Saudi wahabi ideology perceive as apostates.

Which means no matter how loudly other OPEC members scream at Saudi Arabia to cut

production, it's just not going to happen, in fact I would not be surprised if we find out in a

few months time that Saudi Arabia has further increased production in an attempt to

monetize the oil in the ground whilst it still has customers for it and ahead of Iran opening

the taps. This illuminates why Saudi Arabia in January 2016 announced intentions to put its

oil industry (Aramco) on sale, which is because it understands that the nations 266 billion

barrels of oil in the ground could become worthless long before it can be produced and

sold, so instead are trying to forward sell Saudi Arabia's oil reserves to clueless investors. By

the end of 2016 some of these Al-Saud wannabe Saddam Hussain's will have made enough

of a name for themselves so as to make it into the mainstream media as they leave their

finger prints as the instigators of regional instability through extreme acts of violence of

which the recent executions were just a taste of what is to follow.

Iraq is still desperately trying to rebuild its devastated cities after the U.S. and allies went on

a decade long rampage across the nation all on the basis of lies such as that its was for 9/11

or that there were weapons of mass destruction ready to hit Europe within 45minutes, the

consequences of which still continues plague Iraq to this day which remains a divided nation

of between Sunni's and Shia's. After America's departure the one hope that Iraq had

towards building a better more stable future was Iraq's huge oil reserves which given a price

of $100 would be more than enough for the central government to paper over the cracks

and buy off the various competing factions with petro dollars. However, again despite a low


break even price of $12, $30 is just not enough to meet the requirements for a fragile Iraq

which implies that 2016 could turn out to be just as bad a year for Iraq as was 2015, as the

factions such as the Kurds, and various Sunni and Shia militias attempt to seize control of the

oil producing regions resulting in continuing sectarian warfare. In fact the Kurds by the end of

2016 could come to be seen in a similar manner as ISIS is today, as Kurdistan seeks to

control Iraq's northern oil fields and take all of the revenues from themselves therefore

risking a Shia Iraq / Kurd war.

The consensus view in America is that Saudi Arabia is engaged in an oil war to knock out

America's shale oil industry. However, when one looks at the facts the reality is more like

the US oil war on Saudi Arabia as evidenced by the fact that it is the United States which

has effectively doubled its oil production over the past 10 years from 4.5 million barrels a

day to over 9 million today that virtually rivals that of Saudi Arabia which is producing little

more than it was 10 years ago (10.2 against 9.7 10 years ago).

This view whilst obvious remains invisible to a propaganda driven mainstream press that

instead of reflecting reality instead peddles and regurgitates the view that it is all Saudi

Arabia's fault. The U.S. shale oil production peaked during 2015 at approximately 5.7 million

barrels per day and today has declined to 5.15 million barrels a day, with expectations for

the decline to steepen during 2016 in response to a sustained low oil price resulting in a

bloodbath amongst the US shale oil industry that could kill off half of the industry this year


leaving output at least 2m b/d lower at approximately 3m b/d. Therefore US total oil output

could fall to approximately 7m b/d by the end of 2016. Whilst the majors should fair better

having locked in prices for multiple years as high as $60, nevertheless will be scrapping

hundreds of billions in exploration and drilling projects during 2016 resulting in further job

losses. So on the basis of fundamentals there is little sign for an end to low prices any time

soon as it will be slow grinding process of wiping out approximately half of the US shale

industry which is the only peaceful method of bring price stability to the oil market. Which

means any bottom in the crude oil price is unlikely to spark a return to anywhere near the

likes of $100 with a real risk that the crude oil price could sink even lower, as given these

fundamentals $20 is very possible (60% probability), and whilst today it is difficult to imagine

the oil price trading as low as $10 as some suggest (Standard Chartered), nevertheless it is

no longer impossible (20% probability).

the saudi oil war against russia, iran and the us

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