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Tom Kool

Tom Kool

Tom majored in International Business at Amsterdam’s Higher School of Economics, he is Oilprice.com's Head of Operations

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Saudi Arabia: A Weak Kingdom On Its Knees?

Saudi Arabia: A Weak Kingdom On Its Knees?

The great Kingdom of Saudi Arabia—the long-time dictator of crude oil prices for the world—is struggling on all fronts.

The Saudis are losing their proxy wars in both Syria and Yemen; their OPEC leadership is under threat; they are not winning the crude oil price war; and its long-running alliance with the West is in question.

From Saudi Arabia’s perspective, Iran seems to be gaining ground everywhere. Saudi Arabia has several weaknesses that help explain the current anxiety emanating from Riyadh.

1. Saudi Arabia losing its leadership in the OPEC

Saudi Arabia has been the default leader of OPEC; however, despite Saudi insistence to the contrary, the U.S. shale boom, increased Russian oil production, and a very resolute Iran are challenging this leadership.

The result is that Saudi Arabia now finds itself powerless in supporting oil prices. Instead of the much-needed production cuts, during the 4 December 2015 meeting, the OPEC nations refused to adhere to any ceiling, which has been the practice for years. Related: Get Ready for Iran’s Oil: Sanctions Could Be Removed Next Week

2. Burning through reserves—fast

(Click to enlarge)

Source: www.tradingeconomics.com

Iran is waiting for the lifting of sanctions, expected sometime in 2016, to pump more oil to improve its economy, whereas the Saudi’s are losing they are burning through their cash reserves quickly. The above chart speaks for itself, depicting the kind of damage low oil prices are inflicting on Saudi reserves. By the most optimistic opinion, Saudi Arabia can survive low oil prices only for four years.

3. Iran has assumed a very significant leadership role among Shia Arabs

Both Iran and Saudi Arabia are currently locked in a bitter proxy war on two fronts: Syria and Yemen.

Iran has the support of Hezbollah in Lebanon, along with support from the majority of Shiites in Iraq. More to the point, Iran has even managed to grow its Shiite support base among Sunni-ruled nations. The execution of Shia Sheikh Nimr Al-Nimr by the Saudis is an indirect acceptance of the growing influence of Iran among the suppressed 15 percent Shiite population in Saudi Arabia. This shows that the Saudi leadership is feeling threatened on their own soil. Related: Saudi Aramco IPO More About Geopolitics Than Finance

4. Saudi Arabia cannot defeat Iran in a direct war

Iran is a much larger nation than Saudi Arabia by population and has held its own in numerous long wars. By comparison, the Saudis have an army that is inexperienced, led by loyalists of the Royal family who occupy plum postings. These are not the war-hardened generals of Iran.

While Saudi Arabia has a nice arsenal with the latest weaponry, the kingdom is heavily dependent on the West for its use and maintenance. Its indecisive and ineffective handling of three conflict fronts—Iraq, Syria, and Yemen—give us no confidence in its ability to take on Iran.

5. Saudi Arabia knows it won't have U.S. support for a direct war with Iran

The painfully misguided wars in Iraq and Afghanistan are enough to deter the current U.S. administration from entering into full-fledged war in the Syrian and Yemen theaters. Washington's non-committal stance, along with efforts to broker a deal with Iran, should serve as very loud signals to Saudi Arabia. The message to the kingdom is this: Don't go to war with the hope that that U.S. will support you. And without the West, Saudi Arabia knows it stands no chance of winning a war against Iran. The royal family will probably not take the risk of losing power by indulging in such a war.


These relationships are anything but clear, and everything about balance. So the U.S. will continue to sell weapons to Saudi Arabia to allow it to maintain a bit of balance—with the latest deal approved in October—and Washington and Tehran will continue to play cat and mouse as they near a nuclear deal and a removal of sanctions. This is best illustrated by the recent detainment and then quick release of U.S. sailors for an incursion into Iranian waters, and the statement and then denial by Iran that it had completely closed off a key nuclear reactor that would have sealed the nuclear deal. Related: War Between Saudi Arabia And Iran Could Send Oil Prices To $250

The Saudis are in a state of panic all around—from its OPEC status and dwindling reserves to its proxy wars that absolutely cannot turn into full-fledged wars and its growing friendlessness. The fact that oil fell briefly below $30 a barrel on Tuesday for the first time in 12 years won't have helped.

At the end of the day, Saudi Arabia has overextended itself, and overestimated its prowess and it does not have the clout that it once had to be able to do this effectively.

If you're wondering whether there will be an all-out war between Saudi Arabia and Iran, it's unlikely. At this point, the Saudis are likely to continue the proxy war and hope that the Iranians do something foolish to upset the nuclear deal with the West. Until then, Saudi Arabia will make a lot of noise and attempt subversive activities, but nothing more.

By Tom Kool of Oilprice.com

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  • John Scior on January 14 2016 said:
    # 1 The saudis are attempting to reassert their leadership by oversupplying the world with oil to bring more producers to the OPEC cartel, once the shale frackers have been bankrupted and the high producing oil players are cleared off the table, the remaining oil producers will come to a production level that is consistent with world demand and thus be able to sustain a higher pricelevel ( by the way this also clears the table of electric vehicles and alternative fuel producers ) #2 "Burning through their reserves quickly and can only last 4 years", this seems to be quite a long time. They have one of the largest reserves of foreign capital and other producers will come to their knees first. Also their proven reserves are only a fraction of what might lie underneath much of the country as it became senseless trying to explore for more oil when you have already proven reserves greater than any other nation ( pumping fromwells and nothigh cost extraction methods ) #3 Iran has many internal problems of its own, ie crumbling infrastructure, differences within their own leadership, drug (heroin ) epidemics, etc, so if they ere so strong, why did they succumb to the sanctions # 4 Saudi Arabia's military numbers may be small but its much like saying the Chinese won the korean war because their numbers were superior. Certainly quantitative advantages cannot be ignored but superior military technology in the right hands can achieve victory. Not to mention Saudi Arabia has from time to time called its ally Pakistan to equalize the numbers game. #5 Although the US - Saudi relationship is not as strong as it once has been, the US would certainly protect the Saudi oil fields, of this there is no doubt. Perhaps the best hope is that these various nations and factions realize that somewhere behind the scenes is an operator pulling the strings laughing the old phrase, "pit your enemies against one another " . Hopefully peace will prevail and all parties can come to an amicable understanding where everyone wins while each gives up a little something. Its called compromise and its what has unified the United States for many years.
  • Thomas on January 15 2016 said:
    This article is only a bunch of wrong assertions based on quick readings from headlines. The situation in the Gulf is way more complicated than is described in this article.

    You are vastly underestimating Saudi Arabia's clout in the west.
  • Jhon on January 15 2016 said:
    Nice comment.. I feel the same eay, someone is pulling the strings behind the scene.. and playing them(both countries Iran and Saudi Arabia) off against each other. Do you have any idea who it might be? (Latin - 'Qui bono?') Who benefits from this? is the first question that comes to my mind.
  • NDoil on January 15 2016 said:
    I'll give you a hint....it starts with an I.
  • Teddy on January 15 2016 said:
    Nothing about the current administration leads me to believe that we'd go to bat for Saudi Arabia right now.
  • Isa on January 15 2016 said:
    Wow such a misleading article. That is all that I could say
  • JW on January 15 2016 said:
    Putin's Russia needs oil at $100 to maintain their economy and he will do whatever is necessary to get oil prices up. His ace in the hole is Iran - together they know on the short term with Iran's tankers full of oil soon coming to the market will cause oil to go even lower possibly $20 per barrel. It is estimated Iran's takers hold some 50 million barrels ready for delivery. At a low around $20 - Iran and Russia will crank up the war rhetoric against Saudi Arabia. OPEC will cut production in an attempt to calm matters. Oil will quickly rise to $50 per barrel by mid year 2016 and could go much if Iran and the Saudi's actually go to war. The world's countries who financially depend on oil revenue will side with Iran and Putin. The U.S. will not become involved other than selling the Saudi's arms at steep profits. North America - now energy independent with un-told capped wells will uncap all wells and the spigot's will be turned on. The U.S. stock market will go up dramatically reaching all time highs. "A possible scenario."
  • Terry Taerum on January 15 2016 said:
    The fundamental problem is the Saudis appear to have underestimated how much readily available oil is sloshing around the world. And between Iran coming on stream and how easily wells can be uncapped as they become profitable, the rise in the price of oil should be agonizingly slow. This combined with the slowdown in China, and we have moved into a new local attractor. And, in spite of the rhetoric about global warming, Xi has been given every indication that he can use coal until 2030. Rarely do all signs lead to the same destination, as they do now. All of this is not a problem just for Saudi Arabia and we will discover, in the day ahead, who all are 'too big to fail'.
  • Ismail on January 16 2016 said:
    I think the middle east suffering with concurrent Sunni Shia tussle. The historical hostility between two sectarian group has reached its peak after the war on Syria and Yaman. Both Saudi Arabia and Iran played their role and other gulf countries also joined hand in hand to support their proxy war of sectarianism. The internal tussle uncovered with hanging of Shite leader Nimr al Nimr last month.
    The international oil crisis may oil fuel to the fire of the sectarianism worsely on coming days.
  • Keith on January 16 2016 said:
    This reads as if Mr Kool decided to write a one-sided story to see what reaction he might engender. It reads as if low prices affect Saudi but not Iran. As others have pointed out, the situation is more complicated than portrayed in this article.
  • Desertrat on January 16 2016 said:
    I'd give some thought to Iran's stirring up the Shiite population residing in eastern Saudi Arabia's oil field area. Sabotage, there, e.g.
  • Amvet on January 17 2016 said:
    "The execution of Shia Sheikh Nimr Al-Nimr by the Saudis is an indirect acceptance of the growing influence of Iran among the suppressed 15 percent Shiite population in Saudi Arabia. This shows that the Saudi leadership is feeling threatened on their own soil." Nonsense.
    The influence of Iran among the Saudi Shiites is less not more. The Saudis have stopped the traditional free mingling of Iranians and Saudi Shiites, In the 1980s one heard Farsi being spoken along the coast of Saudi Arabia. Intermarriage was common.
  • JOHN ISH ISHMAEL on January 17 2016 said:
    How close is the #Saudi Monarchy to emulating the Iranian Peacock by fleeing to America, on private jets. The tyrant Shaw was defeated by... cassette tapes of Khomeini's talks.
    The tribal Saudi tyranny recalls, to my mind's eye, the British class system of effete "generals" - of their "Charge of the light brigade" or their three defeats at the hands of the minimally armed Afghan warriors. Or the American's Custer's wipe out by the Lakota People...
    That Saudi kleptoracy is reported to have paid billions to their not so secret fanatic ally - Netanyahu - for attacking Iran from Saudi soil. After the major powers joined with Obama, for the #IranianANukeDeal, that supposed Saudi $30B to Netanyahu will get the Saudis a billion tons of Dead Sea salt. And the derision of savvy Jews worldwide.

    I expect the rotten monarchy to share a moment with Persian history - boarding their planes to the US as the Peacock Throne's Shah of Iran did, defeated (along with his controllers of the CIA, MI6 and Mossad.) Or they may be strung up or blown up by their own people. Western leaders will miss the baksheesh.

    Just saying, friends and non friends. You heard it here first. Hugs. ISH
  • pete allport on January 18 2016 said:
    with all the problems at these prices, who can afford to pump less to bring the price up?? i think we are on a runaway train to deep worldwide recession..most pension and 401 k plans are in a recovery phase from the last deep recession..as this long low price ripples thru the economy, and unemployment results( a fiscal quarter lagging indicator) , the destruction of value will leave many of us with only social security for retirement...all at the hands of a 30 yr old prince put in charge of saudi oil production by his daddy the king. and, even when the weaker ones go bankrupt, what happens to their assets...when oil was at 100, those assets were bid up to higher and higher prices, raising break even costs..the assets wont go away..they will be bought at dirt cheap prices by the surviving producers, lowering their break even costs substantially...economics 101..over the long term, supply at each price point will be the same as before..fracking technology wont go away, unless outlawed...the saudi's are doing this , and in the long run they accomplish nothing except destruction of their own economy, the opec members that pay to be members..and if it lasts long enough, a deep worldwide recssion...get ready for return to the dark ages.
  • wladyslaw karpeta on January 18 2016 said:
    Why is Saudi Aramco planning to float an IPO with such depressed oil prices? Does Saudi Arabia need the money that desperately?
  • Alfred James on January 21 2016 said:
    To: Mr. John Scior: Excellent, thank you; your scenario makes more sense than most others. I am a longtime petroleum geologist. Most of my production, in CO and KS, is at $15-20/bbl today, which is less than my costs. But I have no debt, saved money in the good times, so I can endure this for a while. Many cannot due to inefficient operations, excessive promos, and mainly debt, the four-letter word. Many of these are not ethical people and we are better off without them....a housecleaning. I think you are correct in predicting an eventual supply/demand balance with a price that enables a continuance of exploration and production, without pricing oil so high as to enable other energy sources to replace it. This will happen soon enough anyway, mainly in a breakthrough in solar and energy storage. My great grandchildren will ask "what was a petroleum geologist. Fred James
  • alfred james on January 21 2016 said:
    wladyslaw karpeta: Yes, they do need the money. But only a fool would buy this IPO because when the oil price rises, the Saudis will simply nationalize oil for pennies on the dollar as they did before.

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