Tuesday, January 23, 2007

Are Saudis waging an oil-price war on Iran?

Falling fuel costs probably not a coincidence, oil traders say

This factor was discussed in a commentary titled "Watching The Price Of Oil", by Tony Sayegh, posted here on January 16.

"Oil traders and others believe that the Saudi decision to let the price of oil tumble has more to do with Iran than economics.

Their belief has been reinforced in recent days as the Saudi oil minister has steadfastly refused calls for a special meeting of OPEC and announced that the nation is going to increase its production, which will send the price down even farther. Saudi Oil Minister Ibrahim al-Naimi even said during a recent trip to India that oil prices are headed in the "right direction."

Not for the Iranians.

Moreover, the traders believe the Saudis are not doing this alone, that the other Sunni-dominated oil producing countries and the U.S. are working together, believing it will hurt majority-Shiite Iran economically and create a domestic crisis for Iranian President Mahmoud Ahmadinejad, whose popularity at home is on the wane. The traders also believe (with good reason) that the U.S. is trying to tighten the screws on Iran financially at the same time the Saudis are reducing the Islamic Republic’s oil revenues.

For the Saudis, who fear Iran’s religious, geopolitical and nuclear aspirations, the decision to lower the price of oil has a number of benefits, the biggest being to deprive Iran of hard currency. It also may create unrest in a country that is its rival on a number of levels and permits the Saudis to show the U.S. that military action may not be necessary. The Saudis firmly and publicly deny this, saying it’s all about economics. Not everyone believes them.

“If under normal circumstances, the price of oil was falling this dramatically [17% in the last few months], Saudi Arabia would have already called for a special OPEC meeting,” says one oil trader. “It’s got to be something else and that something else has to be Iran.”

Costs higher in Iran
The trader notes that Iran, OPEC’s second largest producer, is “in trouble” both in the short and long term. Iran’s oil reserves, he notes, are declining more rapidly than Saudi Arabia’s and are more difficult to extract. While a barrel of oil costs the Saudis $2-3 to get out of the ground and to market, that same barrel costs Iran as much as $15-18.....

Political fallout
There are domestic political consequences to such a convergence, note traders and officials in both the U.S. and Iran. Ahmadinejad was elected on campaign promises that he would end corruption and better distribute the nation’s oil wealth. He has been unable to do either; now, with declining oil revenues, his job will be even more difficult......

Meanhwhile, the Bush administration is only too happy to see Ahmadinejad's deteriorating domestic situation — and to let the Saudis further turn the screws. Moreover, administration officials are hinting they will be applying financial pressures to complement the Saudis. (As one official said recently, Iran cannot operate in the oil markets without using dollars.).....

One trader is convinced that the U.S. and Saudis sealed a secretive deal on Iran when Vice President Dick Cheney met with King Abdullah in what appeared to be a hastily arranged summit in Riyadh in late November 2006. There have been lower-profile meetings as well that could have dealt with the arrangement....

Rafsanjani is known to believe that Iran should not continue to anger the U.S. and should align itself with the Americans in a fight against the Sunnis, an opportunity that is slipping away as Iran angers the U.S. in Iraq and on the nuclear front. And this week, reformist Ayatollah Hossein Ali Montazeri joined in the criticism.

For the U.S. and Saudis, this can only be seen as good news."

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