I promise this will be my last post on Iranian oil for a while (maybe a week?). But I want to point you in the direction of a new article on Tehran Bureau that dovetails with my 2012 Iranian Oil Survey, also published by PBS. The author is Andrew Scott Cooper, who recently wrote The Oil Kings: How the U.S., Iran, and Saudi Arabia Changed the Balance of Power in the Middle East. His book was well-reviewed but I haven’t read it yet. Unfortunately, my stack of must-reads is tall enough that it could tumble over late one night and smother me in my sleep.
Cooper’s Tehran Bureau article, titled “Iran’s Economy: Once More to the Precipice,” suggests that today’s theocrats are in danger of repeating the Shah’s economic mistakes and losing oil revenues at a critical time. I (mostly) agree with him that Saudi policy will make or break Iran; Saudi remains the world’s only swing producer and Saudi-Iranian tensions remain high. Former Iranian president and current head of the Expediency Council, Ali Akbar Hashemi-Rafsanjani, agrees too. In March he said, “If we had good relations with Saudi Arabia, would the West have been able to impose sanctions? […] Only Saudi Arabia could fill the void left by Iran.”
But a few of Cooper’s points deserve a second look. His statements are in bold:
The last time the Saudis intervened in the oil markets was in 2008. Fearing the collapse of U.S. banks and financial networks, President George W. Bush appealed to King Abdullah to open the spigots and offer price relief to Western consumers. In the last six months of 2008, the price of a barrel of oil plunged from $147 to under $35, dealing a massive and unexpected financial blow to Iran.
Cooper gives way too much credit to Saudi Arabia for driving down the price in 2008. The sequence of events that year is revealing. A cursory timeline shows that the Great Recession destroyed the price structure that year by decreasing demand. Cooper, however, gives sole credit to Bush’s appeal and the Kingdom’s willingness to “open the spigots.”
Let’s rewind. Bush visited King Abdullah twice in 2008, once in January and again in May. In order to satisfy the White House, Riyadh raised production by a modest 300,000 b/d in June. Critics and market analysts dismissed the increase as too little, too late. In truth, Bush’s appeals failed. The Kingdom did not ramp up production enough to make a dent in the price.
Prices continued to rise in spite of Saudi Arabia’s modest production increase. Brent, the European benchmark that Saudi oil is tied to, reached a record high of $147 a barrel in July. Saudi officials, for their part, did not think increased production would correct the price because they believed speculators were to blame—not supply-demand dynamics.
July oil prices settled into the $120-$140 range after reaching their historic high. In August, prices hovered around $115. Lehman Brothers collapsed in September and with it the global economy entered its free fall. Brent sold for $105 on September 1, two weeks before Lehman Brothers filed for bankruptcy. It bottomed out at $35 in late December, as the recession dragged economies down.
The Saudis did not ramp up production and drive down prices. It was the recession that slashed prices and temporarily ruined oil’s appeal as a traded commodity.
Although Ahmadinejad’s government absorbed the losses, the outbreak of anti-regime protests the following year suggests a causal link between turbulence in the oil markets, economic distress, and social and political unrest. It was a lesson the Shah learned to his bitter regret 35 years ago. To paraphrase economist Jahangir Amuzegar, the Islamic Republic — like the monarchy it succeeded — still rests on “oily legs.”
I can’t remember any protests against Iranian oil policy or the low price of crude in 2009. Oil politics did not consume Twitter that summer. No Iranians carried signs claiming the regime was wasting its crude oil inheritance. Instead, hundreds of thousands of people turned out to protest the regime because they believed Ahmadinejad’s re-election was rigged. We can safely assume that many protested because Iran’s economy is in bad shape. But overlapping grievances and causation are not the same.
The Green Movement championed dignity in the face of arbitrary, pervasive oppression and the denial of fair elections. There is no “causal link” between oil and unrest in this case.
Stockpiling oil when prices are high is “economically counterintuitive,” observes the Financial Times. So what is going on here [now that Saudi and U.S. inventories are growing]? If the Saudis do not intend to take the oil to market, and if the Americans do not intend to consume it, what do they intend to do with it?
Yes, stockpiling oil when prices are high is stupid. But how high was the price of Saudi crude in the first half of this year, when American inventories began growing? I ask because, since the last quarter of 2011, U.S. imports of Saudi crude have climbed above those from Venezuela and Mexico, two countries in the same neighborhood that normally vie for second or third place in total exports to the U.S. (behind Canada). Saudi Arabia now stands as America’s number two source of imported oil, a position they have not held for roughly a decade.
Multiple sources confirm the Saudis discounted crude in order to increase sales to the U.S. and push down the price everywhere. The article cited by Cooper says as much: “Data shows that the Saudi crude has been priced advantageously for U.S. buyers. Official selling prices (OSPs) for U.S. buyers, which are set by the state oil firm Saudi Aramco, have fallen to a deep discount versus Asian and European refiners, according to Reuters data.”
Sitting on oil makes sense if you’re getting it cheaper and prices are expected to stay higher.