Economic Warfare in the Middle East May Keep Oil Prices Low for the Near Future

Saudi Arabia continues to produce oil at high levels despite dropping oil prices. Oil makes up 80% of the Saudi economy, yet prices have dropped significantly over the past few months. The price now sits just over $30 a barrel. With their increasing production

OPEC nations agreed to increase oil production in hopes of weakening U.S. shale oil production. Most Middle Eastern countries can produce oil at less than $30 a barrel, while it takes around $60 to produce a barrel through fracking, the method used by shale oil producers. OPEC achieved its goal of slowing down U.S. production; however Saudi Arabia and Iran refuse to lower their own production, as oil has become a strategic weapon in the larger geopolitical conflict between the two Gulf rivals.

Saudi Arabia has expressed a desire for OPEC nations to lower production levels in order to see a rise in oil prices.  However, Iran is anxious to raise its own output levels as the U.S. lifts its sanctions. As a result, the Saudis are reluctant to decrease their own production as Iran makes up for lost profits in the oil market. With well-established cash reserves and the lowest breakeven price per barrel in OPEC, Saudi Arabia suffers less from low oil prices than does Iran.

Despite this however, the Saudi government is aware that its cash reserves are dwindling rapidly at the current price, and has lately debated new methods of funding. One option they considered was the IPO offering of state-controlled oil company, Saudi Aramco.

While the Saudi government publicly denies concerns over their deficit spending, privately there’s reason to worry. The Saudis are spending roughly $5 to $6 billion of their national reserves every month. With $630 billion total in reserves, it looks as if they are in no immediate danger, but that is assuming oil prices will not drop even further.

More troubling for the Saudis is the potential for Iran to surpass them as the top economy in the region. The recent Iran Nuclear Deal has lifted the economic sanctions that have long kept the Iranian economy from reaching full potential. With the sanctions lifted the World Bank predicts that Iran will see a 5.8% rise in GDP in 2016 and a 6.7% rise in 2017.

The Obama Administration has chosen to shift its focus on improving relations with Iran, to the detriment of Saudi Arabia, a long time U.S. ally. As a result, the Saudis have been forced to turn to other strategic methods for dealing with Iran, rather than relying on American military.

The Saudis are currently engaged with a proxy conflict with Iran on two fronts, Syria and Yemen, and relations between Iran and Saudi Arabia have continued to deteriorate following  the Saudi government execution of Shiite cleric Nimr al-Nimr on terrorism charges. By keeping oil production high and the price below Iran’s break-even point, Saudi Arabia hopes to keep the Iranian economy weak and hit the Iranians where it hurts.

While economic considerations may have initiated the drop in oil prices, Saudi strategic considerations are likely to continue to suppress prices as the Saudi government continues to utilize the market as a weapon.