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January 17, 2007
Have The Saudis Declared Economic War On Iran?

Noticed a drop in prices at the gas pump of late? After approaching or even topping $3 a gallon for gasoline, the prices have steadily fallen in recent weeks; stations here in Minnesota had it at $1.89 per gallon over the weekend. The decline at the pump comes from an unexpected glut in the market, and some OPEC producers had hoped to force a round of production cuts to bolster crude prices. However, Saudi Arabia announced today that it had 3 million bbls/day of spare capacity, and it intends to start using it (via Hot Air):

Prices fell in early trading after Saudi Arabia's Oil Minister, Ali al-Naimi, said his country has 3 million daily barrels of spare capacity and will push ahead with projects to expand output. Oil futures plunged yesterday after al-Naimi said he saw no need for an emergency OPEC meeting to consider further cuts in output.

``The Saudis are saying that they don't want to be the swing producer,'' said Bill O'Grady, director of fundamental futures research at A.G. Edwards & Sons Inc. in St. Louis. ``The Saudis have made substantial cuts, unlike a lot of the other OPEC members. Oil in a $40 to $50 range suits the Saudis much better than oil at $70.''

The Organization of Petroleum Exporting Countries, which pumps about 40 percent of the world's oil, agreed to cut production by 1.2 million barrels a day starting Nov. 1, citing slower-than-forecast demand growth and rising stockpiles. Member states will cut daily output by a further 500,000 barrels on Feb. 1, the group said Dec. 14.

Venezuela and Algeria are seeking a third accord since October to reduce production because of the fall in prices. ...

Prices are down 21 percent from a year ago. Oil in New York has fallen 27 percent in the past year when measured in euros, 30 percent in British pounds and 18 percent in yen.

This will hurt those producers whose efficiency cannot match the Saudis, which primarily means Iran and Venezuela. It's doubtful that the Saudis care much about Hugo Chavez and his determination to nationalize the Venezuelan energy industry, but the Saudis care a great deal about Iran and its radical Shi'ite mullahcracy. The Iranians have a big economic problem at the moment, and their only hope is to keep oil prices high enough to cover their gaps. If oil prices continue to drop, it slices off most of the margin the Iranians can capture from oil sales, their only export of any significance.

It also frees the Western nations sanctioning Iran to conduct an agressive pressure campaign. The Iranians thought that they had more leverage than the West as a major oil producer, although Iranian exports only account for a small percentage of global commodity trading (around 5%) -- and that share gets smaller and smaller. The Iranians have had to use more of their shrinking production for domestic purposes, meaning that the lower prices have an exponentially crippling effect on their economy.

Put this another way; the Iranians contribute around 2.5 million bbls/day, that's less than the Saudi spare capacity. The Saudis have basically pledged to make an Iranian shutdown irrelevant in the short to medium term, taking away one of the Iranian trump cards in their standoff with the West.

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Posted by Ed Morrissey at January 17, 2007 1:57 PM

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