P B A Sultans of Swing? The Geopolitics of Falling Oil Prices F. Gregory Gause, III The Brookings Institution is a private non-profit organization. Its mission is to conduct high- quality, independent research and, based on that research, to provide innovative, practical recommendations for policymakers and the public. The conclusions and recommendations of any Brookings publication are solely those of its author(s), and do not necessarily reflect the views of the Institution, its management, or its other scholars. Brookings recognizes that the value it provides to any supporter is in its absolute commitment to quality, independence and impact. Activities supported by its donors reflect this commitment and the analysis and recommendations are not determined by any donation. Copyright © 2015 Brookings Institution BROOKINGS INSTITUTION 1775 Massachusetts Avenue, N.W. Washington, D.C. 20036 U.S.A. www.brookings.edu BROOKINGS DOHA CENTER Saha 43, Building 63, West Bay, Doha, Qatar www.brookings.edu/doha Sultans of Swing? The Geopolitics of Falling Oil Prices F. Gregory Gause, III1 he recent fall in world oil prices Will domestic upheaval and regional war follow cannot but have an impact on the from our current period of a drastic fall in oil politics of the Middle East. Many of prices? That is highly unlikely. While salient Tits states, including two of the major players examples of such dramatic events pop easily to in the current struggle for regional influence– mind when thinking of past periods of low oil Iran and Saudi Arabia–rely heavily on oil to prices, the less dramatic fact is that very few fund their governments and to float their oil states actually experienced regime change economies more generally. Russia, trying to during oil price declines and that regional wars re-establish its regional influence after a two- are as likely to happen when oil prices are high decade hiatus following the collapse of the as when they are low. The geopolitical results of Soviet Union, is also highly reliant on oil. At the current oil price decline are most likely to a minimum, declining revenues highlight the be very modest, and in fact might be positive costs of an aggressive regional policy, whether for the United States. it is Iranian support for clients like the Bashar al-Assad regime in Syria and Hizballah in The straitened circumstances of all the oil Lebanon or the billions that Saudi Arabia and exporters could lead to a reduction in tensions other Gulf monarchies have committed to the among them, as they explore ways to cooperate Sisi government in Egypt. Falling prices also in order to prop up the price of oil. That has been present domestic political challenges to the oil a pattern in past periods of oil price decline. states, all of which have built patronage regimes Lower oil prices could lead Iran, Saudi Arabia, that require ever-increasing revenue to meet and Russia to the bargaining table on oil issues, the demands of growing populations. and any agreements they make could reduce the level of geopolitical and sectarian tension One can cite serious domestic and regional in the Middle East more generally. There are no disruptions that have followed severe oil guarantees here, to be sure. The intensity of the price declines in the recent past. Oil prices Syrian conflict and the sectarian tensions that it collapsed in the mid-1980s, falling from their has spurred regionally cannot be downplayed. previous height of around $30 per barrel at But the possibility exists that all these players in the beginning of the decade to a low of below the regional game will be looking to de-escalate $10 per barrel for a few months in 1986. The their tensions as they are all squeezed by lower political crisis that revenue drop occasioned oil prices. This could open up a window for in Algeria eventually culminated in elections creative diplomacy, linking oil talks to broader won by Islamists, a military coup, and a brutal regional crisis management, which Washington civil war that would last well into the 1990s. should be ready to exploit. Saddam Hussein’s 1990 invasion of oil-rich Kuwait has also been explained as, at least in This policy briefing will proceed to address a part, attributable to his desire to increase Iraq’s number of geopolitical issues surrounding the revenues at a time of financial stringency and fall in oil prices. It will briefly assess the role of political instability at home. geopolitical factors in creating the current oil 1 F. Gregory Gause, III is a non-resident senior fellow at the Brookings Doha Center. He is also Professor of International Affairs, holder of the John H. Lindsey ’44 Chair and Head of the Department of International Affairs at the Bush School of Government and Public Service, Texas A&M University. He gratefully acknowledges the research assistance of Rebeca Orrie in the preparation of this Policy Brief. 1 glut, arguing that the fundamentals of supply years underpins any reasonable explanation for and demand are far more important in explain- the current state of the market. Like all good ing current market realities than are purported monocausal theories, this one about Saudi Saudi geopolitical goals. It will then treat the Arabia driving down the price does fit with two major geopolitical questions raised by the some salient facts. There is no doubt that Saudi price decline in the Middle East: 1) will it de- Arabia would like to see the power of Iran stabilize oil-producing governments and 2) will and Russia curtailed. Riyadh, with over $700 it lead to greater levels of regional conflict. The billion in the bank, is much better able to ride paper answers “no” in each case and points to out a period of low oil prices than is Moscow the incentives for cooperation among major re- or Tehran. gional oil producers in this period of low pric- es. It will conclude with a call for a more ac- The problem with the geopolitical theory is tive American diplomatic stance regarding the that it just does not fit the facts. The price various crises besetting the region now, taking collapse that began in September 2014 was not advantage of what the author sees as the likely caused by an increase in Saudi production. The moves by Saudi Arabia, Iran, and Russia to deal Saudis produced about as much oil per day in with one another on oil-related issues. 2014 as they did in 2013, when prices closed the year above $100 per barrel. During that The 2014 Oil Price Collapse: Politics or same year, American production increased by Economics? over one million barrels per day (see Figure This subtitle is, of course, a false dichotomy. I). The collapse was the result of a belated Market fundamentals and government market recognition that supply was beginning decisions both play important roles in to outstrip global demand as well as the herd explaining the gyrations of the oil market. mentality that tends to exaggerate market But there is a persistent desire to identify forces (both at the upper and the lower ends) monocausal explanations to complicated in such a speculative market. phenomena, and the oil market is no exception. One persistent, though minority, trope in Privileging the geopolitical in Riyadh’s analyses of the 2014 price collapse is that the calculations ignores more important elements real driver of the market glut is Saudi Arabia’s in how the Saudis make decisions on oil policy. production policy. According to this line of The historical precedent that drives Saudi thought, Riyadh should have played the role of Arabian oil policy makers is not the heady “swing producer,” reducing its output as prices days of the 1970s, when a cryptic utterance fell in order to try to put a floor under prices. by the Saudi oil minister could send markets It did not do so because falling prices hurt its skyrocketing or tumbling, but rather the geopolitical rival Iran, and Bashar al-Assad’s traumatic experience of the mid-1980s. Oil great power ally Russia, much more than they prices started to decline at the beginning of hurt Saudi Arabia. The primary responsibility that decade, driven by the dual consequences for the collapse of oil prices in 2014 can thus of the enormous price increases of the 1970s– be attributed to Riyadh’s foreign policy agenda. increased supply (with more expensive oil from the North Sea and the North Slope of Those who put forward the geopolitical theory Alaska coming on line) and decreased demand. do not deny that market forces are driving The Saudis tried to arrest the fall of prices by prices lower. The Saudis cannot create glut or cutting production. Their OPEC partners shortage simply on their own. The rise of North pledged to cut production with the Saudis, American production and the slowing growth but rarely followed through. By 1985, Saudi rate of Chinese oil consumption in recent Arabia’s production had fallen to just above 2 Sultans of Swing? The Geopolitics of Falling Oil Prices Figure I: American and Saudi Oil Production and Oil Prices U.S. Saudi Production Brent Price (year Production average or end of (mbd) (mbd) month) 2008 5 9.26 $96.94 2009 5.35 8.25 $61.74 2010 5.48 8.9 $79.61 2011 5.65 9.46 $111.26 2012 6.5 9.83 $111.63 2013 7.45 9.7 $108.56 Jan 14 7.96 9.94 $108.16 Apr 14 8.22 9.7 $108.63 Jul 14 8.69 9.84 $104.94 Aug 14 8.74 9.74 $101.12 Sep 14 8.9 9.64 $94.67 Oct 14 9.05 9.74 $84.17 Nov 14 9.02 9.64 $71.89 Dec 14 n/a n/a $55.27 Source: U.S.