Despite the dramatic drop in the price of oilover 40 percent in just a few monthsSaudi Arabia announced at the recent OPEC meeting that it plans to maintain current production levels. This guarantees that there will be no short-run price turnaround, and possibly continued price declines. After all, the price decrease puts the hurt on Saudi Arabia as well as others. While the nation used its oil profits to build a huge sovereign wealth fund, the government also spends a lot of money; and the International Monetary Fund recently suggested that the country may soon face government expenditures greater than revenue. So why this course of action?
Sure the Saudi choice is painful to the Saudis. But that’s not the issue. The issue is how much gain for the pain. If short-run pain generates longer-term gains, then it is worth the cost. But what are these gains?
One theory is that the Saudi strategy aims primarily to heel oil fracking in the U.S. Oil output in the U.S. has hit decades-long highs as a result of the development of fracking. Yet while oft-mentioned as a major target for Saudi production decisions, I suspect that U.S. oil production is, at best, a second-order concern for the Saudis. After all, the oil now accessible via fracking in the U.S. represents a non-reversible shift outward in oil’s supply curve. While a price decline can mess with production in the short runand cause higher-cost wells to shut downthe same wells can be opened when the price rises again. The oil in the ground isn’t going anywhere. To be sure, there would be some lag due to the need to reestablish infrastructure and to rehire workers, but a producer doesn’t gain much advantage from a lower price if the competition can reenter the market if the producer attempts to raise the price again.
The real cause of the Saudi decision likely hits closer to home. Another oft-mentioned possibility is that the Saudi production decision takes aim at its regional Shia rivalIranand possibly also against a resurgent Shia presence in Iraq as well. This hypothesis, while plausible, is likely only an added benefit to the Saudi’s price decline. To be sure, the price decline surely impacts Iran negatively, and can stir up trouble for the government, the remote and uncertain benefits of this gamble would not seem to be worth the cost that Riyadh is paying with certainty right now.
Even if there were a regime change in Iran, it would remain a Shia-dominated government. It’s true that declining oil prices can likely slow down Iran’s nuclear program, or even induce change to a regime that might discontinue the program entirely. Yet the oil price’s effect on Iranian nuclear development would seem marginal at best, and the probability of inducing a regime shift would seem so low as to make the current cost greater than an improbable gain. The gamble wouldn’t seem worth it. And while the price decline might inflict damage on a Shia-dominated Iraq, there are no obvious gains that Riyadh might anticipate commensurate with the cost that its action imposes on itself.
I suspect that the threat the Saudis most fear is not the long-simmering rivalry with regional Shia governments, but the new Sunni-led threat constituted by ISIS. The paltry level of oil supplied to world markets by ISIS offers no economic threat to Riyadh, so the Saudi action might initially seem akin to attacking a mosquito with a shotgun. But the stream of oil revenue to ISIS is a critical life-line of support for that organization, and I suspect that Saudi leaders view ISIS as just shy of an imminent threat to their existence.
ISIS’s existence threatens Saudi leadership at some of its most vulnerable points. ISIS is a product of the international Islamic revival, parts of which developed into various factions of the international jihad. Once fellow travelers in opposing Soviet intervention in Afghanistan in the 1980s, the alignment between revivalists and the Saudi state evaporated soon after, prompted by the first Gulf War.
The Saudi government’s reliance on a non-Islamic, foreign government for its defense, and the physical presence of U.S. troops on Saudi territory (which later were withdrawn in 2003), provoked jihadists into bitter criticisms of Saudi rulers, and a series of dramatic, violent attacks in Saudi Arabia.
Islamic revivalism is a distinct, externally-developed religious current relative to Saudi Arabia’s traditional Wahhabism. It has developed even in Saudi Arabia as a result of visitors and immigrants, influences picked up in the Afghan war, and increased communication across national borders. ISIS’s claim to reestablish the Islamic caliphate attempts to draw on widely shared aspirations of Muslims in general, but particularly aims to strike a chord with jihadists. In doing so, it aims to delegitimize the authority of other Islamic states and their rulers. This theme also resonates with some in Saudi Arabia who feel alienated from both Saudi rulers and from traditional Wahhabism. Given the numerous, violent attacks in Saudi Arabia by jihadists, and indigenous criticisms of the government and Wahhabism, ISIS stands as a focused, existential threat to Saudi rule in ways that other regional powers, like Iran and Iraq, do not.
ISIS may not yet be an imminent threat to Saudi Arabia. If it isn’t already, it is on the cusp of becoming so. At the very least, it is close enough that a prudent Saudi leadership would have plenty of incentive to take immediate action rather than risk allowing the threat to grow. That this is Saudi Arabia’s first-order concern does not of course negate additional advantages the state can accrue from allowing the oil-price decline to stand. But ISIS is the new variable in the Saudi equation and, to my mind, explains the otherwise surprising Saudi actions in the oil market.
James R. Rogers is associate professor of political science at Texas A&M University. His previous articles can be found here.