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Peace Through War: Can an Oil War Lead to Peace in the Middle East?

Written By Prathit Singh

Research Associate, Law & Order

Disclaimer: Please note that the views expressed below represent the opinions of the article's author. The following does not necessarily represent the views of Law & Order.

Oil has been a matter of immense geopolitical importance in inter-state relations and has played a crucial role in determining the foreign policies of almost all countries in the world. Historically, the political economy of oil has been integral to the US national security calculus, the wealth and security of its allies and rivals, their foreign policies and grand strategy choices, and, by extension, the regional and global security environment (PAINTER, 2012). National economies and foreign policies around the world highly dependent on global oil prices and relations with major oil-exporting nations. Oil can therefore be easily considered as a decisive factor in terms of determining the strategic and geopolitical hegemony of nations that possess it in abundance.

The largest exporter of oil in the world is Saudi Arabia in the course of which, Saudi Arabia has never missed a chance to exert its hegemonic position on the Gulf countries and in the world as a whole. In fact, being the second-largest producer and largest exporter of oil, Saudi Arabia is a swing producer which means it can increase its oil production and supply arbitrarily, thus possessing the power to destabilize global oil prices and changing the geopolitical scenario relating to oil at its will. Though these factors give Saudi Arabia a position of immense responsibility and importance in terms of managing global oil prices and supply, the country in the recent years has not been seen shouldering the responsibility and managing this importance well.

Quite frequently in its course to exert dominance, Saudi Arabian efforts have resulted in the drastic collapse of oil prices and disturbances in global oil trade - the repercussions of which had to be collectively faced by the world and sometimes equally by Saudi Arabia itself.

Historically, Saudi Arabia had used its position and geopolitical hegemony over oil trade quite wisely. The trend was seen in 1973 when Egypt under Anwar Sadat persuaded Saudi Arabia to induce an oil price shock by reducing production and raising prices and later embargoing oil exports as a gesture of punishment to the United States for acting against the Arab world to support Israel. As a result, the oil prices quadrupled and Saudi Arabia proved to be successful in its intentions (Topf, 2014). Yet again in 1986 and in 1990, when Saudi Arabia led OPEC saw Russia as a threat to its oil hegemony, the bloc coordinated a massive price drop which did ultimately result in Russia defaulting its debt upon oil price drop from $25 to $12 in 1998 (Topf, 2014). Saudi Arabia has also been known to draw the reverse card by suppressing production in the face of high demand, keeping the oil prices artificially high, leading to an influx of ‘petrodollars’ among the OPEC members at large and Saudi Arabia in particular. This was the case in 2008 when oil prices rose to $147 per barrel due to this obverse exertion (Topf, 2014).

However, a larger instance of mismanagement of power was seen in 2014 when oil prices plunged down due to reducing demand and increased global production. Saudi Arabia had a major role in promoting this plunge as it blatantly refused to cut down on its products which could have resulted in preventing a further reduction in prices of oil by giving it a floor (Topf, 2014). Saudi Arabia, by refusing to cut down production in the face of low global demand was partly successful in its motive, which was to enforce discipline among its fellow OPEC Members, pressurizing US Shale Oil producers (Bowler, 2015) and punishing Russia and Iran (Goldwyn, 2018), all at once by letting the oil prices fall further. However, the move also backfired on Saudi Arabia, as it faced severe economic backlash when oil prices fell as low as $80 per barrel and the global demand for oil fell lower than expected (Samuelson, 2014). The country was forced to realign spending with revenues with rising economic slack and diminishing long-term growth prospects (Special Focus 1, 2018).

These backlashes ultimately set in motion the ongoing Saudi effort to expand its economic dependence beyond oil trade. In the larger picture, the plunge of oil prices was accompanied by a global slowdown, amid weakening global trade, subdued capital flows to Emerging Markets and Developing Economies (EMDEs), and broad-based weakness in commodity prices. (Special Focus 1, 2018)

Another larger instance of miscalculation and mismanagement of Saudi Arabia’s hegemonic control over the geopolitics of oil was seen in the recent months during the COVID19 pandemic. In March 2020, upon Russian refusal of production cut agreement with the OPEC members, Saudi Arabia in a bid to teach a lesson to Russia slashed its prices, offering massive discounts in order to increase its market shares, while it embarked upon a price war with Russia ( Krauss and Reed, 2020). The subsequent supply glut pulled down the prices. By the time the Saudis, Russians, and other major oil producers agreed to cut output by 9.7 million barrels a day on April 13, it was too late. Daily demand had already fallen by more than 20 million barrels a day as global economic activity came to a grinding halt amid the coronavirus induced lockdowns (Johny, 2020). Subsequently, Saudi Arabia found itself in a disadvantageous position wherein they never would have imagined being in. The Saudi government was forced to dip its hands into the foreign reserves for meeting expenditures. The Kingdom saw a record USD 24 billion monthly drops in its reserves in March to USD 479 million. It is also raising billions in debt from the bond market while the Finance Minister Mohammed Al-Jadaan was marked saying The Kingdom hasn’t witnessed a crisis of this severity over the past decades.” Consequently, the IMF predicted a 2.3% drop in the country’s GDP (Johny, 2020). The price of this mismanagement by Saudi Arabia is now being paid by its citizens who are facing a re-imposition of Value Added Tax, tripled taxes on basic goods, and also an allowance cut-off for the government officials (Johny, 2020).

While the event and its related repercussions turned out to be a mishap for Saudi Arabia, it has brought up an opportunity for peace. Owing to the deficit and financial pressure that Saudi Arabia has been facing, it was bound to declare a unilateral ceasefire in Yemen in April 2020, disengaging itself from one of the worst humanitarian crises, perhaps led largely by Saudi Arabia itself. Furthermore, owing to its present condition of economic helplessness, Saudi Arabia may go a step further in delving into cooperation with Iran, with whom it has shared a historic relation of rivalry. The international community has already seen an initiation of this in Saudi Arabia’s humble gesture to initiate talks with Iran ( Fassihi and Hubbard, 2019). If the peace talks follow, it will be more of an opportunity for peace for the world than a crisis for Saudi Arabia.

A host of problems that have been threatening peace in this region may start to perish if Saudi Arabia, in the face of a falling economy, and Iran, in the face of its declining hegemony decide to enter into any kind of cooperation by finding common ground.

If so happens, Saudi Arabia, which is likely to very closely represent the US interest, may be able to promote de-escalation of tensions between Tehran and Washington too, somewhat subduing the power race in the Middle East. Furthermore, this turn of events will also serve the larger US interest in the Middle East. The new US policy to promote peace in the Middle East, as had been done by Henry Kissinger, by making Saudi Arabia and Israel as dominating powers in the region (Indyk, 2019) would serve the best of US interest if Saudi Arabia is able to strategically control Iran in the region perhaps by subduing Iran’s influence in the region and using its position strategically by extending a hand of leveraged cooperation under terms of de-escalation in the region or even economic cooperation. Though the likeness of cooperation to this extent is less the possibility of lasting peace through this method is more and so are the chances of a US interference if events turn out so.

While presently, the Kingdom struggles with its financial problems, the prolonged prospect of this crisis may turn it into an avenue for the world to witness peace in the Middle East. The mismanagement of Saudi’s oil hegemony and the pandemic may turn out to shape the foundation for this conflict to end and strengthen the hope for peace in the Middle East through diplomacy. Meanwhile, it rests upon Saudi Arabia if it chooses peace in the Middle East, after having lost the oil war.

Bibliography 1. Bowler, T. (2015, January 19). Falling oil prices- Who are the winners and losers? Retrieved from BBC News: https://www.bbc.com/news/business-29643612

2. Clifford Krauss, S. R. (2020, March 8). Oil Prices Dive as Saudi Arabia Takes Aim at Russian Production. Retrieved from The New York Times: https://www.nytimes.com/2020/03/08/business/saudi-arabia-oil-prices.html

3. Farnaz Fassihi, B. H. (2019, October 4). Saudi Arabia and Iran Make Quiet Openings to Head Off War. Retrieved from The New York Times: https://www.nytimes.com/2019/10/04/world/middleeast/saudi-arabia-iran-talks.html

4. Goldwyn, D. L. (2018, January 20). Here’s Why Saudi Arabia Has Let Oil Prices Fall—and Why They Could Revive by Year’s End. Retrieved from Atlantic Council: https://www.atlanticcouncil.org/blogs/new-atlanticist/heres-why-saudi-arabia-has-let-oil-prices-fall-and-why-they-could-revive-by-years-end/

5. Indyk, M. (2019, November-December). Disaster in the Desert- Why Trump's Middle East Plan Can't Work. Foreign Affairs.

6. Johny, S. (2020, May 11). Coronavirus and oil price crash: Saudi Arabia is battling double crises. Retrieved from The Hindu: https://www.thehindu.com/news/international/coronavirus-and-oil-price-crash-saudi-arabia-is-battling-double-crises/article31558173.ece

7. Painter, D. S. (2012). Oil and the American Century. Journal of American History.

Special Focus 1. (2018, January). With the Benefit of Hindsight: The Impact of the 2014-16 Oil Price Collapse.

8. Topf, A. (2014, December 23rd). Did the Saudis And The US Collude In Dropping Oil Prices? Retrieved from Oilprice: https://oilprice.com/Energy/Oil-Prices/Did-The-Saudis-And-The-US-Collude-In-Dropping-Oil-Prices.html

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