Why Saudi Arabia Wants to Increase Oil Production

The kingdom is trying to put pressure on Syrian allies Iran and Russia to influence the civil war there.

When oil exporting nations meet in Vienna on Thursday, Saudi Arabia, one of the world’s largest oil exporters, is expected to seek a raise in production quota. Neighboring Gulf states could support such a move but most non-Arab countries, including Iran and Venezuela, are likely to block it, arguing that production rates suffice to meet global demand, evidenced by declining oil prices.

So why do the Saudis push for lower oil prices when even they need crude to trade at over $90 per barrel to make ends meet? (A barrel of Brent crude oil sold at $97 on Wednesday.) The Financial Times quotes economist and oil watcher Phil Verleger who says that the kingdom is willing to let oil fall below its “break even” price for economic and political reasons.

The Saudis recognize that lower prices in 1999 were of great help in solving the Asian debt crisis. They know that low prices today help the recovery of Western economies which is ultimately in their interest as growth in the West will increase demand for oil.

Moreover, lower prices will slow the development of share oil and tar sands in Canada and the United States and might just slow the move toward alternative energy sources in Europe and North America.

This was all true a year ago though. What’s really driving the Saudi push to increase production now is geopolitics.

“The Saudis are very upset with the situation in Syria,” writes Verleger. They support the largely Sunni uprising against Alawite president Bashar al-Assad who is an ally of Iran’s. The Saudis may hope that reducing oil prices will convince the Russians, who continue to support Assad, to change their ways.

With China, Russia has consistently blocked United Nations Security Council resolutions that would have condemned the Syrian regime for the violence it deploys against demonstrators and rebels. Syria is still a top buyer of Russian military hardware and has hosted a Russian naval base in the city of Tartus on the Mediterranean since 1971. Moscow also fears that if Assad is overthrown, it could embolden separatist movements in its own outer provinces.

Russia needs oil to trade at $110 a barrel to manage its finances. Iran needs an even higher price to balance its budget and is under pressure from Western oil sanctions that are meant to convince it to give up its nuclear program.

Both Syrian allies will feel squeezed if the Saudis convince the rest of the OPEC cartel to raise production quota which is why it unlikely to happen. The mere effort, though, shows how Saudi Arabia is still looking for ways to influence the Syrian conflict, short of sending in troops which would probably prove disastrous for the notoriously ill experienced Saudi armed forces.

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