Energy

By John Hannah

Are the Saudis prepared to constrain oil prices to weaken Iran? It's an intriguing possibility that, if implemented, could have major implications for U.S.-led efforts to curb the Islamic Republic's nuclear program.

In no small part because of a weakening dollar, oil prices have risen for most of the past year from a low of close to $30 per barrel to around $82 per barrel last week. But since then, prices have been slowly sliding back, dipping below $77 yesterday. Most media attributed Thursday's decline to a report that U.S. oil inventories had increased higher than expected, and that U.S. consumers continued to reduce energy use in a still sluggish economy. No doubt true. But other factors have been at play as well.

Specifically, the near-record stockpiles of oil that currently exist not only in the United States, but across the developed world, have been made possible by the fact that OPEC has been increasing output at the fastest pace in two years. Earlier this week, Bloomberg reported that the cartel has boosted production more than a million barrels a day since March -- despite the worst global recession since World War II. OPEC's largest producer, the Saudis, have helped lead the way, increasing exports four out of the past six months. Saudi output has increased almost 300,000 barrels per day since earlier this year. Overall OPEC production reached its highest level in 10 months in October.

The Saudis have said that $75 per barrel is an appropriate target price. This week, a Saudi government advisor told the press that, at over $80 per barrel, prices had reached "the high end of our range" and any further rise could prompt the Kingdom to further tap its unused capacity -- which currently stands at approximately 4 million barrels a day.

The Saudis have publicly explained their effort to moderate prices as a function of their desire to protect a fragile global economy. But it's hard not to notice that the Saudi strategy also has the side benefit of pinching Iran. Specifically, while the Saudis in 2009 require an average oil price of about $51 a barrel to cover their budget, Iran needs an average price in excess of $90. If the price holds steady at the Saudi-designated range of $70-$80 for the rest of this year, the Saudi treasury could come in with a slight surplus. The Iranians, by contrast, have reportedly been forced to consider phasing out food and energy subsidies in an attempt to battle their looming fiscal problems.

Of course, reducing subsidies on essential commodities is almost always political dynamite -- especially in a place like Iran, where the economy is already in a shambles, and where millions of Iranians have taken to the streets since the fraudulent June 12 elections to make known their hatred of the current regime. The fact is that the Islamic Republic is desperate for increased cash flow that could be used to buy off as many of its disaffected citizens as possible and cover up its gross economic mismanagement. Saudi determination to limit any price spike -- for whatever reason -- is clearly an impediment.

With daily exports in the range of 2.5 million barrels per day, Iran stands to lose about $900 million annually from every one dollar drop in the price of oil. With excess capacity of 4 million barrels per day, the Saudis are clearly in position to go much farther than they have to date in squeezing Iran if they so choose. An aggressive Saudi effort to depress oil prices well below the current $75 target could prove extremely harmful to Iran's already reeling economy and tumultuous political situation. Almost certainly, such an effort could inflict as much pain on the Iranian regime as many of the sanctions currently being discussed by the United States and its international partners -- and, given Russian and Chinese reluctance to get tough with Iran, would almost certainly be quicker and easier to implement.

Would the Saudis really be prepared to play hardball with Iran in this way? In the past, the answer has usually been no. Taking big risks to offend more powerful neighbors has generally not been the Saudi way. A transparent effort to inflict major damage on the Iranian economy would certainly incur the Islamic Republic's wrath. The Saudis no doubt recall that a similar charge about depressing oil prices led Saddam Hussein to invade Kuwait in 1990. Even if an Iranian military attack is not likely in the cards, the Saudis have good reason to fear the kind of mischief Iran could cause within the Kingdom -- especially among the large, potentially restive Shiite population that is concentrated in its oil-rich Eastern Province.

That said, there's no doubt that Saudi King Abdullah views Iran -- and the near-term prospect of its acquiring nuclear weapons -- as nothing short of an existential threat to the House of Saud and its preeminent position in the Islamic world. There's at least some chance that he may be prepared to consider doing things now that in the past would have been unthinkable in order to prevent his worst nightmare from coming to pass -- especially if he's provided sufficient support, encouragement and guarantees from the United States and our major European allies.

In this regard, the current crisis in Yemen, in which Saudi forces have been drawn into combat on their southern border against Iranian-backed Shiite rebels, has only upped the ante. As with almost everything Iran does, Abdullah no doubt perceives the Islamic Republic's involvement in Yemen as the latest maneuver in a grand strategy whose ultimate target is the Kingdom itself and control of the Islamic holy sites of Mecca and Medina.

The big question is how far the Saudis are willing to go in drawing on their oil power to really do something about it -- something, that is, that actually stands a chance of either 1) compelling the Iranian regime to fundamentally re-calculate its nuclear ambitions, or 2) speeding the regime's unraveling at the hands of its already seething population. Of course, encouraging the Saudis to use oil as a political weapon is not without its downside risks; after all, the United States was on the receiving end of just such a Saudi gambit during the oil embargo that followed the 1973 Arab-Israeli war. But given the enormity of the stakes now at play vis a vis Iran -- both for the Kingdom and for the United States -- it's clearly an option that at least deserves serious consideration. One hopes that it's already the subject of intense consultations between Washington and Riyadh, preferably at the highest levels. Should the United States conclude that the potential benefits outweigh the risks, it will need to muster every instrument at its disposal to steel the Saudi king to take unprecedented measures to face down Iran's unprecedented challenge.               

Scott Nelson/KAUST via Getty Images

By Christian Brose

Admittedly, I'm no climate science expert, but I found this piece from Jim Manzi pretty darn persuasive as to why Waxman-Markey -- the American Clean Energy and Security Act -- is a bad bill. It's well worth your time in light of Congress' vote on the bill tomorrow.

By Philip Zelikow

As announced by Igor Sechin on leaving Beijing, it appears that the Chinese government will loan $25 billion to two giant energy companies controlled by the Russian government. In exchange, the Russian government has pledged to supply 15 million tons of oil to China per year for the next 20 years.

This appears, roughly, to be a pledge of about 2.2 billion barrels of oil, over the next 20 years, in exchange for $25 billion now. Depending on how one calculates the cumulative value of present money, this sounds like a deal worth something in the neighborhood of $20 a barrel. And this would lock in at least about 5 percent of all Russian oil exports just for the Chinese market, at such an effective price. I invite others to share information that contradict or elaborate on these apparent estimates. 

If the United States had used credit to obtain such a long-term commitment of oil on concessionary terms from a debtor (say, one in the Arab world), some of my academic colleagues would be calling this an illustration of informal empire. For anyone with memories of Chinese history of, say, the 1890s (specifically the history of Russian finance in Manchuria, and the Chinese Eastern Railway), this announcement has to bring a smile -- at least a smile to some folks in China, who know this history very well indeed.

If these numbers are close to being accurate, this deal is a revealing glimpse into the current state of Russia's political economy. Again, though, I invite others to refine these crude, initial guesstimates.

By Philip Zelikow 

In a set of suggestions for a global perspective on fiscal policy in the crisis, I offered some suggestions about spending and some suggestions about taxes. On taxes, payroll tax cuts (not a one-off rebate) could be coupled with some kind of carbon tax. I noted that Lawrence Lindsay and Charles Krauthammer had made similar points.  

The payroll tax cut gets a quick demand boost by providing a lasting increment in income to folks most likely to spend the extra money. A carbon tax meanwhile reinforces our global credibility on fiscal sustainability (essential for the success of the stimulus). Such a tax could have many other positive macroeconomic effects that could complement an overall spur of aggregate demand: e.g., reduce the long-term current account deficit, dampen reliance on inflation-prone commodities (oil prices are likely to spike again as growth returns), and stimulate R&D on energy productive technologies where U.S. firms may gain a global edge. And then there are the energy and environmental arguments.

The political window for bipartisan policy action has just widened some more. Steve Coll helpfully called attention to an important speech last week by Rex Tillerson, chairman and CEO of ExxonMobil. Tillerson's topic was global energy security. He was not speaking off the cuff. This was a carefully prepared address from the head of one of the largest energy companies in the world. The following passage repays especially close study and is worth quoting in full:

As a businessman it is hard to speak favorably about any new tax. But a carbon tax strikes me as a more direct, a more transparent, and a more effective approach. It avoids the costs and complexity of having to build a new market for securities traders or the necessity of adding a new layer of regulators and administrators to police companies and consumers. And a carbon tax can be more easily implemented. It could be levied under the current tax code without requiring significant new infrastructure or enforcement bureaucracies.

A carbon tax is also the most efficient means of reflecting the cost of carbon in all economic decisions -- from investments made by companies to fuel their requirements to the product choices made by consumers.

In addition, such a tax should be made revenue neutral. In other words, the size of government need not increase due to the imposition of a carbon tax. There should be reductions or changes to other taxes -- such as income or excise taxes -- to offset the impacts of the carbon tax on the economy.

Finally, there is another potential advantage to the direct-tax, market-cost approach. A carbon tax may be better suited for setting a uniform standard to hold all nations accountable. This last point is important! Given the global nature of the challenge, and the fact that the economic growth in developing economies will account for a significant portion of future greenhouse-gas emission increases, policy options must encourage and support global engagement.

This is not the occasion for examining the cap-and-trade issues in detail.  But, in short, I think Tillerson is right. The current UN and EU systems for international offsets and globalization of carbon credits are broken, yet such structures are essential to make cap-and-trade work globally.  Senator Bob Corker's critiques last year had much merit. 

Yet doing nothing is not a good answer either, substantively or politically.  Hence I welcome Tillerson's move to open up political space for an approach that may appeal to traditional Republicans and for Democrats willing to join in a bipartisan approach coupled, for stimulus, to a durable cut in payroll taxes.