Daniel Lacalle

The Increased Isolation of Iran versus Saudi Arabia and Israel

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(Article published in Spanish in Cotizalia on Sept 30th, 2010)

It is the largest arms contract signed in U.S. history. $60 billion in weapons to Saudi Arabia. More importantly, that huge contract probably includes a long-term agreement to ensure oil supplies to the U.S. from the Saudi Kingdom. After so many empty words about energy independence from the Middle East, it seems that gone are the days of anti-OPEC messages from the current administration. But it is also of paramount importance to secure the protection of Israel from the threats of the Iran regime. After all, the Saudi Kingdom has as much to fear from Iran as Israel has.

The United States faces a future that needs Israel and Saudi Arabia as much as it did twenty years ago, if not more. Israel as the representative of Western values and democracy in the region, and Saudi Arabia as the best balancing factor as a West-friendly regime versus Iran and other radical Arab nations. And this is needed because the US will only be able to focus on recovering economic growth on the foundation that is provided by cheap energy, the only possible way, and through three pillars: the abundant reserves of conventional natural gas and shale gas (more than 250 years of supply, as Peter Voser, CEO of Royal Dutch Shell, says), oil from the Saudi + U.S. + Canada triangle and to a lesser extent, clean energy (nuclear and wind).

Of course, this agreement is intended to send a message to Iran, that is continuing with its nuclear program, despite the virus threats to its IT systems, and its anti-Israel but also anti-Saudi messages. It is not just a prevention message, it is a way to strengthen the Saudi government as leader of the moderate wing of the Arab countries. The Iranian regime is not supporting the King Abdullah, and continues to try to grab influence in the Shia community versus the Suni majority, while Saudi Arabia is undertaking the most ambitious program of modernization and opening up in its history, more than a billion dollars of investment in infrastructure and services, and, after sporadic protests in August, a very specific focus on education and securing employment for the population younger than 25 years, more than half of its 18 million inhabitants. A stronger Saudi Arabia and a lower influence of Iran on the Shia muslims means also a safer Israel and a better balance in the region.

We are aware that arming the Saudi Kingdom with $60 billion to send a message to a country, Iran, whose military budget is less than the $10 billion a year, must start from the view that conflict is most likely than what we believe or obey other strategic objectives. That goal may be the security of oil supplies ahead of an eventual geopolitical problem that significantly reduces exports from the Persian country.

Since March we have seen all Western oil companies cancel, reluctantly, supplies to Iran. The embargo is effective and is already evident in the prices of oil and the increase of Saudi crude exports to the United States that has analysts all over the world scratching their heads.

Why grow imports when U.S. demand is not really rising and inventories are at a five year high? At the end of the day, imports are going up because someone is buying these boats, and not, as some analysts seem to assume, because suddenly, lo and behold, boats appeared out of the blue one afternoon to download. Are the US building a cushion, an additional strategic reserve? Maybe.

Add to that the increase in the number of vessels storing oil on sea, which has risen 10% in two months, and it is plausible to estimate that if they are not preparing an environment of conflict, at least they may be seeking to ensure supplies of oil in a more complex geopolitical environment, taking advantage that oil trades with virtually no political risk premium.

It is true that OPEC now has 6.3 million barrels per day of spare capacity and that between Russia and Iraq they are expected to increase global supply by 2.5 million barrels per day in 2013, but I fear that not even Hussain al-Shahristani , Iraq’s oil minister, assumes the country’s goals as easily achievable in the medium term, particularly if the investments of international business concession of the fields start to slow down following the recent local incidents at the premises of the Al-Ahdab East field (CNPC, China).

But if Iran has to be considered out of the equation in a tense geopolitical environment, spare capacity is gone, and the additional barrels will only be able to come from the only country that can immediately increase capacity from 9 to 11 million barrels a day … You guessed it, Saudi Arabia.

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