In March the Centre for Policy Studies published my paper, Deploying the Saudi Oil Weapon Against Russia. The report suggested that the best means of stopping Russian aggression in Ukraine was for Saudi Arabia to increase oil production and depress oil prices. The logic behind the strategy is that Russia needs an oil price of about $85 or above to sustain its state budget, whereas the Saudis can weather weaker prices, and the West would subsequently benefit.
So it’s interesting to see that, despite the turmoil engulfing the Arab world, prices are indeed sliding to around $95/barrel (from around $105/barrel earlier this year), and seem likely to go lower. This is due to weak demand, but also rising US production. Over the weekend press reports stated that the Saudis had begun to increase production in return for the US joining in the fight against ISIS, and that lower prices would also hit ISIS funding. But ISIS sells just a few tens of thousands of barrels per day on the black market for well under half the open market price – and it’s unclear whether a lower open market price would have much impact on the discounted rate ISIS gets. A more direct approach would be to watch the ISIS-controlled oilfields with drones and attack any trucks seen leaving, something that Obama now has the means to do.
Much more likely is that the US wants to pull the rug from under the Russian state budget, just as suggested in my paper. The timing is also suggestive – the latest round of US sanctions start to threaten existing high-tech drilling by Exxon in the Kara Sea and elsewhere in Russia, and there are hints that a direct ban on existing projects may be coming. On Russia, as on ISIS, Obama is starting to emerge from behind the sofa.
If oil prices continue to slide and the US makes good on its upstream sanctions threats, the combined effect on the Russian economy will be stark, both short term and long term. Whether that deters Putin’s adventurism is another matter – but there is ample proof that doing nothing encourages him, and is no longer an option.