Saudis use their own strategic weapon against Iran

NY Times:

Saudi Arabia, which benefited immensely from record oil prices last year, has sent signals in the past two weeks that it is committed to keeping oil at around $50 a barrel — down $27 a barrel from the summer peak that shook consumers across the developed world.

The indications came in typically cryptic fashion for the oil-rich kingdom. In Tokyo last week, Ali al-Naimi, the Saudi oil minister, said Saudi Arabia’s policy was to maintain “moderate prices.” The previous week, on a stop in New Delhi, he effectively put his veto on an emergency meeting of the Organization of the Petroleum Exporting Countries to prop up prices after oil briefly dropped below $50 a barrel, the lowest level in nearly two years.

The events that propelled oil prices above $77 a barrel last July, then dragged them down again, were beyond the control of any single producer. Still, Saudi Arabia, which is by far the largest oil producer within OPEC and sets the cartel’s agenda, is seeking to avoid a repeat of the dramatic rise in prices while trying to put a floor beneath them.

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The Saudis appear to be rediscovering that painfully high energy prices take a profound toll on the global economy, which in turn reduces demand for their oil. But other motives seem to be at work, too, including the Saudis’ desire to restrain Iran’s ambitions in the region.

How much influence the United States has exerted is an open question. Vice President Dick Cheney met with King Abdullah of Saudi Arabia in Riyadh in November, but his office would not say if oil was discussed. The White House has been supportive of Saudi energy policy, and President Bush and his father are close with Prince Bandar bin Sultan, the Saudi national security minister and former ambassador to Washington.

Although Saudi officials say their oil policy is based on market considerations and not political ones, the meeting in November led to renewed speculation that the kingdom might be tempted to dry out Iran’s ambitions by pushing oil prices down. Prices have already been falling because of mild weather and slowing demand.

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The Saudis can be more sophisticated than many give them credit for. The lower prices not only hurt the Iranians but in the long run they help the Saudis because they make the economics of alternative energy less attractive and they also make conservation less necessary. Right now for the US the damage to Iran's economy is the most important factor in the short term. Iran is not able to meet its current OPEC quota so it cannot increase production to make up the revenue shortfall. That, along with the UN sanctions and the pressure the US is putting on them militarily is making life very uncomfortable for the Ayatollahs.