The Oil Weapon is Unleashed against Iran

Crude oil has become a key weapon in the battle between Saudi Arabia, Kuwait, and the UAE, aligned with the United States, against the mullahs of Iran. The Arab Oil kingdoms fear the emergence of a Tehran-led axis linking Iran, Iraqi Shiites, Syria, Lebanon’s Hezbollah, Palestinian Hamas in Gaza, and Islamic militants linked to al Qaeda trying to topple the Saudi royal family.

Earlier this month, Riyadh fired the first shot in the war against Iran, by knocking the price of crude oil to as low as $50 per barrel. The goal is to squeeze Iran’s budget and wreck havoc on its economy, as much as possible, before the mullahs can get their hands on the nuclear bomb. According to a Jan 24th report in the UK Telegraph that indicated North Korea is helping Iran to prepare an underground nuclear test similar to the one Pyongyang carried out last year.

Under the terms of a new understanding between the two countries, the North Koreans have agreed to share all the data and information they received from their successful test last October with Teheran’s nuclear scientists, to assist Teheran’s preparations to conduct its own test, possibly by the end of this year.

On Jan 23rd, Saudi Arabian Oil Minister Ali al-Naimi said the kingdom is aiming for moderate oil prices, but did not give an actual price level. He noted that Saudi Arabia’s spare crude production capacity is set to rise to 3 million barrels per day (bpd). In the event of a US naval embargo on Iran’s daily exports of 2.4 mil bpd, Riyadh could fill the missing gap from its spare capacity.

Crude oil prices were sliding steadily in the second half of 2006, even as OPEC was cutting back on its oil output from a record high of 28.3 million bpd. That’s because 1.8 million bpd of new oil supplies from Angola, Brazil, Canada, Kazakhstan, and Russia are expected to come on stream this year. As of Feb 2nd, OPEC-10 had lowered its output to 26.8 million bpd, but is still cheating by one million bpd above the quotas that it agreed upon on in October and December.

US Vice President Dick Cheney’s visit with King Abdullah on November 25th was brief, lasting only a few hours before he flew back to Washington. Cheney might have asked Abdullah to use his influence in the oil markets to knock prices lower, to put a squeeze Iran’s troubled economy, which depends on crude oil sales for 95% of its foreign exchange earnings and 50% of government spending.

To counter the Saudi inspired plunge in oil prices, Iranian President Mahmoud Ahmadinejad proposed on Jan 21st, to cut the oil price on which the next Iranian budget is based to $33.70 per barrel for the year starting in March, compared with a price of $44.10 for the existing budget.

“It is a signal to Iran’s enemies saying we are ready and we will manage the country even if you lower the oil prices more. We assume our enemies want to damage us by decreasing the price of oil. So we must reduce our dependency on oil revenue,” Ahmadinejad said.

Iranian crude usually sells for about $7 a barrel less than US light crude oil. So West Texas Sweet would have to stay below $51 per barrel for an extended period of time, to wipe out Iran’s budget surplus. Tehran spends $20 billion to $30 billion on heating oil and gasoline subsidies per year, costing the government roughly 15% of Iran’s GDP. Ahmadinejad was elected promising to bring oil revenues to every family, eradicate poverty and tackle unemployment.

But Ahmadinejad has failed to meet those promises. Instead, inflation in Iran according to various estimates is galloping ahead at 15% to 30%, and the jobless rate among men below 30 years old is at 20 percent. Anticipating a possible US blockade of gasoline imports in the next stage of economic warfare, Tehran is prepared to start rationing gasoline as early as March 23rd.

Mohsen Rezai, secretary of Iran’s Expediency Council, told the Dubai-based Al-Bayan newspaper on Jan 21st:

“America will exploit sanctions against Iran to incite people to rise up against the Islamic revolution, provide aid to movements hostile to Iran, carry out operations inside Iran and promote a sectarian war. The next two months will show the world this strategy. An Iranian-US confrontation is inevitable,” he said.

Iran’s nuclear program is continuing apace, and it aims to install an array of 3,000 centrifuges at a uranium-enrichment plant, more than enough to produce fuel for a nuclear bomb. Iran’s supreme leader Ali Khamenei said that if the United States were to attack Iran, he would respond by striking US interests all over the world.

Speaking to a gathering of air force commanders on February 10th, Khamenei said:

“The enemy knows well that any invasion would be followed by a comprehensive reaction to the invaders and their interests all over the world. Some people say the US president is not prone to calculating the consequences of his actions. But is it possible to bring this kind of person to wisdom?”

US crude oil prices (AMEX: USO - News) bottomed out at $50 /barrel, after Prez Bush ordered another 21,000 troops to Iraq, and directed the USS John Stennis to the Gulf. US crude oil rallied more than 4% on Jan 23rd, the biggest one-day gain in nine weeks, after US Energy Secretary Sam Bodman announced a plan to expand the Strategic Petroleum Reserves by 11 million barrels (100,000 bpd) starting in April.

Crude Oil Market Jolted by Depletion of Mexico’s Cantarell Oilfield

Then on January 29th, crude oil surge by $3 per barrel on news that daily output at Mexico’s biggest oil field tumbled by half a million barrels to 1.5 million bpd last year, according to the Mexican government. Mexico’s overall oil output fell to just below three million barrels a day in December, down from almost 3.4 million barrels at the start of the year, the lowest rate of oil output since 2000.

Some experts predict that Cantarell’s output will drop another 600,000 bpd by the end of this year. Petroleos Mexicanos [PEMEX] might try increase output by 200,000 barrels a day at other fields, leaving the country with a net decline of 400,000 bpd by year’s end and daily exports of less than 1.4 million barrels. Mexico’s oil reserves are expected to last only nine years and eight months at current rates of production.

Cantarell, the world’s second-largest oil complex, in the shallow gulf waters off the shore of Mexico's southern Campeche state, is a prolific giant that is past its prime. Monthly production peaked in late 2004 at just over 2.1 million barrels a day and has fallen more than 28.5% since then. Experts agree it has nowhere to go but down. Its proven reserves have tumbled by more than a third since 2000.

To counter a powerful $10 per barrel rebound in crude oil prices from a low of $49.84 per barrel, on January 18th, to $60 /barrel on February 19th, Saudi oil minister al-Naimi indicated in a timely interview with the media, that the kingdom would continue to over supply the oil market in the first half of this year. “Are we going to make additional cuts or increase supply? Most probably, if the trend is like it is today, (i.e. $60 /barrel) with the market getting in much, much better balance, there may not be any reason to change,” he said.

While the Saudis try to squeeze Iran’s income with low oil prices, the Bush administration has increased pressure on foreign banks and financial institutions to cut ties to Iranian counterparts, warning them that they risk losing access to US financial markets unless they stop doing business with Tehran. The US is especially trying to dry up financing for Iran’s two massive new oil fields that could expand output by 800,000 bpd over the next four years.

The Saudi inspired plunge in crude oil is just one of the economic levers that will be applied on Iran’s economy as the year unfolds. But can such “crude” methods work, especially with the rapidly depleting oil output from Mexico, and saber rattling in the Persian Gulf bolstering prices?