‘Oil Conspiracy’ Theory and Its Critics

Friday, January 23, 2015

Kaveh L. Afrasiabi   

In Iran, although both the Supreme Leader and President Rouhani have lashed out at a “political treachery” behind the current oil price slump, a number of pundits have drawn a somewhat different conclusion that does not subscribe to an “oil conspiracy” or place any major blame on either Saudi Arabia or the US. As expected, the Saudis have defended themselves and their oil minister, Ali al-Naimi, has characterized the conspiracy allegation as a "wild and inaccurate conjecture...We do not seek to politicize oil. For us it is a question of supply and demand." In contrast, both the Russian and Venezuelan leaders have pointed at "an agreement that the US and Saudi Arabia" have cooked up to "punish Iran and affect the economies of Russia and Venezuela." Iraqi officials have also echoed this sentiment.     

Clearly, this is an issue of highest national and international importance that needs to be addressed properly based on empirical facts and historical knowledge. Although the figures for Iran are not out yet, in Russia alone it has been estimated that the 2015 budget will have a serious shortfall (of minimum $45 billion dollars) as a direct result of the oil ‘crisis’. Cheap oil has played a huge role in bringing Russian economy to an official recession and econometric estimates regarding Iran will likely put the damage due to the oil price fall to several billion dollars in the current fiscal year (US's latest estimate is $11 billion). In order to get to the bottom of the 'oil story' a special task force consisting of oil experts, economists, and people familiar with geopolitics, is desperately needed, in order to undertake a systematic study of the issue and to put their final findings in a report to the public. In such an undertaking several inter-related issues would need to be addressed, such as whether or not the oil price fall is due to an “oil glut” pure and simple or rather primarily to market manipulations and an undeclared “oil war”?   

Myth of Oil Glut  

There is simply no huge oil oversupply that correlates with the steep price decline.  According to the Wall Street Journal (January 20, 2015), there is an oversupply of around 1.5 million barrels a day (from a total of 93 million barrels/day). But, this tells only a part of the picture, in addition to conflating a minor 'oversupply' with 'oil glut'. In fact, over the past couple of months, demand has increased and production has fallen, yet without any effect on the downward spiral of the oil price. In November and December, oil supply fell and import of countries such as China and India rose. Despite talks of falling demand in Asia, China's import rose nearly 10 percent compared to the previous year. In fact, in September, 2014, China's crude oil imports rose 7.4 year on year to 6.74 million barrel/day, the second highest on record, a 13.1 percent rise in volume compared with the preceding month. Nor has there been a steep decline in oil demand, which explains the stability in 'call' for OPEC oil during 2014, in light of the (slow) growth of the industrialized (OECD) world (at 1.3 percent in 2014, for India at 5.5 percent, for the world at 3.1). 

World global oil demand grew by 1.2 percent according to some authoritative estimates, and forecasts are for a slightly higher growth in 2015. The OPEC’s own latest forecast paints an upward swing in oil demand in the intermediate and long-term. Yet, compared to the average oil price of $110 in early Summer, 2014, Goldman Sachs's estimate for 2015 is around $50 a barrel.  And the big question is of course why? What is behind this dramatic decline from the 2014 Summer peak, in the absence of a great disparity between the supply and demand curves?  Another question is what has caused that disparity, given the absence of any huge increase in the inventories of non-OPEC producers in 2014?     

Concerning the latter, it is important to realize that in 2014 there was no steep decline in U.S. demand for oil on the world market either. Total U.S. crude imports for the first 9 months of 2014 were only down 15 percent compared to two years before, this despite a boost in U.S. oil production. U.S. imports around 22 percent of its oil from Persian Gulf. Yet, irrespective there is a global perception of a huge "oil glut" that has definitely contributed to the 'psychological' variable in the oil price depression.

The Role of Speculators/Market Manipulators

In a recent interview, Dr. Abbas Maleki cites the "entry into market of oil reserves of major consumer countries" as one of the reasons for the oil price decline, yet this is at best a marginal factor in the big picture and, moreover, can be viewed as an evidence of market manipulation by certain governments. A more important factor is the action of speculators that, according to the September 2014 statement by the OPEC Secretariat "are behind much of the price decline." The Organization's monthly reports have observed that intentionally these individuals or groups, who are engaged in the main crude oil futures contracts, have been "exerting significant downward pressures on price."

What then is needed is a close scrutiny of the activities of these speculators who have manipulated the market, e.g., holding at least 12 tankers that store 25 million barrels of crude at sea according to Al-Arabyia, which reminds us of the comparison with the 1980s, when the CIA Director William Casey set up an elaborate and systematic scheme to manipulate oil trading markets, that complemented Saudi Arabia's quid pro quo of receiving advanced arms in return for flooding the market - in the span of less than one year the Saudis hiked their production level from 2 to 5 million barrels a day, thus causing a decline of 1986 oil prices from $27 to $10 ($58 to $22 today). That proved disastrous for the world's largest producer at the time, the Soviet Union, while the Saudis did not suffer great revenue losses because the price declines wee offset by their output increases.

Saudi Arabia’s Complicity

In the current debates on the oil price fluctuation, pendulum keeps swinging back and forth between blaming and absolving Saudi Arabia of complicity in the current oil price fall. Dismissing the idea that the Saudis are "the main factor behind the on-going fall in the oil prices," some pundits have overlooked that (a) Riyadh has acted as the only global swing producer, and (b) its refusal to play this role highlighted at the November 2014 OPEC meeting speaks volumes about its true intentions, indeed louder than the verbal denials of its oil officials, which should be dismissed as nothing more than the contrived facade of an oil delinquent. Even the likes of Amirita Sen, the chief analyst at Energy Aspects Ltd., have admitted that the Saudis remain the "only factor that can stabilize the markets in the short term." The Saudis' 'game-changing' behavior cannot be understood simply in pure economic terms, or through the “national interests” prism.

Indeed, a key flaw of critics of 'oil conspiracy' theory is that they tend to put Iran and the Saudis in the same category, when it is abundantly clear that Saudi Arabia is a US client state that closely follows US’s regional and global strategies. History is highly instructive here and calls for close comparisons between now and the early and mid-1980s when the CIA director visited Riyadh and enrolled the Kingdom in a secret economic warfare against the Soviet Union. It is therefore not far-fetched to think that the US has gone back to the old script in the face of a new cold war with Russia, new competition by the BRICS, the Russia-China substitution of dollar with local currencies, as well as Iran's resistance in the nuclear talks. Even the New York Times has readily admitted (without any reference to an oil conspiracy) that the US has harvested “huge benefits” from the oil price decline, including geopolitical gains against its adversaries such as Russia, Iran, and Venezuela (consistent with the US's post-cold war doctrine of preventing the emergence of a global rival at any cost). 

In conclusion, history shows that conspirators rarely show their hands and often the passage of time is necessary to uncover them and circumstantial rather than direct evidence must be used to prove a conspiracy. This is why during the 1980s the US media acted as the propaganda arm of the US government by denying any oil conspiracy whatever and it took more than a decade before the facts came out. Learning lessons from the past, however, means drawing legitimate inferences and conclusions called for by the existing facts that suggest strong affinity with a sinister past.

*Kaveh Afrasiabi, PhD, is the author of several books on Iran’s foreign policy. His writings have appeared on several online and print publications, including UN Chronicle, New York Times, Der Tagesspiegel, Middle East Journal, Harvard International Review, and Brown's Journal of World Affairs, Guardian, Russia Today, Washington Post, San Francisco Chronicle, Boston Globe, Mediterranean Affairs, Nation, Telos, Der Tageszeit, Hamdard Islamicus, Iranian Journal of International Affairs, Global Dialogue.

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*These views represent those of the author and are not necessarily Iran Review's viewpoints.

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