Running Out of Magic Tricks to Keep the Status-Quo Aloft

Conflicts Forum's Weekly Comment, 17 Oct 2014

In a recent article in Foreign Policy, Stephen Walt bemoans the fact that despite the US having followed the core neoconservative foreign policy prescriptions from 2001 – 2006 (and for much longer than that, many might say) with disastrous results, the neocons never concede to having made a single mistake, nor do they ever acknowledge their ‘narratives’ to have been founded on deliberate lies and fabrications. But after each and every failure and exposure, they simply glide (unfazed) towards the next project, floating on a magic carpet of shamelessness, think-tank puff, media sycophancy and money.

Well, here we are again. ‘They’ have ‘moved on’, and now the targets (albeit longstanding ones) are the ousting of President Putin and the preparing of the ground to hammer China’s head back beneath the parapet wall. Stephen Walt may shake his head in disbelief that such a discredited group still retains such influence, but he nonetheless acknowledges the fact that they still weigh heavily in the scales of American politics. Standing up and against tide is President Obama’s sharp ‘lawyer’s mind’, his ‘instinctive’ grasp of certain political dynamics (such as the need to re-balance the Middle East, and a small (mostly domestically orientated) circle of advisers.

But this is not enough to push back against the onslaught. As Michael Bremmer observes, “oddly, Obama's manifest feelings of [intellectual] superiority are matched by ones of insecurity when it comes to the pillars of American society [e.g. when faced with the massed weight of the American Deep State]. That has meant [Obama] prosecuting the GWOT as defined in the Bush years, and down-playing second-order consequences; therefore maintaining all inherited alliances on existing terms -- Israel, Saudi Arabia, Gulf principalities, Egypt, and now a maverick Turkey; substituting verbal declarations for action wherever the existing order comes into conflict with unpleasant new realities”.

There is little doubt that President Obama’s professorial management style – and particularly his aversion to direct face-to-face conflict – opens ‘space’.  And it is into what these conservatives see as open political space, that they are thrusting their ‘projects’ with renewed vigor.

And so, the next round has begun -- using the oil weapon. In 1985, Saudi Arabia, with American support, dramatically increased oil production from 2 million to 10 million barrels per day, dropping the price from $32 to $10 per barrel. The U.S.S.R. began selling some oil at an even lower price, about $6 per barrel – and, as noted by Pravda earlier this year, “Saudi Arabia [did not lose] anything, because when prices fell by 3.5 times [Saudi] production increased fivefold. The planned economy of the Soviet Union was not able to cope with falling export revenues, and this was one of the reasons for the collapse of the U.S.S.R.”

This week, Saudi Arabia signalled clearly to the market that it no longer supports oil at $100 per barrel – and, by underlining this fact through cutting prices and increasing output marginally – Saudi Arabia has again - 30 years later – succeeded in crashing market crude prices (though there has been some rebound – perhaps as the US Administration saw the Shale Boys bleeding red in the market).

Saudi Arabia’s timing could not be more ‘coincidental’: Just as many Americans are seriously doubting the continued value of the US alliance with Saudi Arabia in view of the kingdom’s long entanglement with extremists such as ISIS, Saudi Arabia suddenly re-creates the original neocon ploy to kick Russia – and Putin – just where it hurts.  52% of Russia’s budget was derived from hydrocarbons last year, and Russia last year would have required oil to be at $108 per barrel in order to break even in its budget). But with WTI crude at $ 80.41 (today), there will clearly be a substantive effect on Russia’s finances, even after the substantive rouble devaluation has mitigated some of the adverse effects of the oil price drop

As the government in Kiev weakens and fragments, it is clear that for the US, wielding Ukraine as the tool by which to weaken President Putin is losing its efficacy – not least because Europeans are becoming increasingly disenchanted at their having to impose sanctions on Russia.  If sanctions have become problematic for (economically) distressed Europe, then we are back to the old remedy of Oil Wars. On September 12, the Treasury Department announced that it was imposing strict constraints on the transfer of U.S. technology to Rosneft, Gazprom, and other Russian firms for the purpose of drilling in the Arctic.  And now the oil price has crashed sufficiently to make such high-cost exploration commercially unviable anyway.

Ostensibly, Saudi Arabia is just engaging in some predatory pricing: dropping the crude price sufficiently to squeeze out of existence the US shale oil boom, much of which will no longer be viable at these lower prices. In short, the Saudi aim is to remove excess US production, in order to obviate the need for OPEC to cut its own production levels. This may be so (see below), but the Saudi FM was blunt in exposing his ulterior motive some weeks ago, when he said that the only way to oust President Assad was to put pressure on President Putin – and for this to happen, oil prices be slammed.

That the US should accede to this ploy, which will hurt not only their own Shale Boys but also the US Oil Majors drilling in high cost environments, is testimony to the determination within US neo-conservative circles to end the Russian challenge to the ‘American Century’. (It was probably also a part of the price – acceding to Saudi’s resort the oil weapon to facilitate President Assad’s removal – for bringing Saudi Arabia into the Coalition against ISIS.)  There was here, in short, an overlap of US (neo-con) and Saudi interests.

To some extent, the passion behind this onslaught against President Putin seems not unrelated to the financial state of the US and Europe. Big, unstable financial bubbles have been blown, post–2008, on the presumption that eventual GDP ‘growth’ would somehow naturally resume; and that that growth, in itself, would dilute and blow away the (bad) indebtedness. But growth has not come, and as Bloomberg reports, “investors around the world are shocked, shocked that the monetary wizards may have run out of magic tricks to revive global economic growth,” said Yardeni, president and chief investment strategist at Yardeni Research Inc. in New York: “Even the wizards are admitting that their powers to do so are limited.”

As great powers feel their powers slacken and wane (as happened, for example, to the UK in the wake of WW2) there is a psychological need felt by leaders to reassert their remaining powers more forcefully. In Europe, this took the shape of the disastrous Suez campaign – designed to show that the UK was not as weak and vulnerable as she was widely (and correctly) perceived to be. In reality, the British ‘show of strength’ served only to hasten the decline, rather than to push it off.

This week’s financial turmoil is attributed in the mainstream media to ‘poor data’ emerging over recent days; but behind this stands the unspoken fear that the financial ‘system’ itself is vulnerable. Hence the remarks that the Central Bank ‘wizards’ may have run out of magic tricks (such as their zero interest rate policy, and QE). And there, in the context of this anxiety, stand Russia and China, preparing to hollow out further this fragile ‘system’ by establishing a rival, parallel financial, trading and clearing framework.  It is not so surprising the angst felt by the neocons.

It is on this post-war banking and trade system (that provides for discriminatory and damaging exclusion for designated states) that America’s control of the global order now largely rests – given the shift against military interventions amongst the American public. Timothy Garton Ash, a British historian and a strong advocate of global ‘free’ trade has written: “One way of thinking about [TTIP and TPP – the new free trade deals] is to see it as the Widest West Web… [But] Another way to describe it is EBC: Everyone But China” [emphasis added].

And it is against this background that the dropping of the oil price should be understood: It is about ‘disciplining’ Russia’s attempt to step outside the tramlines – and evidently the US is ready to accept significant costs to make this point. What is not so clear is how long the US Administration might be prepared to persist with a low oil price that threatens not just the highly leveraged shale oil companies, but will incur high level lobbying from some US Majors too (perhaps the price recovery suggests that already Washington has tapped on Riyadh’s shoulder).

This Saudi oil ploy however, aims to kill more than two birds (President Assad and the US oil shale competition) with one stone. It has another target in mind too. The next month will see whether the US is capable of ‘re-equilibrating’ amongst its Middle East allies as the P5+1 negotiations with Iran are set to conclude by 24 November.

Professor James Russell, who has held a number of posts in the office of the US Assistant Secretary of Defence writes:

“Its hard not to cringe watching the United States careen around the Middle East these days, dispensing bombs, money and political fealty…to a series of supposed allies that take turns slapping us around while demanding our protection.  These unseemly and contradictory scenes are emblematic of the crumbled bookends of America’s [broken] foreign policy paradigm conceived in an earlier era that has ceased its usefulness in the 21st century.
   
“America’s Cold-War era regional foreign policy, which has seen us construct a series of partnerships in Cairo, Tel Aviv, Riyadh, Doha, Abu Dhabi and Islamabad, is no longer relevant to US and regional interests. Moreover, it is difficult to conceive of a more unattractive group of states to align ourselves with - all of whom engage in behaviors that do not serve American interests and that are inconsistent with our values. Its time to recast the Sunni-state plus Israel alliance that characterizes American foreign policy in the Middle East.” 

Saudi Arabia too, will be only too aware that it is this coming month that will be crucial in determining its future relations with America:  AIPAC and the Saudi lobby in Washington are already hard at work to ensure that whatever the outcome of the P5+1 talks, the result will leave the sanctions regime in place.

It is in this context that Saudi has stuck in its ‘oar’ - by demonstrating that it is still the ‘indispensible US ally’. The Europeans may cavil and be fearful of sanctions on Russia, but Riyadh still has the steel (and ability) to crash crude, and thereby mount a ‘bear-raid’ on Putin’s finances.  Perhaps the Saudi ploy will be successful in convincing some Americans of Saudi Arabia’s residual value

But will the Saudi oil ‘put’ prove to be geo-strategically effective?  It seems unlikely. In the first eight months of this year, Russia achieved a budget surplus of 2% of GDP ($26 billion), despite the weaker rouble (or, more correctly, because of the weaker rouble).  Iran too will be affected by the lower crude pricing (it needs approximately $130 to balance its budget; but Iran is producing far less than its potential oil output.  It will survive (as it has done so far against sanctions); indeed this year has seen the Iranian economy stabilize.

So how does one strike the geo-strategic balance?  Saudi Arabia has faced a number of recent set-backs:  It has been shocked by the Houthi overturning of the Saudi political dispensation in Yemen.  The kingdom has failed to elicit from the US a commitment to attack or depose President Assad. On the ground in Syria, the Syrian army has succeeded in re-taking Aleppo. Saudi Arabia has lost its ‘control’ over the Syrian opposition to Qatar and Turkey; and it has entered into a bitter quarrel with Turkey (and Qatar) over the future nature and direction of Sunni Islam – a deep dispute that is centred on the present crisis within Sunni Islam.

Equally significantly, it seems that the Saudi Foreign Minister, Saud al-Faisal - a long-standing and bitter antagonist of Iran - has (for now) wrested control of Iran-Saudi relations from the ailing King (who has been absent from affairs for more than a month) – and, as Saudi analyst, Dr Fouad Ibrahim, has clarified, the apparent warming of relations in the wake of the UN meeting between Saud al-Faisal and the Iranian Foreign Minister has proved to be a chimaera.  Relations have soured and “the road between Tehran and Riyadh is closed until further notice”, as Saud al-Faisal (also himself ailing) wages war in various fronts against Iran.

This does not bode well for any US regional ‘re-set’. Saudi Arabia is in a petulant frame of mind (a leading Saudi political commentator referred to the US Vice-President as  "'Ayatollah' Biden" this week, noting that the

"Americans are now talking as if they were Iranians"), and persists with threats to act independently of US interests in the region, should Saudi interests continue to be neglected.  It does not take a cryptologist to understand that by ‘threatening its interests’ the kingdom means ‘US rapprochement with Iran’.

On balance, we should perhaps bow to Michael Bremmer’s shrewd psychological analysis of the US President: Obama is likely – faced with harsh domestic lobbying against any shift towards Iran; his ISIS approach under fierce contestation; a recalcitrant Congress; and a decades-long American dependency (and habit) of taking Saudi Arabia as its ‘go to’ compass for steering in the Middle East – to lay his better instincts aside, by “maintaining all existing alliances intact, and substituting verbal declarations for action wherever the existing order comes into conflict with unpleasant new realities”.   It is very likely that Iran has already reached a similar conclusion.

(Apologies for the late posting of this piece).