WHY SAUDI ARABIA DOES NOT SUPPORT A STRIKE ON IRAN

WHY SAUDI ARABIA DOES NOT SUPPORT A STRIKE ON IRAN

Posted at http://www.raceforiran.com/ on March 8th, 2010

We are pleased to publish this post from our friend and colleague, Jean-François Seznec, whom we consistently find to be a uniquely insightful analyst of the intersection of politics, economics, and energy in the Middle East. Jean-François is currently Visiting Associate Professor at Georgetown University’s Center for Contemporary Arab Studies, where his scholarship and teaching concentrate on the influence of political and social variables in the Gulf on financial and energy markets. He is currently focusing on industrialization in the Gulf and, in particular, the growth of the region’s petrochemical industry. He has 25 years’ experience in international banking and finance, 10 of which were spent in the Middle East, and is currently Senior Advisor to PFC Energy as well as a founding member and Managing Partner of the Lafayette Group, LLC, a U.S.-based private investment company. He holds a MIA from Columbia University and a MA and Ph.D. from Yale University. In this post, Jean-François offers important observations about Saudi perspectives on a prospective U.S. military attack against Iran and the profound damage that a U.S.-Iranian military confrontation could do to America’s international economic position.

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Seen from Washington, Saudi Arabia seems to speak with a forked tongue on Iran. On the one hand, the Saudis are telling the United States that under no circumstances should it bomb Iran, or allow Israel to do so. On the other hand, the Saudis are also letting it be known that they are worried and quite sure that Iran is building nuclear weapons.

It seems that, in fact, the Saudis are more worried about potential U.S. military action against Iran than they are about the Iranians’ ability actually to obtain nuclear weapons. The Saudis may not express this view clearly enough to change views on Capitol Hill, but the U.S. executive branch is probably quite aware of Saudi worries about the prospect of U.S. military intervention in Iran.

In a nutshell, and to paraphrase Talleyrand, U.S. military action in Iran would be more than a crime—it would be a mistake or, more precisely, a series of mistakes, which would quite rapidly lead to the United States losing its influence in the world. The economic “blowback” from any U.S. military action against Iran would be enormous, causing great harm to the United States. More generally, military strength is no longer the true basis of national power in the modern world. In the aftermath of a U.S. military confrontation with Iran, the new economic powerhouses—China, India, and Saudi Arabia—would have a shared interest in constraining the United States so that it could not act again to cause such damage to their interests. In acting to realize that shared interest, these states would effectively lock the United States out of both Asia and the Middle East.

On the economic front, a U.S. attack on Iran would lead to a major increase in oil prices, whether the Straits of Hormuz get blocked or not. If only Iranian exports were taken off line, prices could still reach $150 per barrel, as 3 million barrels per day would be removed from the market and insurance premiums would reach the levels seen during the “tanker war” of the early 1980s. If the Straits were blocked for some time, prices could go above $200 per barrel, as 16 million barrels per day in exports from the Gulf as a whole would have to find new ways to get to international markets. In this scenario, Saudi Arabia could export up to 5 million barrels per day through the Red Sea, which would still leave the markets short of 11 million barrels. Within 18 months, it might be possible to lay new pipelines to the Gulf of Oman that would bypass the Straits of Hormuz (mainly for oil exports from the United Arab Emirates), and Iraq could repair its strategic North-South pipeline to export oil via the Mediterranean. However, even with these extraordinary measures, international markets would still be short of about 6 million barrels per day, and the impact on Asian economies that rely very heavily on Gulf crudes would be extreme.

Although, as I will discuss in greater detail below, Saudi Arabia would see a dramatic increase in its oil export revenues in such a scenario, the Saudis are nonetheless opposed to U.S. military action against Iran because, in their view, it could unleash complete havoc in the region. In response to an attack, Iran would undoubtedly promote violent unrest among Shi’a populations in Iraq, Kuwait, Bahrain, Yemen [if they have not started to do so there already among the Houthis], Lebanon, and even in Saudi Arabia itself. Qatar’s LNG trains would make a perfect target for Iranian missiles. The extensive U.S. Navy base in Bahrain also would be an easy target for Iranian missiles, followed by mass upheavals in the country, pitting the royal family against unhappy and disaffected elements in Bahrain’s Shi’a-majority population. U.S. military action against Iran would certainly strengthen the hands of Sunni extremists, even if it implied a temporary alliance between Iran and Al-Qa’ida-type groups. Furthermore, an attack would lead to substantial flight of the private capital now developing the region. The economic boom on the Arab side of the Persian Gulf would come to an end, and mass unemployment, unhappy foreign workers, large-scale bankruptcies would lead to the end of the world as it is known today in the region.

In light of these considerations, one can speculate that the Saudis would take strong retaliatory measures against the United States for striking Iran—measures that could have a serious impact on America’s economic and strategic position. The Saudis are very upset at the United States going back to the invasion of Iraq, its support for Israeli policy in the occupied territories, and its inability to push Israel into a just peace settlement with the Palestinians along the lines of King Abdullah’s peace plan. An attack on Iran would be the proverbial “straw that broke the camel’s back”, ensuring that the seemingly strong U.S.-Saudi alliance could dissolve very quickly.

A potentially effective—and non-confrontational—form of retaliation by the Saudis would be for the Kingdom to reject any plea by the United States to increase its oil production to make up for an Iranian shortfall. Saudi Arabia is the only country in the world that can ramp up its oil production by 4 million barrels per day on short notice. Even if the Straits of Hormuz stayed open following an attack on Iran, without a ramp up in Saudi production, the United States would have to contend with higher oil prices for some time. Of course, the Far East, mainly China and Japan, would suffer most immediately from oil priced at $150 per barrel. But the United States—the world’s largest importer of oil at over 12 million barrels per day—would see the cost of its oil imports increase by $350 billion per year, which would almost certainly throw the American economy into a deep recession. For their part, the Saudis would see a transfer of wealth to them to the tune of an extra $180 billion per year. With their great potential for internal economic growth, China and India could “pick up the pieces” and become the main international economic partners and interlocutors to the Gulf countries, marginalizing the United States and dramatically reducing American influence in this critical region.

The Saudis could also retaliate through international financial markets. Currently, the Kingdom holds close to $500 billion in short term U.S. government paper. The Saudis do not invest in stocks or long-term corporate bonds in the United States, or anywhere else in the world. Should they want to show disapproval of U.S. actions, they could decide to sell some or all of their holdings in U.S. assets. It is unlikely that the Saudis would do so in a sudden and precipitous fashion, as that would hurt the value of their holdings. However, they could start by limiting their purchases of U.S. government paper and then slowly decrease their outstanding portfolio in the United States—just like China is beginning to do. Furthermore, the Saudis could begin reducing their dependence on the dollar by starting to price their oil in a basket of currencies. This would also have a significant impact on the American economy, as the United States could no longer pay for its oil imports (or its foreign liabilities more generally) just by printing money.

Altogether, the Arab countries of the Gulf are quite aware of the potential for disaster in the aftermath of a U.S. military confrontation with Iran. Any U.S. attack against Iran would be followed be the mass desertion of U.S. allies trying to dissociate themselves from the deed. The United States would lose its strategic influence in the region, leaving a vacuum to be filled by other great powers, whether economic or military. Under these circumstances, China and India could very well step into the traditional U.S. role as the chief external arbiter of security and political issues in the Gulf.

Saudi Arabia may not clearly articulate what its policy is vis-à-vis Iran. Indeed, their simultaneous complaints about Iran’s alleged nuclear weapons program and warnings that the United States should not attack Iran are somewhat baffling. However, Saudi Arabia’s real policy toward Iran may be a policy that can only work if it is not stated clearly. Given Saudi views of the current Iranian political order, the Saudi leadership may be counting on the Islamic Republic’s economic failures and corruption to weaken Supreme Leader Ayatollah Ali Khamenei’s regime to the point of complete ineffectiveness. The Saudis see an Iranian elite that is siphoning billions of dollars to Dubai every year. They see Iran’s inability to complete any of its energy investments, whether refineries, gas fields, oil fields, or ambitious petrochemical plants. They see the enormous waste in subsidies to the population. They see that access to the Western technology essential for the large-scale development of Iran’s energy resources is being sacrificed by the Islamic Republic on the altar of locally-grown nuclear technology. In other words, the Saudis may have concluded that the Iranians are their own worst enemies and will not be able to create a credible nuclear deterrent without at the same time making themselves irrelevant on the world stage—in effect, a Middle Eastern North Korea.

From this perspective, pushing Iran militarily would only make the current political order there stronger. Sanctions are not likely to work and could make the government more popular. So, Saudi policy may be to do nothing and let the Islamic Republic crumble upon itself. Of course, the Saudis may be willing to take steps to exacerbate Iranian economic weakness here and there. But the Kingdom is not about to support anything like full-scale sanctions, where Saudi fingerprints would be readily visible.

In conclusion, from a Saudi—and Gulf Arab—standpoint, a U.S. attack on Iran would fulfill Talleyrand’s ditty; it would be a real mistake. >From an American point of view, military action against Iran by the United States—or even by Israel—would irreparably damage American interests and presence in the Gulf. It would also weaken dramatically the U.S. economy and America’s international financial standing—a critical element in American power since the end of World War II.

–Jean-François Seznec