Saudi Arabia's flooding of the oil market could spell disaster for Iraq
The steep decrease in the global price of oil was largely precipitated by the dramatic spread of the novel coronavirus global pandemic and the simultaneous flooding of oil markets by Saudi Arabia – which has brought prices as low as $25 per barrel, half of what it was at the start of this year.
This is reportedly part of Riyadh's bid to take over Russia's market share with China and India. Riyadh is doing so out of anger toward Moscow for its refusal to support cuts in output proposed in an OPEC+ meeting early this month.
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The Saudi move could do great harm to Iraq's economy at a time when the country is already grappling with other major crises.
"This will have a devastating effect upon Iraq, which is the most oil-dependent country in the world," Joel Wing, an Iraq expert and author of the Musings on Iraq blog, told The New Arab.
"At current prices, it will not be able to make payroll or pay pensions which is the largest cost in its budget," he said. "It will also not likely be able to pay the oil companies that operate in the nation."
|The steep decrease in the world price of oil was largely precipitated by the dramatic spread of the novel coronavirus global pandemic, and the simultaneous flooding of oil markets by Saudi Arabia|
Baghdad might decide to cut its own production, but that will result in it making even less money. "To make matters worse the political class are paralysed over picking a new prime minister," Wing said.
"Therefore, the country has no leadership right when it needs it. Even then the Iraqi elite has never been good at planning."
|Read more: Oil price war: An alternate theory on why
Russia left the OPEC+ regime
This was because when Iraq benefited from high oil prices it used the money to pay for hundreds-of-thousands additional government jobs "that they distributed to their patronage networks to stay in power."
Furthermore, the Iraqi government never prepared for a decline in oil prices, which was always inevitable and predictable.
"Baghdad will have to implement massive austerity measures, raid its foreign currency reserves and try to borrow money to get through this newest crisis," Wing said.
"Oil prices are so depressed, however, that these measures may cut so deep that they may lead to a whole new round of protests even bigger than the previous ones."
This is not the first time the flooding of the oil market has helped ignite crises in the past. In 1990, overproduction by Kuwait and the United Arab Emirates raised OPEC's output significantly and led to almost a $6 drop in the price of a barrel of oil.
At that time, for each dollar the price of a barrel of oil went down Iraq would lose $1 billion per year in revenues at a time it desperately needed the income and owed its neighbours billions in loans repayments.
That was one, of many, reasons that former Iraqi leader Saddam Hussein made the fateful decision to annex, and loot Kuwait that August.
|This will have a devastating effect upon Iraq, which is the most oil-dependent country in the world|
The Saudis also flooded the world oil market in 1977 in a bid to prevent Iran from further increasing oil prices through OPEC, a move that also had disastrous results for Iran and the wider region.
"For the Saudi government, the oil markets remain a vital tool in Riyadh's national security arsenal," Andrew Scott Cooper, a historian and author of 'The Oil Kings: How the U.S., Iran, and Saudi Arabia Changed the Balance of Power in the Middle East', told The New Arab.
"In 1977, 1985, 1990, and again in 2008, the Saudis were quite prepared to 'flood the market' to help their friends in the West while settling regional scores with rivals such as Iran and Iraq," he said.
Cooper noted that the present slump is still in progress, and there remains "much that we still don't know about what triggered this crisis."
|Read more: Saudi Arabia bashed for reckless coronavirus response|
That being said, he believes that politics certainly played an important role in this decision by the powerful Saudi Crown Prince Mohammad bin Salman to "effectively remove the floor and let prices collapse without offering any structural support, or indeed any reassurance that prices might rebound in the near future."
Cooper's book is the definitive account of the oil politics between Iran, Saudi Arabia, and the United States in the 1970s, including the latter's flooding of the market in 1977 and its dire consequences.
It chronicles how that move by Riyadh rendered Iran incapable of competing and drove it out of the market, which is similar to what appears to be happening today between Riyadh and Moscow.
At the time, the Shah of Iran was rushing to modernise his country using the stupendous oil revenues Iran generated in the aftermath of the 1973 oil crisis. However, as Cooper assiduously chronicles, the Saudi flooding of the market in 1977 had "a damaging ripple effect" inside Iran.
The Shah's ambitious economic projects were suddenly stalled and austerity measures introduced. Consequently, thousands of young unskilled Iranian labourers who had flocked to the cities to benefit from the unprecedented economic boom of that decade were laid off work, almost overnight.
Read more: Gulf states spend big to buffer coronavirus crisis
The Shah also lost the crucially important support the Iranian middle-class gave his regime, contributing to the 'perfect storm' that was the 1979 revolution in Iran.
While this is certainly not necessarily an ideal precedent to how the present Saudi flooding of oil markets might affect Iraq, it is still a highly informative one.
Furthermore, while Iraq is no longer a dictatorship, there is popular and widespread opposition the corrupt post-2003 political system. The fall in the price of oil will strike another blow to that increasingly fragile system and could well, as Wing warned, lead to the introduction of austerity measures and another economic crisis.
That, in turn, will likely spark another round of enormous and dedicated long-lasting anti-government protests.
In other words, the Saudi flooding of the markets might well prove to be the straw that broke the Iraqi camel's back.
Follow him on Twitter: @pauliddon