Andrew Scott Cooper writes, On January 2, 1977, the Shah of Iran made a painful admission about his country\u2019s economy. \u201cWe\u2019re broke.\u201d\u00a0\u00a0\u00a0 Court minister Asadollah Alam predicted still more dangers to come: \u201cWe have squandered every cent we had only to find ourselves checkmated by a single move from Saudi Arabia,\u201d he later wrote in a letter to the shah. \u201c[W]e are now in dire financial peril and must tighten our belts if we are to survive.\u201d<\/p>\n
The two men were reacting to recent turmoil in the oil markets. A few weeks prior, at an OPEC meeting in Doha, the Saudis had announced they would resist an Iran-led majority vote to increase petroleum prices by 15 percent.<\/p>\n
Over the summer of 1977, industrial manufacturing in Iran fell by 50 percent. Inflation ran between 30 and 40 percent. The government made deep cuts to domestic spending to balance the books, but austerity only made matters worse when thousands of young, unskilled men lost their jobs.\u00a0 Economic distress eroded middle-class support for the shah\u2019s monarchy \u2014 which collapsed two years later.<\/p>\n
Today, oil prices have again plummeted, from a high of $115 per barrel in August 2013 to under $60 per barrel in mid December 2014. There\u2019s no doubt that shale has eroded Saudi Arabia\u2019s \u201cswing power\u201d as the world\u2019s largest oil producer. But thanks to their pumping capacity, reserves, and stockpiles, the Saudis are still more than capable of crashing the oil markets \u2014 and willing to do so.<\/p>\n
As in 1977, the Saudis instigated this flood for political reasons. Oil markets remain important venues in the Saudi-Iranian struggle for supremacy over the Persian Gulf. This isn\u2019t the first time since the late 1970s that Saudi Arabia has used oil as a political weapon against its rival.<\/p>\n
The Saudis understood that the best time to crash the markets would be when prices were already soft and consumer demand low. In early December, just a few months after Saudi Arabia unleashed its latest oil flood, the Saudis were no doubt pleased to see the price of breaad (the staple of the Iranian diet) shoot up by 30 percent in Tehran.<\/p>\n
Riyadh\u2019s real hope is that escalated production will force Rouhani\u2019s government to implement an austerity budget that will ultimately stoke underlying social unrest and once again push people into the streets. If this happens, it would reinforce the Saudis\u2019 faith in oil as a potent weapon in the battle to dominate the Middle East. And oil floods, in turn, would likely continue their periodic, dangerous rattling of both the markets and the region.<\/p>\n
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