How the Saudis are fighting Iran

Our musings about the possibility of the Gulf states cranking up oil production to drive down the oil price and supposedly deprive Iran of the money it needs for its nuclear program have prompted Strategic Investment's Dan Amoss to share the following thought experiment…and alternative scenario:

The Saudis did the same thing in the 1980's to inflict a mortal wound to the oil-exporting Soviet economy.

But that was 20 years ago and billions of cumulative oil production since
then has certainly lowered reservoir pressures.

Here's how it would alter, say, the next 2 years of oil revenue
(disregarding rapid internal Saudi consumption growth at highly subsidized
prices). Using "back of the envelope" numbers:

Status quo: $65 oil * 9.3 million barrels per day * 730 days = $441.2

Flood oil supply: $40 oil * 11 million barrels per day * 730 days = $321.2

So they are looking at a $120 billion+ price tag to bankrupt Iran. That
money can buy a lot of missile defense systems and F-16s from Lockheed,
along with funding an indefinite Sunni-led insurgency in Iraq.

I think that the royal family is confident in the U.S. commitment to the
"Carter doctrine" that says we will go to war against any entity that
threatens Middle East oil-exporting capability. The U.S. Navy is essentially
"their" navy as well.

Plus, they can't quantify the potential damage to oil fields by ramping
production that quickly – it could lower the next generation of petrodollar
income by trillions if irreparable damage is done.

It may in fact be more cost-effective for the Saudi royal family to duke it
out with Iran in "battleground Iraq." The evidence is turning up that this
is the case (at least with those Saudis motivated by the Sunni/Shiite
religious issues).

And then Dan points out this article from the Associated Press:

Private Saudi citizens are giving millions of dollars to Sunni insurgents in Iraq and much of the money is used to buy weapons, including shoulder fired anti-aircraft missiles, according to key Iraqi officials and others familiar with the flow of cash.

Saudi government officials deny that any money from their country is being sent to Iraqis fighting the government and the U.S.-led coalition.

But the U.S. Iraq Study Group report said Saudis are a source of funding for Sunni Arab insurgents. Several truck drivers interviewed by The Associated Press described carrying boxes of cash from Saudi Arabia into Iraq, money they said was headed for insurgents.

Two high-ranking Iraqi officials, speaking on condition of 96 because of the issue's sensitivity, told the AP most of the Saudi money comes from private donations, called zaqat, collected for Islamic causes and charities.

Some Saudis appear to know the money is headed to Iraq's insurgents, but others merely give it to clerics who channel it to anti-coalition forces, the officials said.

Good grief.  So two things are going on here: The Saudis are fighting a proxy war against Iran by fighting Iran's Shiite allies in Iraq.  And…The Saudis are funding jihadis intent on driving a superpower out of a country in the region.  Now where've we seen that before?

The Daily Reckoning