The $40/bbl. oil plot

OK, this is really weird.  This whacked-out notion of $40-a-barrel oil to punish Iran might be starting to get traction.

As I noted earlier this week, a senior U.S national security official in the Middle East has proposed the Gulf states crank up oil production to a point that oil falls to $40 a barrel, which, according to this theory, will make Iran cry uncle and give up its nuclear program.

But that's just one guy, so it's pretty easy to dismiss. 

Now here comes Christopher Dickey with a column at Newsweek's website reacting to the Iraq Study Group report — a column including the following paragraph:

Another possible improvement that Study Group co-chairman James Baker probably has in the back of his mind, if not in his report: a year from now Saudi Arabia will have ramped up its oil production considerably. Once again, as in the 1990s, it may have the spare capacity to turn on the pumps at will, driving global prices down in coordination with U.S. policy. If it does, it could starve Iran of the money the mullahs need to fuel their plans for regional dominance and nuclear development. 

Now I'm starting to wonder if there's something to this.  Might this have been a focus of the meeting last month between Dick Cheney and King Abdullah in Saudi Arabia?  (We have yet to hear a definitive explanation of just what the heck it is they talked about.)

Of course, the Saudis don't have "spare capacity to turn on the pumps at will," but they can certainly try, I suppose.  I can see it now:  The Gulf states crank up production next year, pumping ever-more water into their ever-depleting fields, accelerating their decline that much more quickly so that when production suddenly falls off a cliff, say right after the '08 election, it'll be the next administration's problem.

Only flaw in this scenario:  What do the Gulf states get out of this, other than (presumably) some sort of forward progress on Israel/Palestine?  Or are the Sunni sheikhs so frightened of the Shiites in Tehran that they believe 1) this scheme is essential for their survival and 2) this scheme will actually work? 

The Daily Reckoning