Saudi Arabia, Israel’s improbable ally?

The declining oil market and shared concerns over Iran are creating a surprising new front in the Mideast

Saudi Arabia and Israel have a complicated relationship. Both are strong allies of the U.S. Both express concern about the Iranian nuclear program and about Islamic influence in the Middle East. Yet the two countries have no formal diplomatic ties. Saudi Arabia continues to fight a proxy war with Israel by supporting Palestinian terror and condemning Israel. Saudi Arabia also fights an economic war against Israel by boycotting Israeli goods. In fact, Saudi Arabia had an official ban of Israeli goods until 2005, which ended when Saudi Arabia applied for WTO membership, and still keeps an unofficial boycott.

Concurrently, reports surfaced linking Saudi Arabian and Israeli intelligence at a meeting discussing strategic nuclear disarmament of Iran. In other words, Saudi Arabia’s frosty relationship with Israel can thaw for mutual benefit.

OPEC’s recent decision not to cut the oil supply is shocking. In recent months, the price of oil dropped by over 50 percent, cutting into oil profits while wreaking havoc on the Russian and Venezuelan economies. At an OPEC meeting in Vienna last November, Saudi Arabia curiously rejected Venezuela’s demand that OPEC cut its oil production to reduce supply. Instead, due to Saudi insistence, OPEC decided to keep the oil supply at its current level. While drastically cutting the oil supply, as OPEC did in 1973, compels end users to search for alternative fuel sources and may eventually hurt OPEC, some reductions were expected. Yet that did not happen. Why?

In recent years and especially in light of climbing energy costs, the use of natural gas as an alternative fuel source has dramatically increased worldwide. Hydraulic fracturing, or fracking, is widespread. The use of natural gas is widening, with American colleges Penn State University, MIT, and NYU switching to all natural gas; New Jersey Transit has natural gas buses in its fleet; Florida Power has switched much of its energy supply to natural gas, to name a few. In addition, natural gas is more attractive because it is cleaner burning, thereby reducing emissions.

Israel is also a beneficiary of the natural gas boom. In 2009, Noble Energy, through a permit from the Israeli oil commissioner, discovered a huge natural gas field in the Mediterranean, known as the Tamar Gas Field. 2010 saw the discovery of the even bigger Leviathan Gas Field in the Mediterranean. Israel, which had been largely devoid of domestic energy, is now emerging as an energy exporter.

Moreover, natural gas is a significant source of Israeli energy. Israel currently utilizes natural gas for 55-60 percent of its energy, the highest in the world. Industry insiders suggest that Israel increase that number to 90 percent. Since its inception, Israel has struggled with high energy prices, which has strangled economic growth. Now, through its own energy supply, Israel can remove the shackles of foreign energy imports.

Israel also seeks to export natural gas to Europe and Asia. Exporting natural gas requires liquefying the natural gas, which requires a special facility for creating liquefied natural gas (LNG), transporting the LNG via tanker to a special facility for regasification, and then distributing to customers. As such, exporting is only possible if the locale receiving the natural gas has regasification capacity. Nonetheless, the growing enthusiasm for alternative energy, especially natural gas, is driving countries around the world to build such facilities. As such, Israel is likely to significantly profit from its natural gas exports.

This leads us to last November’s OPEC meeting. While the natural gas boom eats OPEC profits, Saudi Arabia has other concerns, notably Israel and Iran. And those concerns may have influenced the Saudi position to keep the oil production status quo.

One possibility is that Saudi Arabia seeks to indirectly influence the demise of the Iranian nuclear program. Saudi Arabia historically has not engaged its enemies directly; rather, it supports proxies through financial and military aid. It seems that the only country willing to militarily attack Iran is Israel, so by keeping oil prices low the Israeli army will not have to consider fuel costs in its decision to strike Iran. An Israeli strike on Iranian nuclear targets would most likely be an air strike, with jet fuel prices not a factor.

A different possibility is more nefarious and is a form of economic warfare. Israel wants to export LNG, which requires importing customers to build regasification facilities. If the price of oil is low, those would be customers may opt not to invest in building such facilities, thereby shrinking Israel’s LNG export market. Those prospective customers would instead continue importing oil from OPEC, even though OPEC profits are compromised due to low oil prices. This type of discreet economic warfare may be the new Saudi strategy.

Saudi Arabia has long been Israel’s nemesis, through boycotts and its support of terror. Saudi Arabia and Israel also have mutual interests. This complicated relationship may have reached new heights, which was discreetly on display at last November’s OPEC meeting. Has Saudi Arabia opened a new economic front against Israel?

About the Author
Ari Mushell works in the banking industry.
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