Saudi Arabia, Iran and Oil War

Saudi Arabia executed prominent Shia cleric Sheikh Nimr al-Nimr on January 2, 2016. The execution has sparked protests by Shias across the Middle East, especially in Iran, which is ruled by Shia clerics. IranWire will report on the protests and attacks in the upcoming days, but in order to give an understanding of the conflict between Iran and Saudi Arabia, we decided to republish this article which was published in early 2015.

On December 10, Iranian President Hassan Rouhani said falling oil global prices were the result of a “conspiracy” against the interests of Muslims and the Middle East. He threatened that “Iran and people of the region will not forget such conspiracies, or in other words, treachery.” Earlier, on December 7, he had warned that Iran’s budget would have to be adjusted “with caution” in view of declining prices.

The price fall follows a Saudi-led decision by the Organization of Petroleum Exporting Countries (OPEC) on November 27 not to cut production. Saudi Arabia resisted calls from other members, such as Iran and Russia, to reduce production, a move that would have helped them stabilize their oil revenues.

According to Middle East specialist Michael Stephens, Saudi Arabia is using oil as a weapon. Stephens, who heads the Qatar branch of the Royal United Services Institute, a British defense and security think tank, spoke to IranWire about the role of Saudi-Iranian rivalry in the oil market. 

What has caused the recent fall in oil prices?

There have been a couple of important developments. One of those is the huge increase in production by the United States now that they’ve really invested in their shale oil sector, which has led to them pulling out some 12 million barrels of oil a day. This has changed the face of the market, because the US is going to move from being an importer to an exporter.

The Saudis have noticed that shift. They want to protect their market share, and they are currently pumping out nearly 10 million barrels of oil a day, which is unusually high for this time of year, and so you’ve got more production on the market than usual, and you’ve also got falling demand in the far east. That has produced a disparity between production and requirement.

What is the situation at OPEC between Saudi Arabia and its partners?

Publicly, the Saudis have said that they are delighted with OPEC’s stance on current production prices. But that is not the full story. There are a number of members at OPEC, particularly the Iranians and a couple of others, who have recommended that production be cut by at least a million barrels a day. The Saudis have rejected this and insisted that production stays around seven million barrels. There are political differences, and both the Iranians and the Russians are going to get hurt by this. Saudi Arabia has definitely led from the front, but Russia and Iran and a few other producers just didn’t get what they wanted.

What will falling prices mean for Iran?

It’s not good. It’s not easy for Iran because 25 percent of their Gross Domestic Product is hydrocarbon-related. If we think about how the nuclear deal means that Iran may be able to deliver more barrels of oil online, it’s a question of whether that production, and investment in that production, yields any returns. If you start eating into that margin, then you’re really causing problems in your ability to balance budgets and to invest, particularly while sanctions are still on. And sanctions are still on. There has only been temporary relief from some sanctions, and a partial lifting of sanctions on things that Iran is already owed. So it’s not like they’re out of the woods and they’re able to diversify their economy greatly.

Hydrocarbons are an extremely important component of how they prepare their budgets for the year and how they are able to pay their bills. We know that during the end of President Mahmoud Ahmadinejad’s tenure, there was a lot of internal opposition based on economic problems. President Hassan Rouhani was brought in as much on an economic platform as he was on a foreign policy platform, so that economic angle is critically important, and Iran has to be getting a bit worried about these developments.

To what extent did Saudi Arabia’s rivalry with Iran influence its decision?

Hurting Iran and hurting Russia has really sold the policy for them. Some people will argue that it was driven by oil market forces and by Saudi Arabia protecting its market share, which is true. But this is also politically motivated, and the Saudis realize that blocking Iran out and giving it a push back is an important aspect of this policy. They have always seen hydrocarbon revenues as a way to hit the Iranians hard, and as a way to make sure that they don’t expand too quickly beyond their natural borders as the region seems to be turning more in the Iranians’ favor. The politics and the business line up perfectly in this regard.

Just a few months ago, Iranian Foreign Minister Javad Zarif was talking about a new chapter in Iran’s relations with the Saudis. Has this come out of new Saudi anxieties about the postponement of nuclear negotiations?

I don’t think it’s the postponement of nuclear negotiations that has triggered it. The price has been dropping significantly for months now, although it has only nosedived recently. The Saudis are keeping an eye on negotiations, and they are sending out messages to allies that they are not prepared to tolerate Iran being brought in from the cold and being a regional dominating power.

If you look at the progress Iran has made in being able to solidify links across the region into various armed groups and organizations, and the fact that they’re moving closer to the West on issues like fighting the terrorist group Islamic State — these Iranian airstrikes in Iraq recently were clearly done with some level of cooperation with the coalition —Riyadh is looking at all of these factors and feeling left out. It’s trying to engage diplomatically, it’s trying to smooth out issues between Iran and itself. That’s going to take time. It’s important to note that Riyadh doesn’t want to start a conflict with Iran, but it is looking to make sure that their power is checked, and that the Iranians understand that they can’t get everything their way, from the Saudi point of view.

I’m not sure that falling oil prices will make Iran any more likely to reach a deal; they just make it less attractive to come back onto the market. I don’t think it will make Iran more desperate to negotiate. But wait and see. Six months down the road, it might make a difference.

What do the Saudis hope to achieve, beyond perhaps a display of power?

That’s all it is. And one has to ask, now that the prices keep dropping, if the Saudis have miscalculated here, if they have overestimated their ability to control prices, overestimated their role as a senior player and a swing producer in the market. Ultimately, the move is designed to hurt their rivals financially, and to keep Riyadh’s market share at their expense, but it may backfire. In the long run, I’m not sure that Riyadh can sustain this. If the price keeps going down, they’ve shot themselves in the foot, and their attempts to contain Iranian power may cost them a lot of money, more than they thought.