The Iranian-Saudi hostility is one of the most vehement in the world; propelling the entire middle-eastern region into a series of proxy struggles and divvying world-super powers into allies and foes. This destructive legacy however is at a cross-road. Political pundits are divided in the current calamity; will amicable OPEC negotiations lead to a new Middle Eastern hegemony, bringing stability to the entire region or will hostile status quo challenges propel the Middle East down its present path of Machiavellian inferno?
HISTORY OF TURMOIL AND CURRENT HOSTILITIES
The Saudi-Iranian relationship is characterised by centuries of shia-sunni sectarian hostilities, in addition to more recent Persian-Arab regional identity clashes across the Middle East. However, these animosities have only recently intensified through power struggles in regional hegemony, starting after the 1979 Iranian revolution, which saw a pro-west leader being toppled with shia-state-religion. These hostilities are manifesting through the Syrian-Yemen war, but most prominently in a petroleum domain through the oil wars between the two regional powers, making the rivalries quintessentially economic.Tensions have escalated over the last years with the deadly hajj stampede, more assertive Saudi foreign policy and have since deteriorated earlier this year with the execution of Saudi clerk, Shiite cleric Nimr aqer al-Nimr causing outrage among the Middle East’s Shiite populations. Riyadh in return, broke off diplomatic and trade relations with Iran. Saudi Arabia’s allies followed suit and reduced foreign relations with Tehran.
OPEC AND GEOPOLITICS
Since the lifting of economic sanctions in 2015/2016, Iran has been challenging the current Middle eastern status quo and regional hegemony, particularly threatening the leadership of Saudi Arabia in OPEC, as well as its other oil players in international markets with competitive oil and gas investments. The Islamic Republic has rebounded effectively and extremely efficiently, reportedly returning to production at pre-sanction levels. Iranian supply of oil rose to almost 3.65 million barrels per day (mb/d). These efforts will only be bolstered further, with the upcoming deal between Iran’s Petropars, Total and China National Petroleum Corp. to develop gas fields in the Persian Gulf. This deal is monumental, marking the first western investment since lifting of the sanctions, confirming Iran’s pledge to ramp up production of oil and gas over the next several years and further encouraging other Western companies to make headway into Tehran.
Taking a global outlook, Iran is the fourth-largest producer after Iraq, Saudi Arabia and Russia. In the last eighteen months, its geopolitical influence can be felt throughout the region, particularly the Gulf monarchies and on the changing OPEC energy landscape. These structural changes in OPEC have brought into question Saudi leadership in front of a backdrop of recurring oil price crisis’ as a result of global oil markets supply and demand volatility. The OPEC group have increased their economic relations with non-OPEC members such as Russia, further undermining Saudi domination, with the arrival of new players. Losses in Saudi’s oil output and influence within OPEC are only likely to strengthen the Islamic Republic’s position in the oil market.
Saudi Arabia is upholding the global oil supply ‘glut’ by continued over-production. The Saudis have refused to reduce production in order to stabilize prices, even ahead of OPEC talks and the tightening of budgets across oil-rich nations. The primary reason behind Saudi’s actions, is said to be to turn its crude into ‘oil weapon’ that could remove Iran and North American shale from global oil competition. Experts speculate that Riyadh may be willing to sacrifice profits in order to disrupt Iran as it seeks to regain its market share through increasing production now that the sanctions have been lifted. Iran’s flagging economy forces it to boost prices, whereas, Saudi Arabia can withstand these prices for much longer than Iran can in the short term, as a result of its $600 billion cushion in financial reserves. Saudi Arabia is able to keep pumping at full capacity, whilst oil-dependent economies cannot afford the same luxury. In the long term Saudi budgets are more vulnerable however, to periods of low oil prices as 80 per cent of the government budget stems from oil exports.
FUTURE OF IRANIAN-SAUDI RELATIONSHIP
Although Saudi Arabia is continuing with aggressive overproduction it has expressed interest in freezing output along with OPEC and most recently Russia, to soften some of the deficits of oil-rich nations, including itself. The two-year oil slump, in addition to allowing price to move in conjunction with market forces, has left Saudi finances in particular disarray. Its reluctance to curtail production initially arose due to anxieties that other nations may not follow suit, causing the Saudis to lose market share. Other OPEC nations have been producing at full capacity, unrestricted. The efforts to freeze production had previously been thwarted by rival Iran who had reported it was unwilling to negotiate until it had regained more than 4m barrels a day of production’, (and therefore regaining profits it had lost during sanctions), thus heightening tensions between two of the region’s most powerful petroleum producers. For a higher and sustained oil price, freezing output would have to be in unification with all players including OPEC, Russia and Iran. Analysts believe a deal will be reached in a meeting at the end of November, in which it is expected that Tehran will agree to cap production, and Saudi Arabia will reduce as much as 4 per cent of current production levels. This points to signs of cooperation and signals to the industry that the underlying assumptions between Riyadh and Tehran need rethinking. Both powerhouses have been able to put aside their regional rivalries for economic stability.
Despite a deal in the near future, at time of writing oil prices have slumped yet again and volatility in the markets will most likely continue as a result of ongoing global events such as the ramifications of BREXIT and as Trump takes office. European energy in the short run will most likely be affected twofold; firstly, lower prices of oil as a result of increased supply and secondly Europe’s own production of oil will be weakened, resulting in stronger role for Russia in European gas. In Northern America, over production and low prices will deteriorate the economy of their indigenous supplies of Northern Shale, however similarly to Europe, Northern America’s budgets will benefit from the cheaper import.
Driven by Prince Mohammed’s perusal of weaning the Saudi economy from the dependence of oil and diversifying the revenue stream in the long term, the face of Saudi Petroleum and the structure of OPEC is inevitably changing, leaving the pundits to decipher Iran’s future in OPEC and the oil industry. Despite the momentum following the lifting of sanctions and the upcoming Total deal, Iran’s own projections are far over-reaching. Iran’s production capacity and the logistics of exportation are still limited to its lack of, and deteriorating infrastructure. Saudi Arabia will most likely attempt to take advantage of the time it takes for Iran to update its technology and infrastructure and operate at its full capacity by tightening its grip within OPEC and advancing into other sectors of its economy. Although the Middle East will continue to play the most significant role in the political economy of oil production and trade, outside players are becoming more prominent, including the US and most particularly Russia. Notwithstanding the changing dynamics of the industry and the world, the Saudi-Iranian cold, oil war will survive, and remain trending into the near future. These energy-rich nations will compete for crude oil exports, for market share, influence, allies and Islamic legitimacy. Both players have as much to gain as they have to loose, but whether it is a zero-sum game is yet to be decided.
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Written By: Sonia Takhar
Sonia completed her Bachelors in Politics and Economics at UBC. Sonia specialises in development policy and progressive development research. She hopes to make an impact especially in gender inequality in the third world and is passionate about social change and poverty alleviation.