Report

To Punish Iran, Saudis Scuttle Oil-Freeze Plan

Crude prices fell after big oil producers failed to rein in output — fruit of Saudi Arabia’s strategic rivalry with Iran.

Naimi

OPEC’s failure over the weekend to reach a deal to freeze oil production at current levels, and thus nudge oil prices back up, shows that Saudi Arabia hates Iran even more than it hates losing money. That will make it harder for OPEC to take any meaningful steps to soak up the glut of oil that is keeping prices low and straining state coffers.

Riyadh, the largest producer inside OPEC, and other big oil producers had spent months talking up the weekend meeting in Doha, Qatar. But the Saudis made clear they couldn’t sign on to any production freeze that didn’t include Iran. And Tehran didn’t even bother to send its oil minister to the freeze meeting, since Iran is busy throwing off years of sanctions and fighting to regain its share of the global oil market — and has no interest in nipping its nascent recovery in the bud.

As a result, initial expectations for a deal in Doha evaporated by late Sunday — even though that will mean more financial pain in the short term as oil prices go back down. Crude oil fell in New York and London on Monday and would likely have fallen more but for a strike by Kuwaiti oil workers that knocked out half that country’s oil production.

“For the past two years, energy market analysts have constantly dismissed the notion that Saudi decisions on oil supply and pricing have a geopolitical element. They’ve been wrong — consistently,” said Bruce Jones, director of the foreign-policy program at the Brookings Institution. “Saudi Arabia’s strategic concern about Iran and the region has been a sustained factor in their decision making.”

Enmity between Riyadh and Tehran dates back, ultimately, hundreds of years due to the rift between Sunni and Shiite Islam. More recently, in the wake of the 1979 Iranian revolution, both countries have jostled for regional primacy as standard-bearers of their respective creeds.

The rivalry has only grown since the West and Iran reached a deal last year to halt progress on Tehran’s nuclear weapons program. That deal will enable Iran to access tens of billions of dollars in frozen assets, as well as return to the oil market as a major producer and exporter. Saudi Arabia fears Iran will parlay those increased resources into greater regional influence. Riyadh and Tehran are currently fighting proxy battles in Syria, Iraq, Lebanon, and Yemen.

Relations between the two oil-producing titans took a turn for the worse earlier this year, after Saudi Arabia executed what it called a dissident Shiite cleric, sparking an angry response in Iran and the suspension of diplomatic relations.

And that bad blood continued into last weekend’s Doha summit. The big oil producers, including OPEC heavyweights like Saudi Arabia and Iraq, as well as producers outside the cartel, namely Russia, had reached a preliminary deal to maintain oil output at present high levels but not to keep adding even more oil to an already glutted market. Iran would love other big producers to freeze production — but refuses to hamstring its own oil output, which is just now returning to pre-sanctions levels.

And with Iran unwilling to help shoulder the burden, the Saudis reportedly torpedoed the whole conference, showing they are willing to countenance continued financial pain rather than do anything that could benefit Tehran.

Saudi Arabia does have the deepest pockets in OPEC and still has cash reserves of $582 billion to help it weather a prolonged period of lower prices. But even so, Saudi Arabia’s finances have been badly dented by the fall in oil prices: Saudi currency reserves stood at about $730 billion just two years ago. That’s a reflection of lower income from oil exports and rising expenditures elsewhere, including a nearly 20 percent increase in the Saudi defense budget every year since the Arab Spring ignited in 2011.

And while the country is taking big steps to try and save cash — including cutting subsidies and government salaries and selling off huge state assets like Saudi Aramco — Riyadh’s decision to punish Iran by keeping oil prices low could boomerang and undermine its own regional strategy.

“Saudi Arabia is making a high-risk play, using the substantial reserves it has right now to push on a number of fronts within the region,” Jones said. “If this works in the next year or two, they will have succeeded. But it’s not looking good.”

Photo credit: FAYEZ NURELDINE/AFP/Getty Images

Keith Johnson is Foreign Policy’s acting managing editor for news. He has been at FP since 2013, after spending 15 years covering terrorism, energy, airlines, politics, foreign affairs, and the economy for the Wall Street Journal. He has reported from Europe, the Middle East, Africa, and Asia and, contrary to rumors, has absolutely no plans to resume his bullfighting career. @KFJ_FP

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