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What’s Really Going On With OPEC In The Middle East?

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The longstanding rivalry between Saudi Arabia and Iran has been playing out in barrels and in bullets. The latest infighting at OPEC and new proxy wars in the region may be opening up a new front


One example of the long-running rivalry and distrust between Saudi Arabia and its neighbor on the northern side of the Persian Gulf, Iran, is a Saudi plan to build a canal that would cross Saudi Arabia’s vast Empty Quarter desert and connect the Gulf with the Arabian Sea. Such a project, 1,000 kilometers in length, would take years to build, and would serve as a new passageway for oil tankers laden with Saudi crude headed to world markets. The very idea sounds far-fetched, but it exemplifies concern that official relations with Iran could become so hostile that Tehran will someday close the Strait of Hormuz, the strategic funnel at the mouth of the Gulf through which millions of barrels of Saudi oil flow every day.

Oil is the means by which these regimes maintain their existence, and so limiting access to markets is one instrument that Saudi Arabia is using to curtail Iranian influence in the Middle East, as well as secure its own future. When Iranian crude exports were restricted by international sanctions, Riyadh’s battle on this front was proving successful. But when international sanctions against Iran were lifted earlier this year following an agreement with Western governments on the country’s nuclear energy program, the task of restraining Iran’s oil exports became far more complicated.

Saudi Arabia lobbied the U.S. to avoid the nuclear agreement, and Washington’s conclusion of the deal added one more item to a list of issues that now complicate relations between the U.S. and Saudi Arabia. Riyadh wants President Barack Obama, who visited the Saudi capital in late April, to assert more power in the region, especially to counter Iran’s spreading influence. But Obama’s policy is to reduce American influence in the Middle East as much as possible, at least militarily. For Obama, and many Americans, the region has for too long been a complicated, war-prone vortex that needs to resolve its own problems internally. That message was relayed in no uncertain terms to the Saudi leaders during Obama’s visit.

On another front, since mid-2014, Riyadh has been waging a battle against North American shale oil producers, whose early success had cut deep into the country’s long-held share of the market. Since 2014, Riyadh has officially discarded OPEC’s quota system and flooded the market with cheap oil, which Saudi Arabia can produce for as little as US$7 per barrel. Riyadh’s strategy has been successful in that it has forced more expensive oil out of the market. But this has not been without doing considerable damage to the Saudi economy and plenty of damage to those of all other OPEC nations. Iran, Iraq, Algeria, Libya, Nigeria and Venezuela all opposed the action, wanting prices to go higher as their economies are so dependent on revenues from oil sales. With prices now far below what their government budgets require to break even, some OPEC members are on the verge of economic collapse.

With most OPEC members angry about Saudi Arabia’s control over the organization’s policy, and many non-OPEC producers also suffering from low oil prices, Saudi Arabia yielded ground earlier this year to Qatar, Venezuela and non-OPEC Russia to call an oil producers meeting in Doha on April 17 to discuss the possibility of freezing output at January levels. Iran was invited to attend, but Tehran called the meeting ridiculous and said it would proceed with boosting its oil production capacity to pre-sanctions levels and beyond. It was reasoned that a freeze on output would, in time, reduce the nearly three million b/d of world oversupply and speed the return of balance to the oil market, prompting oil prices to eventually rise. The market anticipated a deal in Doha and this was reflected in a choppy rise in oil prices. But when Iran failed to turn up, and refused to freeze production, Saudi Arabia said it would no longer participate in the plan either.

Surprisingly, the price of Brent crude following the Doha meeting did not experience a major slip, but remained in the mid-to-low US$40-per barrel range. Prices will now depend to a great degree on fundamentals in the weeks and months ahead. Iran is still having trouble selling its oil due to tanker insurance and financing issues, but it has put some additional 300,000 b/d on the market since the start of the year and is expected to put another 500,000 b/d on the market by year’s end. Iran’s production during March averaged 3.3 million b/d, according to the International Energy Agency, and Tehran remains adamant that it will boost output to four million b/d by the end of this year and to 5.7 million b/d in 2018.

With Iran pushing ahead to put still more oil on the market, Riyadh is now debating its next move. Saudi Arabia, which is currently producing more than 10 million b/d, could expand its own production to prevent Iran from making market inroads and recapturing that percentage of the market that it declares belongs to the Saudi kingdom. Saudi Arabia has the capacity to produce an additional two million b/d and it’s hard to say what market impact a further injection of Saudi oil would have.

Complicating this is the fact that Iraq is pushing to boost its own oil production and export volumes, and is hampered in this only because of inadequate infrastructure—and, of course, its war with the Islamic State. The jihadist group presently blocks exports through the northern export pipeline to Turkey. Disputes over money with the Kurdistan Regional Government (KRG) also prevent Iraq from exporting crude to Turkey through a Kurdish-built and operated pipeline. There is the additional likelihood that Libya could bring more crude to market if the new internationally backed government in Tripoli can establish control over the oil producing regions of the country. Before its civil war, Libya produced up to 1.6 million b/d. Now, on a good day, output reaches 400,000 barrels.

The failure of the Doha meeting has led commentators to question whether this could be the end of OPEC. As the biggest producer in the group and the only member with the reserve capacity to actually produce more oil, Saudi Arabia determines the organization’s policy, and many members do not believe that it should. Only Saudi Arabia’s Gulf neighbors of Kuwait, Qatar and the United Arab Emirates, support Saudi Arabia’s decision to open its oil taps and capture market share. Historically, when shortages appeared on the market, especially Iran’s decline in output, and the outbreak of wars in Libya, South Sudan, Syria and Yemen, Saudi Arabia and its three OPEC allies boosted output in order to prevent a spike in the oil price, even though the price was then already in the US$100-a-barrel range.

The rivalry between Persian Iran and the Arab states goes back hundreds of years, but was solidified about 1,300 years ago with a schism in the Islamic faith that centered on who had the right to be the main successor to the Muslim prophet Mohammed. Iran is predominantly Shia Muslim, a faith whose members choose Ali, Mohammed’s son-in-law, as the rightful successor. Saudi Arabia, home of the main Muslim holy sites of Mecca and Medina, considers itself the leader of the Sunni Muslim world, and supports a different line of succession.

The real rivalry between Iran and Saudi Arabia began to solidify in 1979 with the Iranian Revolution and the overthrow of the Shah. Iran announced its intention to export its revolution and this sent a shockwave through the Sunni world, especially Saudi Arabia. Large populations of Shia Muslims live in the oil-rich areas of southern Iraq and eastern Saudi Arabia. More than half of Bahrain’s population is Shia, and a Shia population in Lebanon supports the radical Iran-backed militant group Hezbollah.

The last U.S. invasion of Iraq and the overthrow of Saddam Hussein allowed Iran the chance to assert its influence over the majority Shia population in Iraq. The ‘Arab Spring’ uprisings and the region’s spiral into violence has given Iran an even greater opportunity. Tehran’s support for Bashar al-Assad, Syria’s president stems from his being an Alawite, a branch of Shia Islam. Hezbollah’s growing control over the politics of Lebanon has led to Saudi Arabia withholding financial assistance to the country. Iran is also known to provide help in a number of ways to Hamas in the Gaza Strip. Saudi Arabia also accuses Iran of backing the Houthi rebels in Yemen, where Saudi armed forces have been waging a campaign against the rebels in support of the deposed Sunni and pro-Saudi government.

With Iranian oil no longer under sanction, Tehran is boosting its state revenues, much of which is used to supply weapons and gain influence throughout the region. Iran’s Revolutionary Guard and Iraqi Shia volunteers are waging war against the Islamic State in central and northern Iraq. This will serve to strengthen Iran’s influence in Iraq in the years to come. Hezbollah and the Revolutionary Guard are fighting Saudi-backed forces trying to overthrow Assad, whom they wish to remain in power. Much of the population of eastern Saudi Arabia has been agitated since the execution of prominent Saudi Shia cleric Nimr al-Nimr earlier this year. His execution led to the ransacking of the Saudi Embassy in Tehran and the subsequent severance of diplomatic relations between Iran, Saudi Arabia and several of its Sunni neighbors.

President Obama has urged the Gulf States to find a way to make peace with each other, but that does not appear to be on the cards. Despite efforts to find a political solution to the Syrian civil war, the odds do not look good there either. And the war with the Islamic State remains a winner-take-all fight. Whether Saudi Arabia and Iran will be able to find some kind of understanding in the mess that is the Middle East depends entirely upon them. Meanwhile, world oil markets and the lives of many hang in the balance.

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