OPEC Civil War: Oil Negotiations Between Saudi Arabia And Iran Collapse

REUTERS/Naseem Zeitoon

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Andrew Follett Energy and Science Reporter
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A squabble Sunday between Iran and Saudi Arabia caused an international meeting between oil producing countries to collapse into disaster, threatening all future talks and potentially creating serious political fallout.

The meeting between the Organization of Petroleum Exporting Countries (OPEC) and major oil producers like Russia collapsed when Saudi Arabia demanded that Iran stop increasing oil production.

The failure to make a deal has already caused oil prices to drop further, undermining the economies of oil producing nations and likely making their foreign policies desperate and even more aggressive. The failure of the talks will certainly greatly worsen the already bad relationship between Saudi Arabia and Iran.

Saudi Arabia and three other Sunni nations already cut diplomatic ties with Iran in January and have been trying to prevent Iranian oil from reaching the global market.

“The Saudis were on offense against the Iranians at the [Organization of Islamic Cooperation] meeting last week, too – the Iranians complained that they were shut out of the initial drafting process on the meeting’s statement, and complained that it had three anti-Iranian sections and one anti-Hezbollah section,” John Allen Gay, managing editor of The National Interest and coauthor of a book on war with Iran, told The Daily Caller News Foundation. “Provided a war doesn’t break out, we’re probably around the nadir of [Saudi]-Iranian relations…there aren’t many ways for this to get worse.”

Iran, which was absent from the talks, has repeatedly said it is unwilling to accept a freeze, wants to regain the market share it lost during years of economic sanctions and needs the cash to develop its economy.

OPEC failed to make a deal because Russia is currently supporting Iran’s position, likely to protect its political interests elsewhere. “Iran has a special situation as the country is at its lowest levels of production. So I think, it might be approached individually, with a separate solution,” Aleksander Novak, Russia’s energy minister, told RT in March.

The Saudi’s even threatened to increase production by up to a million barrels a day which would fully politicize the country’s oil policy and tank the price of oil, harming all of OPEC. Without Saudi cooperation, no OPEC production cut can occur, meaning that oil prices will likely remain relatively low.

“As long as the Russians are backing up the Iranian position (that Iran should regain its old production levels/market share before it can consider joining a freeze), it’s going to be tough for Riyadh to make this initiative stick,” Gay said.

If the Saudis continue increasing production to keep the price of oil low, it could be devastating to Russia. Historically low oil prices caused the Russian economy to contract by 3.7 percent in 2015. Russia’s economy will keep shrinking unless oil prices recover to at least $80 per barrel, according to the Energy Research Institute of the Russian Academy of Sciences. The current price of a barrel of oil is hovering around $35.

Other major OPEC nations have also been devastated by cheap oil, Venezuela has even been forced to import oil from America and faces total economic and social collapse.

Saudi Arabia can likely handle cheap oil better than other OPEC countries, but even it is expecting a budget deficit of $140 billion— roughly 20 percent of the Saudi economy. When compared to 2013’s surplus of $48 billion, the fiscal outlook for the Kingdom looks so dire, the International Monetary Fund warned it could go through its fiscal reserves within five years. Saudi oil export revenues dropped 46 percent in just the last year and the country is selling bonds for the first time since 2007.

Cheap oil is good news for America and other net oil importers, especially for the poorest members of society who spend a larger proportion of their incomes buying oil products.

“This particular disagreement on oil fits with longstanding Iranian-Saudi disagreements on the oil price – Iran, because of its larger population, is generally going to favor a higher price than Saudi Arabia, which can keep its population happy at a lower price,” Gay continued. “However, it’s also consistent with the broader breakdown in relations between Tehran and Riyadh, a breakdown that’s manifesting itself most obviously in Syria, but also in Iraq, in Lebanon, and in the matter of Iranian pilgrims to Mecca.”

Saudi Arabia has kept oil prices low to hurt Iran, causing oil prices to remain low since mid-2014.

Saudi Arabia and Iran have a long-running rivalry, with roots in religion. Saudi Arabia is a Sunni Islam country, whereas Iran is the home of Shia Islam. The two countries have been engaged in proxy power struggles over the last year, but the Saudi execution of a popular cleric in January immeasurably worsened diplomatic relations.

Iran hasn’t produced much oil recently after seriously investing in its oil sector for years due to sanctions. Simply restoring previous oil production levels is estimated to require a minimum $150 billion of new investment and could cost Iran up to $500 billion over the next five years, according to reports by the country’s state-run news agency. Iran desperately needs the kind of quick cash that only selling oil on the global market can provide.

“By not participating in the oil freeze, the Iranians are effectively saying, go ahead, freeze, we’ll take your market share and take the benefits of the price hike too,” Gay concluded. “By the Saudi account, the Iranians were able to cause a Saudi initiative – the oil freeze – to fail, simply by being absent.”

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