Iran and Saudi Arabia on a collision course over oil at Opec – Telegraph

by Newsstand

After a week of meetings of the Organisation of the Petroleum Exporting Countries (Opec) in Vienna, one thing is clear: Iran and Saudi Arabia are on a collision course that could eventually break the world’s largest oil producing group apart.

Faced with Saudi Arabia’s stubborn determination to keep Opec pumping at full choke, Iran’s oil minister Bijan Zanganeh has upped the stakes in this game of double bluff between the Middle East’s two dominant political forces. He has confidently stated that the Islamic Republic will pump an additional 1m barrels per day (bpd) of crude within months of nuclear sanctions being lifted by the West.

The move – assuming that Iran agrees to all US demands to curb its nuclear ambitions by the deadline on June 30 – effectively fires the starting gun in a race among Opec’s most powerful producers including Iran, Saudi Arabia and Iraq to gain a bigger share of the market. It is a race that will be run regardless of the havoc it will cause within the group’s smaller producers who face complete economic meltdown.

Instead of emphasising consensus and a mutually beneficial production policy to work for all of Opec’s 12 members, Mr Al-Naimi now talks in terms of countries being “free to do what they want”. This begs the question: what is the point of Opec if it is just a platform for Iran and Saudi Arabia to wage economic war against each other to the detriment of all the group’s other members?

In Riyadh, the country’s new ruler, King Salman bin Abdulaziz al-Saud, faces the risk of his family’s closest allies, the US, suddenly changing sides. It could see them shifting their support to an increasingly reformist Iran should a deal to lift sanctions be reached this summer. Such a move could see political power in the Middle East tilt irreversibly towards the Shia Muslim majority in the region. That could ultimately threaten the future of the House of Saud.

Saudi Arabia’s political dilemma has been further complicated by Iranian support of Houthi rebels which it is fighting in Yemen. It also faces encroachment within its own borders of terrorists connected to the Islamic State of Iraq and the Levant (Isil). Throughout the region, the kingdom and its Sunni allies appear under siege, while in Iraq only Iranian forces appear capable of holding back the Sunni-Muslim Isil horde.

It is becoming increasingly apparent that Saudi Arabia’s insistence last November, to force Opec to essentially allow oil prices to fall, was a move aimed not at crippling US shale oil producers; this has failed to happen, with America’s oil output now at a 44-year record high. Instead, it was to allow Saudi Arabia to increase its own production to levels well above 10m bpd, while impoverishing most of its partners in Opec and, most notably, its major rival in the Middle East, Iran.

Sanctions against Iran had already exacted a heavy price in Tehran before the blow of the current oil price slump hit home. President Hassan Rouhani said last October that income from crude sales had fallen by 30pc. That was before the price of crude slumped to a multi-year low around $43 per barrel. Starved of the foreign currency earnings from oil, Iran has found it increasingly tough to support its allies in the Middle East, who also happen to be Saudi Arabia’s natural enemies among Shia Islam.

However, it’s not just Iran which has felt the pain of Saudi Arabia’s willingness to tolerate weaker oil prices in return for freedom to pump more crude. Oil revenues for the whole of Opec are to fall by 46pc this year to around $446bn (£291bn), according to the Energy Information Administration. Even with a small recovery in prices this year, Opec producers such as Nigeria, Venezuela and Algeria are being pushed to breaking point by the civil war being waged by the group’s most powerful members.

Nigeria’s new President, Muhammadu Buhari, warned just days before the start of the Opec meetings in Vienna that the African country’s economy was in “deep trouble” because of the slump in oil prices, caused largely by Saudi Arabia’s policies. However, because of the chaos now gripping Nigeria’s oil industry, the country was unable to send a minister to present its case in Austria. Its former petroleum minister, Diezani Alison-Madueke, faces corruption allegations.

Saudi Arabia and its close knit Gulf allies within Opec – such as the United Arab Emirates and Kuwait – are in the unique position of having vast foreign currency holdings and sovereign wealth investments they can draw on to see them through the current spell of weaker prices. With over $800bn in foreign currency reserves, Riyadh can absorb the fiscal devastation that is being caused by lower prices.

Iran has also tried to break Saudi Arabia’s domination of Opec behind the scenes. Officials from the Islamic Republic approached Abdullah bin Hamad al-Attiyah, Qatar’s respected former oil minister, to replace the current secretary general of Opec, Abdalla Salem el-Badri. After nine years at the head of the organisation, Mr el-Badri is thought to be too sympathetic to Saudi Arabia’s cause within the group.

Faced with being swamped by a tidal wave of Saudi crude and its overbearing influence within Opec, Iran has decided to respond by signalling its intention to increase supplies should it be freed from the shackles of sanctions. This it appears willing to do regardless of Opec’s decision to leave its production ceiling unchanged at 30m bpd. A flood of Iranian crude flowing into an already oversupplied market would exert overwhelming downward pressure on oil prices, which continue to trade at around 40pc below last year’s peak due to a global glut of supply.

Of course, Opec has endured even tougher times and deeper divisions among its members before. The group survived the tensions caused by Iran-Iraq war and the turmoil of the Arab Spring. However, the tension between Iran and Saudi Arabia at Opec is now palpable and it is only a matter of time before these two oil giants come to blows.

Iran and Saudi Arabia on a collision course over oil at Opec – Telegraph.