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US Foreign Policy (Dr. El-Najjar's Articles)
War Between Saudi Arabia And Iran Could Send Oil
Prices To $250
By James Stafford
Al-Jazeerah, CCUN, January 22, 2016
The rift between Saudi Arabia and Iran has quickly ballooned into the
worst conflict in decades between the two countries.
back-and-forth escalation quickly turned the simmering tension into an
overt struggle for power in the Middle East. First, the execution of a
prominent Shiite cleric prompted protestors to set fire to the Saudi
embassy in Tehran. Saudi Arabia cut off diplomatic relations and kicked
out Iranian diplomatic personnel. Tehran banned Saudi goods from entering
Iran. Worst of all, Iran blames Saudi Arabia for an airstrike that landed
near its embassy in Yemen.
Saudi Arabia's Sunni allies in the
Arabian Peninsula largely followed suit by downgrading diplomatic ties
with Iran. However, recognizing the dire implications of a major conflict
in the region, most of Saudi Arabia's Gulf State allies did not go as far
as to entirely sever diplomatic relations, as Saudi Arabia did. Bahrain,
the one nation most closely allied with Riyadh, was the only one to take
such a step.
Many of them are concerned about a descent to further
instability. Nations like Kuwait and Qatar have trade links with Iran,
plus Shiite populations of their own. Crucially, Qatar also shares a
maritime border with Iran as well as access to massive natural gas
reserves in the Persian Gulf. These countries are trying to split the
difference between the two belligerent nations in the Middle East. "The
Saudis are on the phone lobbying countries very hard to break off ties
with Iran but most Gulf states are trying to find some common ground," a
diplomat from an Arab country told
Reuters. "The problem is, common ground between everyone in this
region is shrinking."
The effect from the brewing conflict on oil
is murky, but for now it is not having a bullish impact. In the past,
geopolitical tension in the Middle East, especially involving large oil
producers, would add a few dollars to the price of oil. This risk premium
captured the possibility of a supply disruption into the price of a barrel
of crude. However, recent events
barely registered in oil trading. That is because the global glut in
oil supplies loom larger than any potential for a supply disruption. Oil
dropped to nearly $30 per barrel on January 12 and oil speculators are not
paying any attention to the tension in the Middle East. Also, the conflict
could simply manifest itself in an intensified battle for oil market
share. Iran has put forth aggressive goals to ramp up oil production in
the near-term. And Saudi Arabia continues to produce well in excess of 10
million barrels per day while discounting its crude in several key
markets, particularly in Europe in order to box out Iran.
if the current "Cold War" between Saudi Arabia and Iran turned hot?
Saudi Arabia has a variety of reasons to not back down, not the least
of which is the very real sense of being besieged on multiple fronts. An
The New Statesman by former British Ambassador to Saudi Arabia, John
Jenkins, clearly laid out the threats that Saudi Arabia sees around every
corner: extremists at home; a growing Iran; toppled allies from the Arab
Spring; low oil prices; and a fractured relationship with the United
States. The nuclear deal between Iran and the West was confirmation on the
feeling in Riyadh that it is becoming increasingly insecure.
Already the two rivals have engaged in proxy battles in Yemen and Syria,
supporting opposite sides in those wars. A full on direct military
confrontation would be something entirely different, however. It would
have catastrophic consequences for oil markets, even when taking into
account the current supply overhang. Dr. Hossein Askari, a professor at
The George Washington University, told
Oil & Gas 360 that a war between the two countries could lead to
supply disruptions, with predictable impacts on prices.
is a war confronting Iran and Saudi Arabia, oil could overnight go to
above $250, but decline [back] down to the $100 level," said Askari. "If
they attack each other's loading facilities, then we could see oil spike
to over $500 and stay around there for some time depending on the extent
of the damage."
While not impossible, war is speculative at this
point. Also, $250 and $500 per barrel are numbers pulled out of thin air,
and may seem a bit sensationalist. But despite the glut in global oil
production – somewhere around 1 mb/d – the margin from excess to shortage
is thinner than most people think. OPEC is producing flat out and spare
capacity is actually remarkably low right now. The EIA estimated that OPEC
spare capacity stood at just 1.25 mb/d in the third quarter of 2015, the
lowest level since 2008.
As a result, even though it remains a
remote possibility, direct military confrontation between Saudi Arabia and
Iran could well put oil back into triple-digit territory in short order.
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