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Fuel To The Fire: The Saudi-Iran Flare-Up And The Politics Of Oil

08/01/2016 12:02 PM IST | Updated 29/08/2016 9:43 PM IST
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Iranian protesters raise their fists in front of a portrait of prominent Shiite Muslim cleric Nimr al-Nimr during a demonstration against his execution by Saudi authorities, on January 3, 2016, outside the Saudi embassy in Tehran. Iran and Iraq's top Shiite leaders condemned Saudi Arabia's execution of Nimr, warning ahead of protests that the killing was an injustice that could have serious consequences. AFP PHOTO / ATTA KENARE / AFP / ATTA KENARE (Photo credit should read ATTA KENARE/AFP/Getty Images)

The kingdom of Saudi Arabia in the first week of the new year executed 47 people on charges of terrorism. Amongst them were Al Qaeda figures like Faris al-Zahirini and others that the Saudi state had convicted for terrorism. But also amongst the executed was Saudi Arabia's vocal and firebrand Shia cleric Sheikh Nimr Bakir al-Nimr, a man revered amongst the near 2.5 million Shiite Muslims living in Sunni majority country. Nimr often led protests against the ruling House of Saud, demanding further equality and denouncing the marginalisation of the Shiite population.

Many condemned the mass executions undertaken by Saudi, but in Iran -- which is seen as the powerful Sunni Saudi Arabia's equally powerful Shiite counter balance in the region -- reactions to Nimr's death flared up the long-standing tensions between the two states even further.

The West's rapprochement with Iran and the success the United States has achieved over the country's nuclear program via diplomacy and engagement did not go down well in Riyadh.

As a reaction, the Saudi embassy in the Iranian capital city Tehran came under attack by a mob that managed to cause significant damage. The Iranian security forces, deliberately or not, were unable to stop the protesters in time. This has now led to both countries severing diplomatic ties with each other (Saudi's allies have made similar moves towards Iran in solidarity). Today, both Saudi and Iran are already involved in proxy wars against each other in Syria and Yemen, two conflicts that have the entire region on tenterhooks as the terror group ISIS continues to significantly add to the overall regional challenges.

Many fear that the tensions between Iran and Saudi could erupt in a full-blown military conflict. However, this is a highly unlikely eventuality. The Iranian President has condemned the embassy attack, and Saudi has hinted at renewing diplomatic ties under terms and conditions. In fact, much of the indirect Saudi-Iran war had been already being fought for months hundreds of miles away in Vienna, Austria, behind the closed doors of the cartel-like Organization of Petroleum Exporting Countries (OPEC) headquarters which has sent the global oil industry into turmoil.

This latest flare-up between Riyadh and Tehran comes at a curious time. The West's rapprochement with Iran and the success the United States has achieved over the country's nuclear program via diplomacy and engagement did not go down well in Riyadh. Saudi Arabia, a traditional ally of the US in the region, has lingering feelings of betrayal along with a sense of resolve to demonstrate that it can hold its own ground in the region. Meanwhile, the Obama administration has maintained a "neutral posture" on the widening Iran-Saudi rift. The US can now afford such diplomatic maneuvering as it becomes energy self-sufficient, and moves towards becoming an exporter of oil and gas itself thanks to the shale revolution. Such posturing by Washington would have been unimaginable just a few years ago.

For Saudi Arabia, low oil prices are actually damaging to its own interests far more than Iran.

However, the problems building for Saudi Arabia are not just regional but within its borders as well. For the first time since 2004, prices of crude oil (brent) have fallen below $34 per barrel from well over $100 per barrel just two years back. This price fall is not just because of market movements, but is to a large extent engineered by a cat and mouse game being played by members of OPEC. While global economics today demand production cuts by large oil producers such as Saudi Arabia and Iran, both the countries (along with others) via OPEC refuse to budge in order to protect their market shares. But more so, neither want to lose production capacity to each other, specifically now when Iran is opening up and a glut of foreign investment in its huge and untapped oil and gas reserves is expected to take shape in the coming years as it emerges from years of crippling sanctions. For Saudi, an average price of $95 per barrel is needed to balance its budgets, while for Iran it stands near a whopping $138 per barrel, the highest of all OPEC members.

For Saudi Arabia, low oil prices are actually damaging to its own interests far more than Iran. With the majority of its economy based on oil revenues, Saudi has been put into a steadfast reform mode before the damage goes too deep. For the Saudi rulers, healthy oil revenues are absolutely critical. One of the kingdom's primary methods to clamp down on internal dissent in the country and maintain their unchallenged power hold is to offer a variety of extensive social schemes to its population. From free primary to higher education, jobs, healthcare and many such offerings, the local population is used to huge public sector spending for their interests.

Saudi Arabia's major oil reserves are, in fact, situated in parts of the country with a majority Shiite population.

For a fresh perspective on the debate, M R Izady, a cartographer and adjunct masters professor at the US Air Force Joint Special Operations University in Florida, USA, has developed a map that shows how Saudi Arabia's major oil reserves are, in fact, situated in parts of the country with a majority Shiite population. In fact, his map goes on to show that most oil reserves in the region (such as Iran which according to Izady's data has more proven oil reserves than Saudi Arabia) are in fact under the feet of Shiite Muslims. Perhaps one of the fears for Riyadh is also that Iran, by backing people like Nimr, could instigate pro-Shiite regions of the country and in effect pose a challenge to Saudi's biggest oil fields.

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Source: Dr. Michael Izady at Columbia University, Gulf2000, New York

The low price of oil, however, is great news for the antithesis of OPEC interests that lie in the new Asian importers. India, China, South Korea and Japan are going to become critical markets for Middle East crude oil sales, and for now, the importers are enjoying a bounty run as cheap oil helps boost their domestic economies and balance fiscal deficits. This is also perhaps a time for these importers to think about an importers' OPEC -- an organisation of petroleum importing countries as Asian economies are expected to remain the biggest oil markets for at least the next three decades.

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