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Black Gold and The Price of Doing Business in The Middle East

Image Credit: Tasnim News Agency (Wikimedia: Creative Commons)

Across the Middle East and North Africa, movement in oil prices is inextricably linked with the region’s geopolitics. While few states wield the production capability or political clout to influence prices independently, those that do – namely Russia, the US and Saudi Arabia – have the power to make or break economies.

This, according to Iranian Oil Minister Bijan Zanganeh, is exactly what the big three are attempting today:

“The decisions of OPEC (Organization of the Petroleum Exporting Countries) should not be used to justify […] a politically motivated decision against the Islamic Republic of Iran.”

Washington has set a deadline of November for countries to cut ties with Iran’s oil sector, and Tehran is fuming at the idea that some within OPEC may be complicit. Revenue from oil exports accounted for $50 billion in Iran’s Budget, the loss of which would take the legs out of an already crippled economy. The response from Tehran has been bellicose, forewarning that a blockade on OPEC’s third largest producer would see oil prices soar for consumers – a result President Trump has cautioned against to domestic audiences. Iran’s representative to OPEC, Hossein Kazempour Ardebili, highlighted this possibility in July when he predicted prices – currently hovering around $80 per barrel – would once again breach the $100 mark.

Much to the chagrin of the US, Tehran has history on their side; it was during the previous round of Iranian sanctions that prices rose as high as $140 dollars per barrel. It’s for this reason Washington continues to pressure their allies in the oil producing community to make up the balance.

Preliminary data for July reveals the big three pumped a whopping 40% of global output – 10.6 million in Saudi Arabia, 11 million in the US, and 11.215 million in Russia. In contrast, exports from Iran have consistently averaged only 2.4 million barrels a day. Filling an Iran sized hole will then depend on how much latent capacity can be tapped for exports.

Among the three majors, Saudi Arabia is the dominant player, capable of exporting nearly four times as much as the US, and slightly more than Russia – 12 million barrels a day compared to 3.5 million and 11 million respectively. As the only major player with centralised control of its oil in one company, and a cost of production less than $9.00 (in comparison both Russia and the US are above $19), Saudi Arabia is better placed than any other producer to meet a shortfall in supply. Something President Trump reportedly impressed upon the Saudi Monarchy in a call last month:

“[…] I am asking that Saudi Arabia increase oil production, maybe up to 2,000,000 barrels, to make up the difference…Prices to high! He has agreed!”

But despite this pressure, Saudi Arabia has a limited appetite for unilateral action when it comes to market regulation. A short lived dalliance as a formal swing producer in the early 1980’s saw rivals gobble up the Kingdoms market share by raising their output as Riyadh lowered theirs. The experience left the Saudi’s with a bitter taste, leading Oil Minister Hisham Nazer to declare:

“We will not appoint ourselves custodians of the policies of OPEC, nor will we be willing to play the role of swing producer at all.”

A more likely outcome would see Riyadh lean on existing instruments like OPEC and its agreements with non-OPEC producers to share the burden. This was the approach taken in 2016 when OPEC and non-OPEC producers, led by Russia, agreed to cut 1.75 million barrels per day in an attempt to raise prices that had plunged below $30 per barrel. An update to that agreement in June, resulted in an extension of cuts until the end of 2019, but with a scaling back on compliance by 47%. While seemingly counterproductive, compliance has been running at 147% because of declines in Venezuela and Mexico, leaving room for producers to open the spigots on an extra 700,000 barrels a day.

The next meeting of OPEC and non-OPEC producers will be held in September, only a couple months before the US blockade deadline on Iranian oil. Both Russia and Saudi Arabia have floated the idea of lifting production by up to 1.5million barrels per day at this meeting. But as Iran’s oil minister alluded to, a perceived campaign within OPEC to increase production in support of US foreign policy would compromise the hard won unity of the organisation. If Trump is to get his wish, producers big and small will need to do their part.

James Baylis is the Middle East and North Africa Fellow for Young Australians in International Affairs.

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