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Can the Oil Market Help Bring About a Saudi-Iranian Compromise?

The rift between Saudi Arabia and Iran is one of the most significant challenges to global diplomacy in decades. It is a multi-dimensional conflict, and though it has its historical roots, its current flare defies any single-sided explanation.

However, more often than not, accumulative tension reaches a breaking point one way or another. In certain cases it is war that ends a conflict that has been building up in earnest. In others, tension ends in a less dramatic fashion.

But in all cases, it is inconceivable to expect an open-ended continuation of a buildup in tension. The underlying dynamic of an unstable balance reaches, sooner or later, a point of relative stability. A rapid pace of escalation is also a sign of a conflict ripening into an end game of a sort. In the case of Saudi Arabia and Iran, it is worthwhile to try to find an area where the two sides can descend the tree and reverse the upward direction of the curve of their rivalry in order to avoid any overdramatic conclusion of the current escalation.

The suggestion that oil policies may be a proper candidate for such an area may shock some readers. After all, one key reason why oil prices are as low as they are now is that both countries refuse to cap their production and both are engaged in a race to give additional discounts to prospective buyers, to snatch a potential market from the hands of the other. 

However, in this picture of heated escalation and economic warfare, there is a latent opposite – that of coordination and dialogue. After all, it was the Cuban missile crisis that inaugurated the “detente” decades between the Soviet Union and the US.

Both Saudi Arabia and Iran are impacted heavily by low oil prices. Both have a genuine interest in bringing those prices to a reasonably higher level. And above all, both can do exactly that if they succeed in reaching an accommodation in the global energy market. If reached, such an accommodation can pave the road to dialogue pertaining to other spheres of competition. 

 A huge gap between global oil prices and Saudi Arabia’s fiscal breakeven — the oil price at which its budget is balanced — has led to a budget deficit estimated at 15% of gross domestic product (GDP) in Saudi Arabia last year.

Austerity measures in its 2016 budget have helped reduce Saudi fiscal breakeven from just over $100.40 per barrel in 2015 to an estimated $77.60 per barrel in 2016. In other words, Riyadh needs to sell its oil at $77.60 a barrel in order to fill the gap in its budget.

In addition to austerity measures, which include cutting subsidies on consumer energy prices, the Kingdom is tapping into its huge financial reserves at an increasing rate.

But both tracks have their limits. Austerity measures cannot be toughened beyond the point where they are likely to trigger a public backlash, and the financial reserve can be tapped only to a certain point before threatening other fiscal and financial domains.

Iran is actually facing a direr situation. The potential positive impact of ending US and international sanctions, even partially, is offset by dwindling oil revenues. Iran has lost about $135 billion just from the fact that it wasn’t able to produce as much as it could during the sanctions. But over the next five years, it’s going to lose about $180 billion due to low oil prices based on a price level of $45-50 a barrel, even by 2020.

Iran’s budget for the current year is estimated at $89 billion (based on the official exchange rate), which is 2.6% less than what president Hassan Rouhani’s government had planned for. The actual revenues, however, will be considerably less. While official numbers point to a budget deficit of 2.2%, the real figure may be as bad as double the estimated deficit.

Politically, the Iranian people granted their regime all the support it needs to face the sanctions imposed by the “Great Satan”. Confronting the West was the foundation of the Tehran regime’s abrasive behavior against the population and a handy explanation of economic hardships. But once this Great Satan background drops from the picture, the regime will stand naked in the eyes of ordinary Iranians.

As we see now, Tehran is trying to inflate the role of Saudi Arabia as a replacement antagonist of the Grand Satan. Yet, it will remain evident, in the eyes of most Iranians, that giving up provocative policies can help pave the road to a kind of understanding that helps both countries to focus on the urgent mission of stabilizing their economies.

Looking deeper into the situation in Iran, it would be helpful for the Arabs to say more loudly what they say privately or on scarce public occasions: Arabs are indeed ready to build bridges with Iran if it engages in good faith talks to reduce regional tension.

There are obstacles on the road to reach this goal. The Iranian Revolutionary Guard Corp (IRGC) exists on a base of continued revolutionary fever and the export of Iranian revolutionary values to the region. But Tehran should realize that it will lose its bird in hand, which is mutual cooperation and joint economic development with the Arabs, for the imaginary ten birds in the bush of illusive intervention policies and expansion that so far has led to the miserable scene we now see in the region. The main question here is: will Ayatollah Khamenei get the IRGC to drink the poison of accepting an understanding with the Arabs when such an understanding will certainly lead to shaking the IRGC’s raison d’etre – intervention, export of the revolution, and the creation of imaginary Satans of all sizes? 

It is self-evident that both countries, Saudi Arabia and Iran, have a genuine interest in reaching a deal in the oil market to increase the price level to around $70-80 a barrel. This target price could be reached if both Riyadh and Tehran realize that neither of them will be able to ruin the other without ruining itself in the process.

This fact can help furnish the foundation of an understanding between the two rivals. Russia would help, if only for self-serving reasons. And the US can help, as the escalating regional polarization in the Middle East puts Washington, in the post-nuclear-deal era, in an awkward strategic position.

In 2016–17, according to the Energy Research Institute of the Russian Academy of Sciences, economic growth will remain negative at around -0.5% to 1.5%, even if oil prices recover to $80 per barrel. According to other estimates, the Russian economy can only achieve positive growth if the oil price were to rise above $90 per barrel.

Russia was energetically involved in last April’s oil producers’ conference in Doha, which ended in total failure due to differences between Saudi Arabia and Iran. President Obama has also been promoting his “cold peace” between the two rivals, though as usual in his preaching rhetoric and without providing practical avenues to advance this objective.

But the more the tension escalates, the larger the window to reach a compromise opens. It is time for more behind-the-scenes diplomatic activities to de-escalate tension between Saudi Arabia and Iran.

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