An expert on relations between the two countries weighs in on this week’s clash in an exclusive Oil & Gas 360® interview

Relations continued to worsen this week between Iran and Saudi Arabia in the Middle East, with Iran claiming that Saudi Arabia intentionally struck its embassy in Yemen with an airstrike late Wednesday night. Yemen has served as a proxy battleground for Iran and Saudi Arabia, with the former backing the Shia-minority Houthis against the Sunni-led government of President Abdu Rabu Mansour Hadi.

“Saudi Arabia is responsible for this action, as well as for compensating Iran for injuries to the embassy personnel and the damages to the embassy building,” said Iranian Foreign Ministry spokesman Hossein Jaberi Ansari, reports CNN. “… Iran reserves the right to (legally) pursue this matter.”

The Saudi-led coalition in Yemen refuted the claims, saying an investigation is needed. “This is not credible because we have not seen any evidence,” said Saudi spokesman Colonel Ahmed Asseri.

The alleged attack in Yemen is the latest in a string of incidents to take place in the past week. On Saturday, Saudi Arabia executed a Shia Muslim cleric, along with several other prisoners, leading to outrage in Tehran where the Saudi embassy was attacked.

The attack on the Saudi embassy led to several Sunni Muslim countries cutting or downgrading diplomatic ties with Iran, including the UAE, Kuwait and Qatar.

CRS Sunni Muslims in ME

Iran responded by implementing an import ban on all products originating from Saudi Arabia, and has banned Iranians from traveling to Saudi Arabia, preventing its people from taking part in pilgrimages to Mecca.

Standoff with Saudi started when Shah was removed in 1979

The complex relations between Iran and Saudi Arabia go deep into history, but the current standoff between the two is rooted in Iran’s 1979 revolution. The Iranian Revolution removed Shah Mohammad Reza Pahlavi, a Western ally, from power, dealing a blow to Western relations. Saudi Arabia viewed the new government as a threat to Gulf Arab monarchies, a sentiment that is still deeply held according to Dr. Hossein Askari.

Cooperation based on oil: they haven’t even been able to make it to first base 

Askari, who is the Iran Professor of International Business and International Affairs at The George Washington University, and has served on the Executive Board of the International Monetary Fund, Special Advisor to the Minister of Finance of Saudi Arabia and as a consultant to the OECD, the World Bank, the IFC, the U.N., the Government of Saudi Arabia, and a number of multinational corporations, said oil was meant to serve as a starting point for better relations.

“[Iran and Saudi Arabia] were hoping to build cooperation based on oil,” said Askari, “but they haven’t even been able to make it to first base.”ECI Oil Barrel Production

The deep-seated fear that Iran has ill intentions for Saudi Arabia, whether they be imaginary or fact, has soured relations to the point that cooperation has become unlikely. “Deep down I think the Saudi regime feels that if they cooperate on oil and it increases Iran’s revenues, they are doing it to their own detriment,” Askari told Oil & Gas 360®.

Iran agreed to the nuclear deal with the U.S. based on one thing: economics

The major incentive for Iran to take part in developing the Iran nuclear deal with the G5 was to improve its economic position, said Askari.

“They agreed to this deal because they thought it would help them economically. [Iranian President] Hassan Rouhani ran on this platform, that’s what the Iranian people believe he’s going to deliver. If he doesn’t deliver this, not only is he in trouble, but the whole regime in Iran is in trouble.”

With oil prices currently at multi-year lows due to a surge of production in the U.S. over the last several years combined with the policy decision from OPEC (led by Saudi Arabia) to defend market share over price, Iran may not see the economic rewards it was hoping to get out of the nuclear deal.

The Islamic Republic hopes to attract in excess of $200 billion to revitalize its oil and gas industry, but Askari is less certain they will be able to attract investors. Iran may be able to attract some capital, but it will likely need to offer extremely attractive terms to lenders first.

“Iran is dreaming that everyone is rushing to invest there,” he said. “It will take time. People may want to sell them things, but anyone looking at long-term investment there should have their head checked.”

TAFT Iran Map

Source: TAFT

Saudi’s strong reluctance to raise the price of oil

Lower oil prices have been especially painful to bear for members of OPEC, who see large portions of their revenue come from the export of crude oil. Saudi Arabia in particular depends on oil exports for about 80% of the government’s revenues. With a heavy financial burden associated with its social programs, some of which it has already begun to cut, Saudi Arabia has been forced to dig into its sovereign funds.

Social programs in Saudi Arabia are largely responsible keeping the peace between the ruling royal family and the general citizenry in the kingdom. Because so many subsidies exist, and no one pays taxes, the Saudi royal family is able to govern unilaterally without answering to a representative government.

Despite the political necessity for social programs, and the need for oil revenues to pay for them, Saudi Arabia still may not be that interested in seeing the price of oil rise higher, if that makes Iran a more credible threat, says Askari.

“If I were to put myself in the shoes of the Saudi royal family, and [if I] think how I believe they think, then the last thing I would want to do is cooperate with Iran on raising oil prices.” Askari believes Saudi Arabia has around $500 billion in cash reserves, enough to last it five to six years if the Saudi government spends it prudently.

“If they cut back some of their expenditures, [and] some of the lavishness of the royal family, they can probably last five or six years before they need to start borrowing. Whereas, if they cooperate with Iran, that could spell disaster for them,” Askari said, emphasizing that this was how he believes the Saudi royal family thinks, and not his personal feelings on the matter.

Saudi’s wish to confront Iran wherever they are to be confronted could pull in U.S.

“Because of the importance of this confrontation [between Iran and Saudi Arabia] I think Saudi Arabia is willing to take some risks, even if it means not meeting their social obligations, in order to confront Iran wherever they are to be confronted.”

“There’s a really big danger for the United States in this,” said Askari. “More than I think you saw in crises like Ukraine, Syria, North Africa, or all of these put together, because the United States will probably have to do something to support Saudi Arabia,” if tensions continue to rise.

Oil prices could quickly spike to triple digits if an Iran and Saudi conflict results in damage to each other’s loading facilities: Askari

The conflict between Iran and Saudi Arabia has kept to proxy wars until the recent attacks on their respective embassies, but if full-scale warfare broke out between the two, it could substantially interrupt or lower production from the Middle East, causing oil prices to spike.

As OPEC’s largest producer, Saudi Arabia alone is responsible for more than 10 MMBOPD, with Iran producing an additional 2.9 MMBOPD in November, based on secondary sources cited in OPEC’s November Oil Market Report. A reduction of oil supply from these two countries, or even just lower levels of exports due to higher domestic demand to supply military forces, could have substantial impacts on the price of oil worldwide.

“If there 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.”

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