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Saudi Arabia's Foreign Minister Adel al-Jubeir attends an interview with Reuters, in Riyadh January 4, 2016. Tensions between Iran and Saudi Arabia have been rising of late. (FAISAL Al NASSER/REUTERS)
Saudi Arabia's Foreign Minister Adel al-Jubeir attends an interview with Reuters, in Riyadh January 4, 2016. Tensions between Iran and Saudi Arabia have been rising of late. (FAISAL Al NASSER/REUTERS)

Steve Yetiv

How the Saudi-Iranian spat could roil the oil market Add to ...

Steve Yetiv is Louis I. Jaffe professor of international relations at Virginia’s Old Dominion University and author of Myths of the Oil Boom.

Rising tensions between Iran and Saudi Arabia have caught the world’s attention. It’s not just that two of the world’s most important Muslim countries, one Shia and one Sunni, are in a row in a region that’s increasingly divided among sectarian lines. But any time there are high tensions between two major oil producers, people will wonder what this means for global oil markets.

Oil retreats despite Saudi-Iran conflict (BNN Video)

There are several scenarios in which these tensions could escalate in a way that would affect global oil markets more seriously.

  • Iran could significantly try to stir up trouble in Saudi Arabia’s oil-rich province of Hasa. In the past, Iran has done so periodically, particularly in 1979, when there were giant Shia demonstrations against the House of Saud. Tehran might also try to subvert the Saudi rulers more directly and discredit their leadership more overtly and heatedly.
  • We can’t rule out some type of military brinkmanship. The two countries almost clashed in 1984 and 1987, during the Iran-Iraq war. They could have a real or threatened air or naval engagement.
  • Both countries could ratchet up tensions in other regions of the Middle East, such as Yemen. Even though this would not really affect oil supplies, markets might misread it as such.
  • The Saudis might well decide to continue their strategy of maintaining oil production to squeeze out higher-cost producers for a longer period than they otherwise would have done, even though that approach runs counter to their historical role in cutting production to boost oil prices. The row with Iran may incline the Saudis to try to punish the country even longer with lower oil prices. Even though Iran’s economy is used to economic pain, this prospect certainly will hurt Tehran.

Of all these scenarios, the most likely is the fourth – that the Saudis extend their strategy of maintaining current production levels in order to punish Iran. This is the easiest, lowest-risk form of rivalry.

The more dangerous scenarios are unlikely, although they may manifest less prominently. Iran has some incentive to escalate the conflict – it would drive oil prices higher, and Iran certainly needs higher prices. Moreover, it would play to Iran’s domestic audience. But, at the same time, Iran wants to integrate into the global economy in line with its recent nuclear agreement. These conflicting incentives should place a lid on just how far Iran wants to matters to escalate.

For their part, the Saudis might also score points at home in escalating the conflict with Iran. However, they are obviously concerned about an insurrection among their own minority Shiites. That’s why they killed Sheikh Nimr al-Nimr in the first place. He was a prominent Shia cleric who railed against the Saudis for mistreating their Shia minority, who live mostly in oil-rich Hasa. Thus, the Saudis probably prefer not to stir the pot with Iran too much, because Iran could retaliate by doing more to agitate Saudi Shia. Riyadh also has its hands full in Yemen and in managing its foreign policy in a tumultuous Middle East.

Strategically, neither country wants a military engagement. Historically, Iran and Saudi Arabia have clashed in many ways but not in a military manner, except for two minor incidents.

To be sure, Saudi-Iranian tensions will make it harder to solve some of the Middle East’s problems, from Syria to Yemen, but these problems are not really oil-market problems. They don’t really threaten major oil supplies in the region. And, in any case, the two countries were adversaries long before the current crisis.

There is another dimension to the crisis. Normally, such tensions in the Persian Gulf would push oil prices up strongly. But the global oil market is oversupplied and the global economy is underwhelming. Recent bad economic news out of China further puts pressure on oil prices by decreasing expected oil demand.

Over all, then, the Saudi-Iranian row will probably simmer, assume a slow burn and complicate bilateral relations – a type of Cold War will become further entrenched. But the tensions are unlikely to escalate enough to cause a major spike in oil prices, unless leaders in both capitals truly believe that they need to boost their political position at home with a foreign adventure.

Of course, when tensions run high on emotive religious issues, one needs to make predictions with caution.

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