Iran and Saudi Arabia: The Current Situation

This past Saturday, Saudi Arabia executed 47 people on charges of terrorism. It was the Kingdom’s largest mass execution in over three decades, but the subsequent uproar has been focussed on the death of just one of these 47; a Shi-ite cleric named Nimr-al-Nimr.

Saudi Arabia is a Sunni majority country, and says that al-Nimr was a ‘terrorist’. Iran, a Shia Muslim country, views him as a martyr. In the wake of executions, Iranian protests in Tehran led to the torching of the Saudi embassy. The Kingdom responded by cutting diplomatic ties to Iran, giving the Iranian ambassador 48 hours to leave the country; all KSA flights to and from Iran have now been cancelled.

Other Nations React

The two nations have been fighting a proxy war for years in countries including Yemen and Iraq, but the latest escalation has the two Middle-Eastern heavyweights bringing their conflict out into the open – with other nations being sucked into the fight. Bahrain followed Saudi Arabia in cutting ties to Iran, as did both Sudan and Kuwait – whilst the UAE stated that it would be ‘downgrading’ diplomatic relations with Iran. As of the time of writing, Iran is now accusing Saudi Arabia of deliberately bombing its embassy in Yemen. This means that currently, two founder members of the OPEC cartel are at loggerheads, with another founder member also publicly taking sides.

What Does This All Mean For OPEC?

The possibility that this could lead to an OPEC schism is highly unlikely. After all, this is certainly not just the first time that OPEC nations have found themselves in open conflict, (look at the Iran-Iraq Conflict and the First Gulf War). However, another question then raises its head:

Will the escalating tensions affect oil prices?

Well, if tensions do not escalate further, chances of this seem to be low. The Saudis have already made it clear that they are not prepared to cut their output – they are still intent on their plan to force oil prices down to a level where US shale can no longer compete, in the hope that in the long term this will force the Shale oil industry out of business and cause prices to rise (this is actually tame behaviour compared to its actions in the Mid-80’s, when the Kingdom deliberately boosted its oil production to lower the value of the commodity, pricing other OPEC countries out of the market, in order to make them accept the system of national annual production quotas).

As far as Iran is concerned, the recent lifting of trade sanctions against the country leaves them unlikely to reign in oil production either – they will need all the income they can get to try and rebuild their economy, and being able to sell oil worldwide could provide them with much-needed funds.

Of course, should a full-scale war break out, things may well be different. But as things currently are, despite the tense conditions, OPEC is likely to remain as it is, while oil prices seem equally likely to remain unaffected much by the current tensions, with no end to the output glut in sight.