The tensions in relations between Saudi Arabia and Iran at the beginning of the year, along with other factors which have been determining the global agenda, seem secondary today on the global crisis map. However, official statistics suggest that both countries are being heavily armed. Their main instrument is the production of oil, in which they underbid each other, reaching record lows. Both Iran and Saudi Arabia extract more oil today than they have extracted for many years. The Saudis even set a new historic record in July.
Excess production pulls the price of a barrel of oil down
In July Saudi Arabia was producing on average 10.67 million barrels of oil a day, 100,000 barrels more than the old record in the summer of 2015. Last month Iran extracted 3.85 million barrels of oil. In six months Tehran increased its production by more than a million barrels. Not a single expert could have expected such a state of affairs.
Oil statistics show how the powers are interested in extending their regional influence in order to defeat their opponent with the help of economic instruments. In fact, it would be more beneficial for both oil-producing countries not to extract so much raw oil. The overabundance of production brings harm, as it pulls oil prices down and reduces revenues. But both countries are willing to put up with financial losses in order to achieve their main goals.
"The Saudis want to maintain their share in the oil market, to counter any attack by Iran,’’ Abhishek Deshpan, an analyst at the French bank Natixis says. The behaviors of both members of the OPEC oil cartel show that we should not expect coordinated reductions in oil production in the near future. An upcoming extraordinary OPEC meeting is scheduled for September in Algeria. Deshpan does not expect to reach a specific agreement. For this reason, analysts lowered their forecast for the oil price in the current year by 15%, to the level of $50. The price is set to quickly rise.
The Arab sheikhs have a better position in the struggle for power among the two raw oil giants. "The cost of the oil produced by them is much lower," Leshus Leon, an expert at the Hamburg Institute of World Economics noted. Production costs for Iranian oil production are substantially higher. The Saudis are suffering a drop in oil prices because they understand that it affects them to a lesser extent than Iran.
Iran urgently needs money after many years of embargo
Riyadh is also aware that Iran will not be able to maintain steady growth of oil production at such low earnings. "After years of embargo, Iran urgently needs funds to upgrade its own technologies," the economist Leshus explained. Iran will be able to extract more oil only after the country invests billions of dollars in its backward oil infrastructure. Tehran will become a real competitor in the fight for market share only after a successful upgrade.
Earlier this year, President Hassan Rouhani said that his country needs foreign investments amounting to $30-50 billion dollars annually in order to achieve the desired economic goals. Most of these funds should be directed to the oil sector.
For this reason, Iran has recently started seeking rapprochement with Moscow, which is willing to engage in dialogue, especially after how the Saudis unceremoniously treated the Kremlin in April this year. At the last minute, Riyadh rejected the agreement reached on the freezing of oil production by OPEC. Moscow, where historically low oil prices are negatively affecting the current situation, had been relying on the deal.
Vladimir Putin wants to draw Iran over to the Eurasian Economic Union
A few hours later the Kremlin announced that it had allocated a loan amounting to $5 billion to Iran. The signal was clear. If the sheikhs continue to resist, blocking any decision to reduce production, Moscow will support Iran in the reconstruction of its economy.
Since then, Russian President Vladimir Putin has been trying to attract Iran to the EAEC. In early August he met with Rouhani and Ilham Aliyev in Baku. Intensive economic cooperation between the two countries was agreed on. A transport corridor between Russia and Iran via Azerbaijan will be launched to facilitate transnational trade. Moscow hopes to receive easier access to Asian markets. Russia is also to build a nuclear reactor in Iran.
Experts are not sure whether a situational alliance between Moscow and Tehran will be able to increase the economic power of the mullahs in their collision with Saudi Arabia. But Russia’s assistance to Iran will definitely influence one thing: soon the tension between Iran and Saudi Arabia will become obvious.
