What the China-backed Saudi-Iran deal means for oil markets
About the Author: Karen E. Young is a Senior Research Scholar at the Columbia University Center on Global Energy Policy.
Saudi Arabia and its confident young leader, Crown Prince Mohammed bin Salman, have pulled off a diplomatic feat of agility. On Friday, the Saudi leadership made a surprise announcement that it had agreed to a deal with Iran brokered by China.
The plan is surprising given the long history of tensions between Saudi Arabia and Iran. Most recently, both have been involved in a proxy conflict in Yemen, where Saudi Arabia intervened against the Houthi movement, which Iran has supplied with weapons. Diplomatic ties have been broken since 2016, when Iranian protesters attacked the Saudi embassy in Tehran following the controversial execution of a popular Shia cleric in Saudi Arabia.
It is too early and overly optimistic to think that the maneuvers will put an end to Iranian arms shipments to the Houthis or to the wider threat Iran poses to the state in the event of a regional war with Israel. But agreeing to begin planning to re-establish diplomatic ties between the Islamic republic and the kingdom, and allowing China to host and take credit for the success that has been toiling years in exhausting talks in Iraq and Oman What a wonderful turn of events.
The eyes of the United States hurt as China takes credit for meddling in a region where it has rarely made efforts on security issues. And Iran is publicly castigated for its regional malign activities, rather than negotiating the Iran nuclear deal for years, states (and most of the Gulf Cooperation Council states) want the US to do so. In the meantime, if Israel and the US perceive a diplomatic opening parallel to Saudi normalization with Israel, the threat of Iranian retaliation against the kingdom in a regional conflict is balanced with some degree of security expectation, or at least consideration in planning. . It’s a very clever balance, at least for the current threat environment.
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Does it change the area overnight? No not at all But it accurately demonstrates to the US that Saudi foreign policy is now playing a two-level game. I spent the past week in Saudi Arabia as part of a delegation talking privately about how to repair or recalibrate the US-Saudi bilateral relationship. None of the senior Saudi government officials we met were told or given even a glimpse of the Chinese-brokered deal. The Americans in the delegation were allowed to brush off our misgivings, while the Saudi leadership had clearly moved on. The US will be a close ally and friend of the kingdom, but not an exclusive security or economic partner. And the options are already engaged.
Iran’s plan is not a game-changer for energy markets, including oil prices. The oil market is already operating at two levels. On the surface, at the official level, OPEC has production targets that are difficult to meet, and some of its biggest producers clamor for a missed opportunity to ramp up production while demand rises. At a less visible level, OPEC+’s partnership with Russia continues despite sanctions and price caps on its exports. Russia is closer to the United Arab Emirates and Saudi Arabia than ever, but it also acts as a wedge between them. At any moment, the threat of a Russian-Emirati partnership to exit OPEC+ could be a disaster for the Saudi leadership of the group, and a threat to production and price-targeting discipline. Therefore, both states keep Russia closer, which undermines US foreign policy objectives and is a long-term consequence of the growing commercial, banking, and technology ties between Russia and the Gulf.
Large-scale double speak will not make the region safer or the energy supply more transparent. Iran will continue to send more oil to China until sanctions are put in place. The Russians will continue to send more oil and sell at various price points undercutting some of their OPEC+ partners, but benefitting others (including the UAE) in refining trans-shipments and re-exports. China and India remain the beneficiaries. Gulf states, especially the United Arab Emirates and Saudi Arabia, are becoming more nationalistic in their foreign policies, more competitive and protecting their economic interests, and less diplomatically engaged in their own territory. Their foreign aid and investment preferences reflect this change. They are willing to watch Egypt falter, Lebanon collapse, and Yemen disintegrate (as long as it is a civil war within national borders) in order to focus on their own security and economic success.
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This reorientation may be more mercantilist, but it also reflects a realistic assessment of the difficult road ahead. Saudi Arabia anticipates a conflict between the United States and China, and understands that Russia is too dangerous to be sidelined, but also too useful to be on the side of. Therefore, Saudi Arabia has chosen to focus on its customers, shield itself from regional adversaries as best it can, and leave the practice of regional conflicts in places where there is little incentive to intervene. .
For oil markets, expectations of conflict usually mean higher prices. In the near term, bullish assessments of the life span of oil demand look positive, along with rising demand from China. Iran may also benefit, as long as it keeps its representatives pointed away from the kingdom. This is the new balance of the region, and Saudi Arabia finds itself at the center of a very dangerous game.
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