Jan 10, 2016

When Saudi Arabia  earlier this month cut diplomatic ties with Iran, sent tremors through the region, and an oil shock was expected to follow according to the Torrent Star.
But rather than a price spike, the market for crude oil plummeted below $35 a barrel, prompting the once unthinkable question: have the links between oil and politics been finally broken?
Less than two years ago, when oil fetched $100 a barrel, a hint of new conflict in the Middle East would have sent the market into overdrive. But in the current slump — caused by a glut of oil from U.S. shale production, boosted supply from the world’s biggest exporter, Saudi Arabia, and fears of weakening demand from China — it’s moving only downward.
Both Saudi Arabia and Iran are dependent on oil revenues to fuel their geopolitical ambitions at a time when suspicion and hostility between the Persian Gulf neighbors are running dangerously high.
“I’ve not known a time of greater instability in the Middle East than we have now,” says Valerie of Chatham House in London, an expert in energy in the region.
Tensions are rising, too, as easing of international sanctions brings Iran closer to restoring its share of the oil market. Tehran says it will pump out an additional 500,000 barrels a day within the next few months, and only discuss a ceiling for its oil production after it makes a “full return to the market.”
That throws down the gauntlet to Saudi Arabia, whose stability — and position in the region — depends on its massive oil wealth.
The two countries, as well as Russia, seem set to accelerate an oil price race to the bottom. They are in a battle to maintain market share and undercut rivals who might turn the spigots higher if they try to raise their prices.
If Iran boosts oil production, “the Saudis say it will use the money to defend the ‘wrong people’ in Syria and Yemen and Iraq,” says Marcel. “Meanwhile, it’s true that an Iran with more revenues can be a more powerful regional player, and that is a great concern to the Saudis.”
Although country analysts predict that Iran will rapidly raise exports as sanctions are reduced, the extent to which it would shake the oil market is uncertain, says Indra Overland, a spokesperson for the Norwegian-based PRIX index, which forecasts the effect of political developments on oil exports in 20 countries. The index predicts that prices will remain low in 2016.
Overland suggests that Tehran may have already raised export levels, through a backdoor deal with Iraq. “There’s a big surge in production and many think it’s already due to Iranian oil.” That means official Iranian exports “might actually ‘surge’ but be matched by a fall in ‘Iraqi’ exports,” leaving the global level less affected.
That does little to ease the pain in petro-state Saudi Arabia, which gets 90 per cent of its revenues from oil sales.
Iran’s isolation has cost it dearly, says a U.S. Institute of Peace Long-term growth depends on new investment, and good will, from the international community. “Iran’s disputes with Western countries led to sanctions that crippled its ability to buy badly needed equipment and new refineries from the West,” it said.
In the slippery politics of the Middle East, oil is still the most fluid factor.