The Real Winner of the Middle East Oil Crisis: You

Is Saudi Arabia pumping oil to hurt Iran?

There are more young drivers than ever before, and  a lot of young people reading this will be learning to drive or already driving. Now in recent months most of us will have seen that prices for petrol have been falling at a catastrophic rate, but why? These falling prices aren’t down to chance. Slowing growth and political tensions abroad are massively affecting us every day at home.

For thousands of years there has been conflict between both Iran and Saudi Arabia. There is complete distrust between the two countries. The root of the problem occurred hundreds of years ago in the 7th century battle over who should lead the Muslim community. This lead to two different branches of Islam forming, Saudi Arabia following Sunni ideology and Iran supporting Shia beliefs.

Due to the different religious beliefs between the two countries there comes about many accusations of each others actions. Iran have the belief that due to Saudi Arabia being a Sunni state that they have ties with Sunni groups such as the ever prominent ISIS. Iran believe that the Saudi government are providing ISIS with weapons and resources. On the other hand Saudi Arabia are angered by Iran’s supposed role in the Yemen conflict. Saudi Arabia have been launching air strikes in Yemen to counter the presence of Iran-sponsored Houthis. They blame Iran for starting the war claiming that they are providing weapons and aid to Houthi extremists.

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Iran vs Saudi Arabia (source: Oslo Times)

So why now is this rivalry suddenly coming into the news and becoming a topic of heated discussion around the world? In only the first few days of the new year the actions of both sides have put them very quickly into a ‘cold war’ situation. Saudi Arabia have removed all diplomatic ties with Iran, they have ordered all Iranian diplomats to return to Iran and have blocked travel and trade between the two nations.

It is debated what the main reasons for this sudden change of heart are, given that the two countries have held relatively stable diplomatic relations over recent years. Saudi officials justify their actions as a legitimate response to Iran’s attacks in their embassy in Tehran, however the protests around the embassy and violence that followed was the direct response that followed Saudi Arabia’s execution of Sheikh Nimr al-Nimr, a prominent anti-government Shiite cleric and activist with 46 others for their role in terrorism related offences.

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Sheikh Nimr Baqir Al Nimr, executed on new year’s day.

Now, I share quite strong views on this issue of free speech and human rights in Saudi Arabia, it is well known that in its kingdom there has been many violations of peoples humans rights. People are scared to speak out against the government in the fear that they will be executed. The government has laws in place to make it a crime to publish any material that harms the governments reputation. The other side to the story, the one Saudi Arabia would like to silence, is that Sheikh Nimr al-Nimr was a figure head for free speech in Saudi Arabia and was very popular with many youth organisations, he protested, peacefully may I add, for free elections in Saudi Arabia, the still authoritarian state. Like many in Iran, I believe the execution of Sheikh Nimr al-Nimr was completely wrong and a savage warning from Saudi leaders to anyone that stands up and speak freely against their regime.

What may not be as well known, is that there are some serious economic repercussions to the political tensions between the two countries. Between Iran and Saudi Arabia, both members of the dominant OPEC cartel, there is the issue of whether the two countries can possibly come to an agreement to set a fixed level of output. At the moment it is very unlikely that the two members will meet to try and bring a halt to the falling Brent Crude oil prices, this will not only have an effect on their economies but will also have terrible consequences around the world. Falling prices harm oil-dependent countries detrimentally, for example oil-dependent Russia would be massively effected. A weak Russian economy would then have negative effects to trade with the rest of Europe, harming growth so much that Europe could go into deflation.

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Oil prices have been falling from late 2015 and show no signs of stopping

Simple economics shows us that if there is more supply of oil than demand for it the prices will fall. This huge oversupply is due the fact that Iran are again exporting more oil, the US domestic production had nearly doubled over the last six years and OPEC are refusing to reduce production. OPEC is cartel of 12 different members that control about 80% of crude oil reserves and therefore have the power to fix production to keep prices high to maximise profit. However Saudi Arabia, its most dominant member has been doing the opposite – why?

It seems to be the case that Saudi Arabia are increasing production is to inflict pain on Iran. They are worried about the emergence of a friendly relationship between Iran and USA in recent years, and the nuclear agreement between the US and Iran further added to these fears. The agreement could potentially lead to the US removing sanctions put on Iran after the war. One benefit of this is Western firms being able to trade with Iran again, boosting their economy and power within the region, something Saudi Arabia would not like.

Therefore, as an act of retribution against the new relationship between the two, Saudi Arabia have been trying to punish them by keeping the oil pumping therefore further lowering the prices. It is in the hope that the more and more oil falls in price, it will eventually lead to oil plants closing in the US and Iran, driving out the competition and hurting the two countries’ fuel markets. Saudi Arabia are betting they will be able to out sustain the current falling prices to the extent that they will become a more dominant supplier in the future.

With members of the OPEC cartel acting in their own self-interest, who knows when oil prices will start to rise again? And in the meantime, what will be the consequences be for the global economy? All of these as yet unknown, but for now, you can be sure to thank these factors for having some leftover change in your pocket at the pump.

About Henry Edwards
Henry Edwards is a 17 year old sixth form student from Basingstoke, Hampshire studying Economics, Maths and Biology. He is especially interested in the global markets, free trade and is hell bent on Britain remaining in the EU. Describing himself as a free market conservative and loves to read about anything involving politics or economics. In his spare time he enjoys playing all different sports but his true love lies in rugby.