New era of Iranian-Saudi cooperation dawning. Very bullish for OPEC and oil prices. This is what the analyst community has missed. OPEC has been born again as an effective cartel.
STRATFOR's
Global Intelligence Update
May 4, 1999
Iranian-Saudi Consensus Holds Seeds of Major Regional Realignment
Summary:
Following his meeting with visiting Saudi Defense Minister Prince
Sultan bin Abd al Aziz al Saud, Iranian President Mohammad
Khatami said that there are no longer any outstanding differences
between Iran and Saudi Arabia. This possible reconciliation
between Saudi Arabia and Iran has serious political, military,
and economic ramifications for the region.
Analysis:
Following his meeting with visiting Saudi Defense Minister Prince
Sultan bin Abd al Aziz al Saud, Iranian President Mohammad
Khatami stated on May 3 at a press conference in Teheran that
there are no differences any longer between Iran and Saudi
Arabia. Khatami said that the two countries now have a
relationship based on friendship and cooperation. "The recent
contacts between the two sides have resolved all problems and
there is currently no hurdle for the two states to expanding
their ties in all fields," said Khatami, who will travel to saudi
Arabia later this month.
If they are anything more than diplomatic hyperbole, Khatami's
comments could signal a major shift in the relationship between
the two states, with possible economic, political, and military
implications for the whole Middle East region. Since the Iranian
revolution, Saudi Arabia and Iran have been anything but regional
allies. While Saudi Arabia traditionally backed strategic
interests of the United States in the Middle East, Iran
experienced international isolation due to its extremist politics
and anti-Western orientation. The two countries' relationship
has been shaped over the past two decades mostly by their
mutually antagonistic geopolitical alignments. In addition, the
relationship between Saudi Arabia and Iran, both major oil-
producing nations and members of OPEC, has often been defined by
the two countries' rivalry over their respective shares of the
world petroleum market.
If Khatami's declaration of rapprochement between Saudi Arabia
and Iran is real, it would undoubtedly redefine the balance of
power inside the 11-member OPEC. Iran, the second-largest OPEC
producer, has criticized the production quota assigned to Saudi
Arabia as excessive. The two countries have both battled for
market share and struggled for revenues by quota-busting, which
in turn has effectively eliminated OPEC's ability to implement
any production control agreement to control oil prices. If Saudi
Arabia and Iran are now able to eliminate their differences in
their oil production strategies, then the situation inside OPEC
would change dramatically. Together, the two countries produce
11,695,000 bpd of crude oil, 42.5 percent of the total OPEC
production. The third-largest OPEC producer, Venezuela,
currently accounts for about 10.8 percent of total OPEC oil
production. Coordination between Saudi Arabia and Iran would
help these two producers more easily influence OPEC production
management, which could result in higher oil prices.
Even more importantly, a reconciliation between Iran and Saudi
Arabia would have serious implications for the two countries'
relations with the United States. Formerly a regime of religious
extremists which was bent on toppling the monarchies of its
neighbors through terrorism and military threats to Persian Gulf
oil transit, Tehran is now an advocate for multilateral, non-
aligned regional economic and security arrangements. With more
than three times Saudi Arabia's population, competing security
interests in the Persian Gulf, and a Shiite Persian population --
versus the Sunni Arabic population of Saudi Arabia -- Iran's
underlying differences with Saudi Arabia remain. However, if
Iran is willing to coordinate its policies with the Saudi
monarchy over the short run, Saudi Arabia -- America's
influential ally in the region -- may be able to provide a
conduit for improved Iranian relations with other Arab states and
with the U.S. In short, Saudi Arabia could become the mediator
between the U.S. and Iran, helping Iran to gradually break out of
its political and economic isolation. The benefits to Iran are
clear -- it desperately needs foreign investment and it needs the
West to counterbalance a resurgent Russia in Central Asia and the
Caucasus.
Beyond the benefits Iran might hope to realize in oil production
and pricing, and in reestablishing connections with the West,
there are other geopolitical advantages to be realized. After
the assassination of a senior Iranian general by Iraq-based
Iranian opposition forces, tensions have once again risen along
the Iran-Iraq border. Meanwhile, Saudi Arabia has reportedly
captured a number of Iraqi infiltrators, and Iraq claims to be
preparing for a major U.S. or U.S.-led attack or invasion. Iran
has called in the past for an Arab-Persian "NATO" to police the
region so the U.S. wouldn't have an excuse to intervene. Iran,
which currently heads the OIC, has also been attempting to
increase the activity and effectiveness of that group in solving
international disputes. Perhaps this newfound cooperation with
the Saudis could be the beginning or formalization of a
coordinated Iraq policy.
The Saudis, however, have to handle this potential realignment
gingerly. Kuwait, Qatar, the United Arab Emirates have
traditionally taken a lead from the Saudi monarchy, and its not
clear that the Saudis are willing to allow a resurgent Iran to
influence them unduly. And, although the Saudis would dearly
love to have the Iranians help contain the Iraqis, they have no
desire seeing the Iranians eliminate Baghdad as a buffer.
Nevertheless, the evolving Saudi Arabia-Iran understanding
contains the seeds of a major realignment in the Middle East.
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