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Crude Economics
Savvy Saudis Making Iran the Enemy of OPEC

The fight over OPEC production cuts is turning into yet another Saudi-Iran battle. Saudi Arabia told Venezuela and other desperate countries in the cartel this week that it’s willing to accept limits on oil output and freeze production at current levels—if Iran and Iraq also accept them. Iran, though, says it has a huge quota boost coming since its sales were limited by sanctions. The FT reports:

“It is illogical to ask Iran to further decrease its output,” Iran’s Opec envoy Mehdi Asali told local newspaper Shargh. “Under the current circumstances that Iran’s production is much below its quota, it cannot expect us to further decrease our production,” he said. […]

Mr Asali blamed Iran’s Opec rivals for “irresponsible” behaviour as they increased production when Iran was under sanctions. “Now that the oil prices have fallen due to the increase in the production of these countries, they expect Iran to co-operate and pay the price for a balanced market,” Mr Asali said.

Iran’s oil minister struck a less combative tone in response to the Saudi-Russia proposal, saying “we look forward to the beginning of co-operation between Opec and non-Opec countries and we support any measure that can stabilise the market and increase prices.” But the minister didn’t go much further than that, and certainly didn’t hint at any commitment to freezing production at current levels—a commitment that would hurt Iran more than most other petrostates, as it is raring to get its sanctions-ravaged oil output back up to speed in the next few months.

For the Saudis, Iran’s throwing a wrench in the works is just fine—it deflects the pressure from Venezuela and Russia and onto Iran. The status quo hurts Saudi Arabia less than the others (Riyadh is sitting on an absolutely massive, if fairly quickly depleting, sovereign wealth fund), so it’s willing to let prices stay low. In the meantime, a bearish market cuts Iran’s income, punishes Russia for its stand in Syria, and keeps U.S. shale production from skyrocketing. And now Iran’s insistence on a big quota increase at the same time everyone else is supposed to cut back gets Saudi off the hook with its fellow OPEC members.

The Saudis think long and hard about oil, and over the decades it’s a tool they have learned to wield well.

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  • Kevin

    With a lot of cheap oil and some accumulated wealth the Saudis have a longer the horizon – low prices that prevent the longer term emergence of other sources of oil and energy are a reflection of this. The Saudis made a mistake allowing prices anywhere near $100/barrel as it encouraged alternatives.

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