Saudi Arabia and Iran: Playing with Fire in Petroland

“Aren’t the Saudis your friends?” the Australian Prime Minister, Malcolm Turnbull, once asked President Obama.

“It’s complicated”, Obama replied.

At present the House of Saud has adopted a zero-sum perspective in its relations with the Islamic Republic of Iran. The Kingdom has positioned itself on a path of perpetual antagonism with Tehran and the chances of a return to amicable relations anytime soon are withering.

One of the key sources of tension can be traced to the July 2015 Nuclear Accord between Iran and the P5+1. The biting sanctions regime was lifted and consequently Iran has begun trading in oil once more whilst starting to mobilise up to $80 billion worth of previously frozen assets.

GTY_iran_world_leaders_ml_150402_16x9_992.jpgThe leaders of the P5+1 after reaching an accord in Vienna in July 2015 (image: ABC News)

The security dilemma from Riyadh’s perspective is clear: if Iran can bolster the Assad regime in Syria, support the Ansar Allah (also known as the Houthis) in Yemen, and finance Hezbollah in Lebanon, all while facing a period of isolation, then what can Tehran achieve with free and full access to all of its assets and power?

Equally troubling for the House of Saud has been Obama’s predisposition towards multilateral diplomatic solutions over the unilateral military interventions of his predecessor. Saudi Arabia’s patron state is reassessing its regional relationships and as a result Uncle Sam’s carte blanche, which underwrites Riyadh’s security, looks more likely than ever to bounce.

Yet the response of Riyadh has been characterised by a lack of foresight and strategy, favouring rash and impetuous adventures.

There is the case of Yemen. Riyadh is engaged in a year-long bombing campaign against the Houthis, a group which enjoys support from Iran. Fought with British and American weapons, the campaign might be seen as a proxy-war against Tehran that has achieved no tangible results.

The campaign signals a departure from a traditionally cautious and tactful foreign policy. Riyadh has favoured raising the stakes through flexing its military muscle in Yemen and communicating a willingness to engage ground troops in Syria.

Saudi airstrikes YemenIn March 2015, a Saudi-led coalition began launching airstrikes against the Houthis in Yemen (image: Times of Israel)

In conjunction with the execution of Shia cleric Nimr al-Nimr and Riyadh’s rapidly deteriorating relationship with Lebanon – where Iran enjoys a strong foothold through Hezbollah – Saudi Arabia hopes its confrontational stance will curb the projection of Iranian power in the region.

However, not only is confrontation ineffective in coercing Tehran but Riyadh has little ability to sustain antagonism and proxy-war. Underpinning the strength of the House of Saud is oil. The wealth gained from oil has long been a tool for stemming domestic discontent as well as a weapon to ascertain regional hegemony. However, oil glistens more than it resembles gold. As noted by Adam Smith, “the income of men who love to reap where they never sowed” engenders vulnerability rather than strength.

In other words, power from oil is a double-edged sword. On the one hand, it has afforded Gulf monarchies vast revenues to be disposed of domestically and internationally. On the other hand, Saudi Arabia’s reliance on oil ensures its power rests on a volatile commodity that is often inimical to the independent development of the state.

nimr al-nimr.jpgThe execution of Sheikh Nimr al-Nimr in January sparked outrage both in Iran and among Saudi Arabia’s own Shia population (image: Bloomberg)

For example, through oversupplying the world’s markets with oil, Riyadh hopes to prevent Tehran from reclaiming its market share now that Iran is beginning to ramp-up its oil production. Yet this is done at great cost; low oil prices have Riyadh running a budget deficit of 15-20%. In a country where youth unemployment is up to 30% and half of the entire population is under the age of thirty, Riyadh requires high oil prices to support its citizens.

Although it can rely on its huge foreign reserves in the short term – estimated at around $750 billion – these reserves are nonetheless plummeting at around $12 billion a month. As oil remains below $100 per barrel, the foreign reserves will continue to dwindle and upon depletion, citizens who will no longer benefit from low taxes and huge subsidies may become increasingly restless and agitated with the policy of military adventurism.

Therefore, the transience of oil, the lack of self-sufficiency and an increasingly reluctant patron state means Riyadh is ill-equipped for prolonged antagonism with the region’s ascendant power.

oilSince its discovery in the 1930s, oil has formed the bedrock of the Saudi economy (image: Getty Images)

In comparison, the story of Iran is much different. Whereas the Arab Gulf states have become reliant on Western expertise, capital and security, Iran’s Islamic Revolution and subsequent isolation has spared it the same dependency.

Iran has a much larger population that is highly skilled and educated. With a large and productive middle class, Iran’s reliance on gas and oil is decreasing whilst its self-sufficiency rises.

President Rouhani has continued to shift state reliance on oil exports towards taxation. In late 2015, for the first time, the state earned more from taxation than from oil exports. Iran can therefore derive its revenues from sources that are less dependent on prevailing geostrategic circumstances.

Iran.jpgThe nuclear deal reached in 2015 will open Iran up to new business opportunities, inevitably boosting the formerly isolated country’s economy (image: Rough Guides)

On aggregate, the Islamic Republic’s advantages cannot be fought with petro-power alone. Riyadh’s focus on Iranian-proxies addresses the symptoms of Iranian strength, and not the source. Therefore, the current assertive regional policies are not only pursued at great cost, but they remain a palliative rather than a remedy. In light of this, the House of Saud must consider an alternative policy. Specifically, a policy of détente with Iran can be achieved through adopting a positive-sum perspective as opposed to the current zero-sum outlook.

There is little – besides the perceptions of certain leaders – that dictates that Riyadh and Tehran cannot both gain in the rapidly changing regional environment.

Firstly, supporting the current peace talks with the Houthis is a step to reducing military overstretch and quelling a huge drain on Saudi resources. Secondly, the time for Syria acting as a theatre of proxy-conflict is coming to an end and resources would be better expended through attempting to shape the outcome of political negotiations. Additionally, an agreement with Iran on the market share of oil would greatly favour both parties as well as fermenting an atmosphere of good faith.

If the flame of Iranian resurgence is set to reignite over the coming decade, it would be shrewd for Riyadh to take measures to assimilate Tehran into the fabric of the regional system – now, whilst it is still feasible.

Although it may be possible for people living in glasshouses to occasionally throw stones, it is ill advised that those living in palaces built on petroleum should play with fire.

By guest writer, Danny Anderson

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