Oil in Saudi-Iranian Relations

26th Aug 2019 by Sukru Cildir

Oil in Saudi-Iranian Relations

Since the mid-1960s, oil has been the most popular energy resource of the world with more than 30 percent share in global energy consumption (BP Statistical Review of Word Energy 2018, p.11). Known colloquially as ‘black gold’ or ‘a prize’, and wars, conflicts, and revolutions have all been made in pursuit of access to oil. This piece will focus on the role of oil in Saudi-Iranian relations, reflecting on the role in shaping relations of and between the two states.. As oil has been regarded as “a strategic commodity”(Bromley 1991, p.82), particularly for industrialized states, analysing its role within Saudi-Iranian relations helps to better understand the driving forces of relations between the two, bringing together international factors with domestic ones. The impact of oil over two states’ relations can be understood with a balance between internal and external pressures.    

Looking at the broad history of Saudi-Iranian relations, it can be seen that the relationship has oscillated between cooperation and conflict. In accordance with the nature of this relationship, oil has been utilized as a cooperative tool  that enhances their friendly relations or a conflicting tool that undermines their relations and feeds their rivalry. Accordingly this changing role of oil in their relations is partially shaped amidst evolving positions within the US-led international system as well as the emerging socio-economic pressures in their domestic affairs. To this end, this piece will focus on three distinct time periods[1]: Pre-revolution (1945-1979), rapprochement (1990-2003), and rivalry (2003-present). 

In the pre-revolution period, the two states posed largely positive relations with Western allies and took their positions within the US-led international political and economic system. Although they had mutual suspicion in their bilateral relations, they were able to work together on issues of shared interest – such as oil - alongside their common threats like nationalism, communism or Soviet expansionism. Their partnership in oil, however, was tested in two events in this period. In 1951, the Iranian oil industry, which was the largest oil producer in the Middle East at the time, was nationalised, prompting a severe isolation/embargo from the rest of the World, led by the UK, and Iranian oil production plummeted to almost zero between 1951-1954. The lack Iranian oil in the global market was offset by other producers, particularly Saudi Arabia, which went some way in negating Iran’s strategy to utilize oil for its political purposes. 

Following the event, Saudi oil production surpassed Iranian oil production. With the Shah’s efforts to develop relations with the West, Iranian oil production was able to reach Saudi oil production by the late 1960s. Here we can see that between 1951 and 1953, oil provided scope for Saudi Arabia and Western states to challenge Iranian domestic politics, ultimately leading to the toppling of Prime Minister Mossadegh

In the 1973 oil crisis, when oil rich Arab states, led by Saudi Arabia declared an oil embargo against the West, Iran took a moderate position between the West and the Arab states. Whilst Iran supported the boycott decision of Arab states in OPEC, it maintained good relations with Israel and the US, and provided them oil during the embargo (Keynoush 2016, p. 91). This policy of Iran made it a more reliable oil producer in the Middle East in the eyes of the Western states. In spite of pressure from neighbouring Arab oil producing states, the Shah rejected pressure to cut off oil supply (IbidNYT 1973). Following the end of oil crisis, Iranian oil production reached its historic peak, over 6 mbpd, a figure that has not been reached since the revolution.  At this time, Iran undermined the oil embargo and took advantage  of being a more reliable ally of the US in pursuit of broader economic relations with Washington and infrastructural development. 

Following the Iranian revolution in 1979, relations between Saudi Arabia and Iran became increasingly fractious. Amongst a range of well documented issues (Mabon 2013), this resulted in tensions in the oil sector and, during the Iran-Iraq war, included mining the waters of the Gulf,  hitting their oil tankers, and bombing oil fields (Chubin and Tripp 1996, pp.13-14)

By the early 1990s, Saudi-Iranian relations began to improve and oil played a facilitator role in this improvement.This burgeoning rapprochement emerged to tackle socio-economic devastation stemming from conflict which was exacerbated by the free fall of oil prices after the mid-1980s and was facilitated by moderate politicians coming to power in both states.

 As stated by  Chubin and Tripp(1996, pp.67-69), in 1993 Saudi Arabia left some of its oil market to Iran by decreasing its oil production from 9 million barrels per day (mbpd) to 8.8 mbpd. Additionally, amidst US pressures, both regional states furthered their cooperation in 1999 and presented a common stance on oil by agreeing a cutback in oil production to boost global oil prices.During this period, oil production followed a stable trend .Thanks to their rapprochement and cooperation in the oil sector, both also utilized their oil wealth for domestic benefits and took advantage of improving relations by drawing on more Western capital, high-technology and investment to their economies, particularly for their debilitated oil sector despite the sanctions then US administration exposed  on Iran.   

Following the 2003 Iraq War and global awareness of Iran’s uranium enrichment programme, Saudi-Iranian relations dramatically deteriorated. Iran was exposed to heavy pressures of Western states and Gulf monarchies, which paved the way for its isolation once again from the international system. Thanks to the high global demand of oil – particularly since the rise of China - Iranian oil production maintained stability of around 4- 4.5 mbpd until 2011. With the US sanctions in early 2012, Iranian oil production sharply dropped to 3.8 mbpd within a year, while the lack of oil in the global market was filled by rising Saudi oil production. With the Iranian nuclear deal in 2015 the Iranian oil industry recuperated once more, and its production reached to 5 mbpd in 2017. However, following the Trump administration’s decision to impose new sanctions, Iranian oil production fell to 4.7mbpd in 2018 while Saudi production jumped to over 12.2 mbpd in 2018 from 11.8 mbpd in 2017.  In this rivalry, it seems that Western states - with the support of Saudi Arabia – used oil production (and prices) to punish Iran.    

Given this historical trajectory, oil has been utilized in Saudi-Iranian relations as a tool either for rapprochement or hostility. As oil is a strategic international commodity, its utilisation has been dependent on external factors as well as internal dynamics.  In the light of  the three distinct time periods, it can be argued that their divergent or convergent positions within the US-led international system determine the way of utilisation of oil in Saudi-Iranian relations. Although it is quite difficult to predict normalizing Saudi-Iranian relations in the era of increasingly hawkish politicians in the United States and beyond, oil remains a means through which relations can be improved, as they did during the rapprochement period.  

[1]According to Simon Mabon, there exist five distinct periods to understand Saudi-Iranian rivalry: pre-revolution, 1979-1991, 1991-2003, 2003-2011, 2011-present day. Simon Mabon, The Struggle to Shape the Middle East, SEPAD Report, 2018, p.4, https://www.sepad.org.uk/report/saudi-arabia-and-iran-the-struggle-to-shape-the-middle-east

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Sukru Cildir is a PhD student in the Department of Politics, Philosophy and Religion. His PhD explores the role of oil in Saudi-Iranian relations in the post-1979. He tweets @sukrucildir20.