The Saudi Oil War on Iran

It's the third round from the Kingdom. The first two ended in Pyrrhic victories. 

When Prince Turki al-Faisal suggested last year that the House of Saud would join in the U.S.-led sanctions against Iranian oil, by seeking to displace Tehran’s oil exports from the global economy, he was not referring to a novel idea. Indeed, Saudi Arabia has led two prior oil wars against Iran.

As detailed in Andrew Scott Cooper’s The Oil Kings: How the U.S., Iran, and Saudi Arabia Changed the Balance of Power in the Middle East, the first Saudi oil war against Iran was intended to weaken the Shah’s modernization programs. The Saudis feared Iran’s rise as a regional power, and wanted to carve out space for independent decision-making in OPEC, which at the time was dominated by Iran.

As the Shah was extremely dependent on high oil prices for his ambitious goals, the Saudis grasped that dissipation of oil prices via increased global supply would be Iran’s Achilles’ heel. As Cooper chronicles, the Saudis ultimately convinced Washington to go along with their plans, facilitated by the U.S. domestic concern about high oil prices. Near the end of the Nixon administration, the Saudis started to flood the market.

The second oil war transpired in the waning months of the Iran-Iraq war, which ended in 1988. As the eight-year conflict threatened Persian Gulf oil exports, Saudis and Americans gradually started to fear the possibility of an Iranian victory by attrition. In a declassified 1984 State Department document entitled “Iran-Iraq War: Elements of U.S. Diplomatic Strategy and Plans,” a main pillar of Washington’s approach was to “take steps to help Iraq avoid defeat by preserving a strategic balance, while maintaining US neutrality.” Yet as the conflict became the “Tanker War,” severely curtailing Persian Gulf shipping transit, its cessation became paramount.

While the United States was attempting to force countries to halt weapons trade with Iran, and even engaged in hostilities with the Iranian Navy, the Saudis once again flooded the market, aiming to dry up Iranian funding for the war. According to OPEC data, Saudi Arabia expanded output from 3.9 million barrels per day in 1987 to 5.1 in 1988, to 6.4 in 1990. Though this decision had little economic rationality to it, as oil prices had dramatically declined from the Oil shock of 1979-1980, the Saudis understood that the same formula of vulnerability that affected the preceding Pahlavi dynasty was still extant with Revolutionary Iran.

In both instances, the Saudis were successful at achieving their short-term goals. Yet in the longer term, their actions worsened their strategic positions. The Shah was ultimately ill prepared for the loss of revenue, and he was not able to use the oil wealth to dampen revolutionary fervor. The creation of the Islamic Republic and the precedent of toppling a powerful monarchy brought far more strategic liability for the Saudis than the Shah’s presence ever did, and added to the possibility of instability within Saudi borders.

In the second oil war, Saudi action weakened the Iranian position vis-à-vis Iraq, but there was little thought about how this would affect Baghdad, which at the time was in dire economic straits. The loss of revenue from dampened oil prices led to desperation in Saddam’s regime, setting off a catastrophic chain of events that led to the revanchist Iraqi invasion of Kuwait and the subsequent U.S.-led destruction of Iraq’s conventional military capability. The country was bankrupt, societally disintegrated, and occupied, to the point where its functionality as viable political entity was lost for years. Today the rise of a new Iraqi political order has further eroded the Saudi strategic environment.

The Possible Fallout

An appreciation of the limits and potential consequences of the third Saudi oil war are critical—the former having to do with Saudi Arabia’s current vulnerabilities, while the latter concern Iran’s possible reactions.

Though the Saudis, as OPEC’s swing producer, can impact immediate supply fluctuations, their ability to fundamentally reshape market dynamics is now being hampered by new pressures. The toxic mixture of rapidly growing domestic consumption (driven by population increase) and ill-conceived subsidies that encourage it is now being aggravated by the possibility of depleting reserves of conventional hydrocarbons.

The resource shortage was alluded to in Wikileaks revelations of U.S. exchanges with Sadad al-Husseini, Aramco’s former head of exploration and production. The cables reveal that Saudi oil reserves are possibly exaggerated by up to 40 percent.

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