Why Saudi Arabia holds the key to a resolution of the Iranian crisis

March 1, 2012 | 00:00

Why Saudi Arabia holds the key to a resolution of the Iranian crisis

It is highly doubtful that the current Western sanctions policy towards Iran will bring about the desired result: to dissuade Iran from continuing on its nuclear course. The only peaceful way to solve the Iran crisis is by bringing Saudi Arabia and China into the equation. They are the only countries that can make an oil boycott work. But for this to happen, the Saudi's should start withholding oil from the market instead of making up for any Iranian shortfalls, as they are doing now.

What if Saudi Arabia announced it will NOT cover Iranian supply gaps? (photo: King Abdullah of Saudi Arabia / source: ArabianBusiness.com)

The first and obvious problem with the oil sanctions the US and Europe have declared on Iran is that they are hurting Western economies as much as they are hurting Iran. They are driving up the worldwide price of oil and making life especially hard on already vulnerable Southern European countries, as well as on South Korea and Japan. For this reason it remains doubtful whether sanctions will actually be carried out properly. No doubt a black market will arise that will service those who are willing to pay the required premium. Iran has also been keen to stress its ability to cut supplies to selective markets at times of its choosing. To be sure, the regime in Tehran, which relies on oil exports for 80% of its hard currency and 65% of government revenues, gets hurt too, but at the same time it can use the sanctions as domestic political capital and blame Western policies for its own failings.

But the most important reason Western sanctions will not work is that the major Asian consumers are not on board. Both China, Iran's largest customer (550,000 barrels a day), and India (400,000 barrels a day) are continuing to source Iranian supplies. Western sanctions alone aren't going to shift the nuclear needle. At best, they will result in a position of diplomatic stalemate, at worst, they represent a policy of escalation dressed up as containment that could lead to war - with massive risks to regional stability and the global economy.

Plenty of buyers

So do we have an alternative option to hand? The short answer is 'yes', but for this we have to look East - towards China and Saudi Arabia. No boycott will work without China given the size of its economy and its seemingly insatiable oil demand. That much is clear. What's less obvious is how to get China onboard to step up economic pressures on Iran. Western cajoling isn't going to have much impact on China. The key is to start focusing on Saudi Arabia (and the smaller Gulf producers) - they have the means to push Beijing in the desired direction.

The Arab States have, of course, a vital interest in precluding Iranian nuclear options. They regard Iran as an enemy and fear a nuclear Iran would do enormous harm to regional stability. The Gulf States also happen to possess the one commodity that China cherishes more than any other: its core supplies of overseas oil.

At the end of the day, China's key supply relationship in the Middle East is heavily anchored in the Gulf States. Out of China’s 5.5 mb/d (million barrels per day) or so of imports in 2011, 2.3 mb/d were sourced from Saudi Arabia, Iraq, the UAE and Kuwait, while Iran accounted for only 550,000 b/d of supplies. China knows that Arab output will always trump Persian production. They also know this is the key relationship they need to get right in the region.

Now as it happens, in the current conflict, Saudi Arabia has made it clear that it is willing to cover any Iranian supply shortages. The International Energy Agency has also indicated it has 14 million barrels a day of emergency stocks it can put into the market for up to a month. This has helped to 'stabilise'

But what this policy does not do is give China any serious incentive to stop free-riding western economic pressures and source Iranian crude at knockdown prices
benchmark prices below $125 a barrel - which could have been considerably higher given supply problems afflicting Sudan, Syria, Yemen, Nigeria and Libya - not to mention on-going threats to the Strait of Hormuz. But what this policy does not do is give China any serious incentive to stop free-riding western economic pressures and source Iranian crude at knockdown prices. Pricing disputes between China and Iran have admittedly turned quite ugly of late, but the key point is that Iran will be able to keep Asian oil receipts rolling in under this 'business as usual' scenario.

If the Saudi's are serious about stopping Iranian enrichment, the real power play here is not feeding global oil markets to keep things ticking over, but to do the exact opposite. What if Saudi Arabia announced it will NOT cover Iranian supply gaps? What if they flipped price signals on their head by withholding, or at least discretely threaten to withhold oil supplies from markets? Prices would rapidly go through the roof. That would be more than enough to get an inflation riddled China’s attention to fully focus on the Iranian question.

On the face of it, you could argue this would only help Iran, since it would be able to sell its oil at much higher prices and there would be plenty of buyers, including China. However, given that China is much more dependent on imports from Saudi Arabia and the Gulf than from Iran, it could never compensate for its higher import costs (or volumes) through Iranian imports. China would be forced to deal with the problem, and it would only have one serious policy option in play: make a deal with the Saudi's to join international sanctions and sever oil ties with Iran until an international resolution could be found. Political pieces would then be sufficiently in place to push for UN sanctions if still needed: even a possible Russian veto might falter once the Kremlin could see how the key players were lining up.

Massively inflammatory

There are serious risks to such a policy of course. Getting China to tighten the 'Iranian noose via Saudi rope' would raise the geopolitical stakes, and massively so. The question is what would Iran do if China (and India) joined the sanctions and it could not sell its oil anymore?

Iran has several options. Top of the list is stirring Shia schisms in Iraq, Bahrain, Syria, Lebanon and Saudi itself. The 'Arab Awakening' is still sufficiently fresh in Gulf States minds to make leaders

If the Saudi's are serious about stopping Iranian enrichment, the real power play here is not feeding global oil markets to keep things ticking over, but to do the exact opposite
anxious. Iran has dropped hints that it could have played much tougher with Riyadh over its intervention in Bahrain. The degree to which Iran could pull the strings in Iraq is not a question many Sunni leaders want to test either - nor those in Washington DC. Further deterioration in Iraq would hammer US credibility in the Gulf. It would also have a sharp resonance for Allied operations in Afghanistan.

A second option, although massively inflammatory, is for Iran to strike key Saudi oil infrastructure. Tehran’s missiles could reach the Abqaiq 5-6 mb/d processing plant, or failing that, loading facilities at RasTanura. That would be hugely disruptive to Saudi Arabia, but arguably less so to Iran (at least in the very short term) assuming Hormuz remained open. Yet a third ploy could conceivably involve a limited closure of the Strait through a well-planned and clearly communicated Iranian military exercise. Not sufficient for a Western casus belli, but enough to spook global oil prices (even further).

Iran could also try to sweat it out, since the world economy would be rocked. If Iran dug in deep against international sanctions, eventual pressures of sustained higher oil prices could force a major climb down across consumer states. Not only would consumers be defeated by their own 'embargo', Iran could claim a political victory, picking up its nuclear pieces. Iran would have the upper hand, and even if power changed hands amid the carnage, Tehran's nuclear line would remain largely the same. Regime change is not at the root of the problem.

Lot to swallow

Such considerations will undoubtedly weigh heavily on Saudi minds before any serious oil market moves are made, but they ultimately remain secondary security concerns for Riyadh compared to the primary fear of an Iranian nuclear capability. Indeed, the real 'upside' potential of bringing Saudi oil

A second option, although massively inflammatory, is for Iran to strike key Saudi oil infrastructure
influence to bear over China, is that the geostrategic equation would be radically altered. Beijing would be placed at the diplomatic heart of the Iranian question. New channels could be opened to Tehran to reach a negotiated position that all sides could live with. That would entail close controls and inspections of what Iran could do in the nuclear field - albeit without pitching this as any kind of political climb down for Tehran. In return, China could give assurances of non-intervention and offer formal membership of the Shanghai Cooperation Organisation as a 'diplomatic deliverable'.

This requires of course that the US would let China play a more prominent role. It would be very useful for all concerned if the US and China decided on who should be taking geopolitical responsibility for what across the 'G2'. Instead of fighting China tooth and nail for geopolitical primacy in the Asia-Pacific, America should bring China into the international security fold: a shared division of labour in the Middle East would be a good place to start. Riyadh would know exactly where it stands relative to its US-Chinese economic patrons in order to exercise the oil options to hand. Ultimately that means the US can't keep trying to go it alone in the Middle East. It has to share the responsibility, rewards (and risks) with China.

This probably all sounds like a lot to swallow. And the strategy outlined here is as economically aggressive as things could get. But the alternative of slowly counting down the nuclear clock in Tehran, as is currently the case, will almost certainly end in war. That will bring a new form of aggression, and not just in the economic realm, but seeing US troops back on familiar ground in the Middle East.

 

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