Iranian, Arab Clout Is Back

CITY PARK, MD. —  With the cost of oil steadily rising, the public grumbling about gas prices approaching $2 a gallon and protesting truckers storming Washington, the Clinton administration is exerting diplomatic pressure on oil producers, especially Saudi Arabia, to increase their production significantly. Secretary of Energy Bill Richardson was dispatched to the Middle East to lobby governments in the Persian Gulf. Clearly targeting Kuwait and Saudi Arabia, the Republican-led House International Relations Committee passed a bill threatening to cut off aid and arms sales to states that fix crude-oil prices. Attention is now focused on the March 27 meeting of OPEC in Vienna. Whatever the outcome of this meeting, economic calculations are likely to supersede politics.

It was only a year ago that the outlook for oil-producing states, especially in the Middle East, was depressing. Having exhausted reserves accumulated during the oil-boom years in the 1970s and ‘80s in two Gulf wars, these states faced declining oil revenues and rapidly increasing populations. Saudi Arabia, the world’s largest oil producer, was unable to meet its short-term financial commitments.

Even optimistic oil analysts saw no end in sight for such financial distress. Some believed that oil producers could only hope for a marginal increase in oil prices over last year’s low levels. Little did they know: In just a few months, oil prices nearly tripled, the highest relative gains since the Arab oil embargo in the ‘70s, when prices quadrupled.

One reason the analysts predicted continuing low oil prices was perceived non-cooperation among oil producers to control production. But when low prices threatened economic crisis, they came together. A key factor in the renewed cooperation is the new political relationship between Saudi Arabia and Iran that has developed since the election of Iranian moderate Mohammad Khatami to the presidency. Their relationship has been central in building--and maintaining--a consensus among OPEC members.

As oil prices have shot up, Iran has been a clear winner, economically and politically. It scored political points worldwide when it successfully held relatively free elections that produced a crop of reform-minded legislators. Its new clout within OPEC adds to Iran’s luster.

The Saudis’ dominant production capacity still makes them the key to OPEC’s success, but they have learned that unilateralism can be very costly. As a result, Saudi Arabia will likely negotiate with Iran an outcome that’s satisfactory to both. As long as the Saudis and Iranians agree, they will be able to neutralize producers opposed to production increases, like Libya and Algeria. After the favorable outcome of the Iranian elections, the United States had added incentive to improve its own relations with Iran. Iran’s emerging role in OPEC may have accelerated the U.S. decision last week to remove some sanctions on trade with the country.

Although Iraq is unlikely to be a major factor in OPEC’s decisions, it, too, is emerging as a player in the oil game. The miracle of the 1990s has been that, despite sanctions on Iraq and Iran limiting the amount of oil they produce, oil prices have still fallen. Iraq has been allowed to sell oil under the U.N. “oil for food” formula, but Baghdad has continually claimed that the sanctions have undermined its capacity to produce oil by denying it suitable drilling equipment. Since the rise in oil prices, however, Washington has signaled that it may be more open to respond to Iraq’s oil needs.

Yet, Iraq’s efforts to sell oil on the black market may increase. Even when oil prices were low, Iraq found many international traders willing to run afoul of U.N. sanctions to buy cheaper oil. The U.S. interception of a Russian tanker carrying illegal Iraqi oil earlier this year illustrates the problem. Iraq is highly motivated to rely on black-market sales because income from these sales is directly deposited in Iraqi government coffers. Revenue from legal sales, in contrast, is controlled by the United Nations, with a percentage of it going to compensate victims of Iraq’s invasion of Kuwait in 1990. Higher oil prices will strengthen the incentives of both the Iraqi government and international traders to bypass U.N. resolutions.

But the clearest winner in this environment of escalating oil prices is Saudi Arabia, which has, almost overnight, reversed its gloomy financial picture and regained some of the influence in Arab politics it enjoyed in the 1970s and ‘80s. It played a dominant role in a recent meeting of Arab foreign ministers to discuss Israeli attacks on Lebanon, and its pledge to help Lebanon, to the tune of $130 million, made headlines in the Arab press. Its financial ability to support future peace agreements between Israel and its Arab neighbors, in doubt only months ago, is once again viable. On the negative side, Saudi efforts to undertake needed domestic reforms will probably take a back seat.

The late-March OPEC meeting, then, will likely result in some increase in oil production, although the exact amount will be subject to intense bargaining among members. Although politics certainly is a factor in the oil-market dynamic, increased production will not come because of congressional threats or pressure from President Bill Clinton. For one thing, the United States would not benefit from a cutoff of arms sales to oil-producing states. In 1998, the Saudis spent an estimated $10 billion on U.S. arms, and, in recent years, the United States heavily lobbied states like the United Arab Emirates to buy U.S. jets instead of French ones. Nonetheless, members of Congress have little to lose in making such threats, since they can claim credit if OPEC increases production and blame the administration if it doesn’t.

The Saudis, though they agree that current prices are too high, don’t want to return to the days of low oil prices and a sick economy. They surely enjoy the added revenue and clout that have burst upon them in the past few months, and they cannot afford to jeopardize the newly cooperative OPEC spirit. How much of an increase in oil production will be agreed upon will be a function of the politics and economics of the moment. In the long run, oil pricing may be mostly a function of economic markets. But for now, oil is back as a factor affecting power and politics in the Middle East. *