Iran, Saudi Arabia and the Tea Leaves
Updated: 3 days ago
The Gulf States are hunkering down for a longer fight
Both Washington and Tehran claim the war will be over soon. Saudi Arabia and other Gulf States look to be settling in for a long siege. They may be on to something. President Trump just rejected to a proposal from Iran’s president Masoud Pezeshkian to reopen the strait in return for fully lifting sanctions and the blockade. In Trump’s defense, the IRCG would probably have rejected the proposal too.
The fact that Gulf States like Saudi Arabia and the UAE have pivoted from asking the US to slow its roll on Iran to lobbying Washington to keep up the sanctions and the blockade of the region’s most enduring headache should tell us something.
It tells us that the Saudis believe that the war with its biggest regional rival has shifted from “bad for business” to “long-term strategic advantage.” First, came the realization that the closure of Hormuz was not, in fact, all that bad for business. At the outbreak of the war, Saudi Arabia was producing roughly 7mm barrels per day (bpd) at $72.48 per barrel (p/b). With the closure of the strait, production dropped to just under 4mm b/d, but is now flowing at 5.5mm bpd. This is in part due to US Naval escorts through the strait that Iran doesn’t want to strike head-on. Useful but unsustainable as it involves American underwriting the logistics of its competitors in the energy markets. Less US-dependent is the ‘steel belt’ east-west pipeline that King Faisal had built in the 1970s from the country’s eastern oilfields to the Red Sea port of Yanbu. Other conduits circumventing the Hormuz, like UAE’s pipeline to its port of Fujairah, have helped as well. Higher oil prices have offset the lower volumes; increasing revenue by selling less at higher margins is rarely a bad thing. At the current of 5.5mm bpd, the price of oil would have to drop to $75 p/b to put the Kingdom in worse finances than before the war. Don’t count on that anytime soon.
Opportunity Costs
Prior to the Islamic Revolution, both Saudi Arabia and Iran were both pro-American, anti-Soviet regional powers sitting on a hydrocarbon lottery ticket. Things got tense after the 1979 Islamic revolution when Tehran started banging on about being the leader of the Islamic world and exporting revolution. Then, in 2003, the world changed. Whatever else the US did by ousting Saddam Hussein, it removed Iran’s closest, clearest threat. That vacuum gave Tehran sway over Iraq’s Shi’a population sitting near the Saudi border while it focused on a constitutional mandate to fund destabilizing revolution to any group to which it could funnel weapons and cash. It was a rough decade, and as the Arab Spring spread like a grease-fire across the region, Iran and Saudi Arabia found themselves backing opposite side of conflicts in Syria and Yemen. The Saudi’s guy may have prevailed in Syria, but as the Iran-backed Houthis rolled over Yemen, the country became a failed state on the Saudi border.
True, the Saudis are furious with Trump for making a separate peace with a group that has locked down the Bab al-Mandab Strait and launched attacks on a crucial ‘steel belt’ pipeline. They have indulged in performative hedging against an unreliable US by signing a security pact with Turkey and Pakistan. Practically, however, they are sticking close to America, which is doing all the heavy lifting in Hormuz. And in that organic arrangement lay the seeds to a homegrown regional order in the Middle East.
If the Saudi Air Force can keep the Houthis more or less contained while the US chokes off its main rival Iran, then a) the Houthi threat on its southern border withers, and b) Saudi Arabia’s main rival for regional Big Man rolls out of the conflict crippled. For that, the Kingdom is willing to pump a little less. At higher margins, of course.
How Much Longer?
Unfortunately for Iran that $200 p/b oil never happened. It pinched at over $100 a few times, and probably will again. September has been a volatile month. WTI is vibrating in the low $90 range, and Brent around $100 – hardly an energy apocalypse. This is partly due temporary intervention: US Naval escorts and Washington’s plans to release some 40mm barrels from the strategic reserve. Part of it is that Iran’s version of the Oil Weapon - like the one OPEC deployed in the 1970s - only works once. It delivers a nasty shock and the markets set to finding a work around. Iran has shot its wad, so expect oil prices will stay elevated, but don’t worry too much about the spikes. The fashionable trade spats we’re playing with will make everything more expensive, so you’ll barely notice.
Over the summer, when the world was hoping that the Hormuz crisis would sort itself out sooner rather than later, it was expected that Iran’s economy would contract by 6%, now estimates look like 10% contraction. Meanwhile the rial has collapsed 44% since the war began, and something like 99% over the decade. Still, it’s important to understand that the Iranian state can bear this longer that Iranian society. It’s a local political reality that the Gulf States seem to understand better than the White House gunning for regime change.
Even if the state did collapse, the Houthis provide a grim case study: They aren’t even a proper tribe and have managed to gum up the Bab al-Mandab Strait for the entire planet. So this unpleasant stalemate could go on a lot longer than any one thinks if a rouge IRGC has half a mind.
How much longer? Well, when the US invaded Iraq in 2003, my daughter was three. Our troops finally left the country this week, a few days after her 27th birthday.
These things linger. It’s best to price them in.
