OPEC ‘No-Cut’ Decision Adds to Middle East Divide

12.16.14

OPEC ‘No-Cut’ Decision Adds to Middle East Divide

12.16.14
OPEC

By Madeleine Moreau for Global Risk Insights

At a meeting in Vienna on November 27th, the Organization of the Petroleum Exporting Countries (OPEC) made a surprising decision to not cut oil production, causing the price of oil to remain at its lowest level in five years. While countries with ample oil reserves such as Saudi Arabia and the Gulf states will largely be unaffected by the low prices – at least so long their reserves can cover revenue losses – states dependent on revenue from oil exports (such as Iran) are getting hit especially hard.

Critics of OPEC’s decisions, such as Iranian President Hassan Rouhani, say that the decision by Sunni dominated countries within OPEC is purely a political ploy to undermine Iran’s presence in the Middle East. As such, bad economic times are unlikely to stop Iran from exerting its influence on the ground across the region where Shias are threatened.

Winners of Low Oil Prices

The price of oil has dropped by nearly half since June 2014, going from $115 a barrel to just below $60 a barrel today. Though the market is shaped by expectations as well as demand and supply, two of the biggest reasons why prices have dropped so significantly is that supply has increased with American shale oil production, while demand has decreased because of weaker economic activity especially in China and the Eurozone and a growing shift away from oil to other fuels.

In situations past OPEC, which controls nearly 40% of the world market, would curb production to protect its profit margins. This pattern of behavior make its recent decision to not cut oil production a surprising move. When asked about the outcome of the meeting, Saudi Oil Minister Ali Ibrahim al-Naimi said, “Why should I cut production? You know what a market does for any commodity. It goes up and down and up and down.”

Countries with rich oil reserves like Saudi Arabia and most Gulf states can tolerate the lower prices quite easily. Saudi Arabia alone has $900 billion in reserves and its own oil costs very little, $5-$6 per barrel, to get out of the ground. Likewise, research by the International Monetary Fund shows that Kuwait, Qatar, and the UAE can still break even on public budgets with oil at $70 per barrel and have reserves to sustain the rest.

Oil importers like Morocco, Tunisia, Jordan, and Lebanon are also benefiting from the low price of oil, as subsides account for a large chunk of their budget. Estimates show that these countries enjoy a $4 billion annual reduction in combined import bills for every $10 fall in the price of oil.

Losers of Low Oil Prices

While much of the Middle East can support the current oil price, Iran and Iraq are becoming the two biggest losers in the Middle East region. Current international sanctions restricting Iran’s access to some of its own petrodollars have already put a great strain on the country’s economy. With the country heavily dependent on oil income, the recent cut in oil prices has only further hurt Iran as it needs oil to sell at $130.70 per barrel to break even.

In wake of such economic woes, the government of Iran has introduced a budget bill to restructure wealth in hopes of maintaining some financial stability. The proposed 2015 budget is expected to be six percent above this year’s, and with inflation will force Iran to tighten spending in some areas.

Iraq is also heavily dependent on oil revenues. OPEC’s second biggest oil producer behind Saudi Arabia, the decline in oil prices is costing the country 27% of its projected revenues for the year. With international airstrikes across the country cutting production from 70,000 barrels a day in August to 20,000 barrels a day, this comes at a time when the government’s budget is struggling to suppress Islamic State (IS) militants within its borders.

However, a recent oil deal with the Kurds could help minimize losses. According to the agreement, the Kurds will be allowed to sell 300,000 barrels per day to Turkey which will be sold in turn by Iraq’s state oil marketing organization (SOMO). In exchange, the Iraqi government will resume payments to the Kurds of 17% share of the national budget and give $1 billion to Kurdish Peshmerga forces battling IS militants.

Political Manipulation?

Considering the winners and losers of the oil price, OPEC’s decision is seen by critics in the Middle East as purely a political ploy. Iranian President Hassan Rouhani has claimed the fall in oil prices as a result of “treachery” by powerful Sunni countries within the organization, commenting recently the decision to be partly “politically motivated” and a “conspiracy against the interests of the region, the Muslim people and the Muslim world.”

Rouhani’s remarks underscore the geopolitical significance of the Sunni-Shia divide playing out on a state by state level, the dynamic ‘on the ground’ not necessarily dictated by economic decisions.

Regardless of economic realities, Iran will likely continue exerting influence in the short-run in Lebanon, Syria, and Iraq by aiding Hezbollah militants and the Assad regime. The Iranian President even announced on December 7th that it will increase military spending by more than a third in the next fiscal year, despite claiming a “cautious, tight budget.”

It is unclear what long-term effect dips in oil prices and OPEC decisions unfavorable to Iran will have on Sunni-Shia tensions between state leaders, but a recent analysis notes: “Optimists think economic pain may make these countries more amenable to international pressure. Pessimists fear that, when cornered, they may lash out in desperation.”

Overall, the drop of oil prices and subsequent regional political drama highlights the vulnerability of economies in the Middle East and emphasizes the need for nations to economically diversify and to not rely solely on oil revenues.

While rich countries such as the UAE and Saudi Arabia have made great strides in investing in alternate sources of energy, the rest of the Middle East needs to find a way to follow suit. Otherwise, economic and political turbulence will continue to follow future steep drops in oil prices.

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