The Hamas attack on Israel, which derailed the main diplomatic initiative of Saudi Crown Prince Mohammed bin Salman, a three-way agreement involving the United States and Israel, and muddled the regional political landscape, left one thing unchanged: Riyadh’s influence on the global oil market.
Last year, Saudi Arabia reduced its production to boost prices, including unilaterally cutting its output by 10% in addition to OPEC-negotiated restrictions. Even though the market had wrongly fixated on a perception of weak demand growth, the truth is that Riyadh faced an unexpected supply surge from countries under Western sanctions, including Iran, as well as Venezuela and Russia. Since October 2022, Iran has increased its production by up to 700,000 barrels per day, the second-largest additional source of oil supply this year, behind U.S. shale.
Washington disregarded the growing smuggling of Iranian crude, primarily arriving in China via Malaysia. The priority was an informal detente with Tehran, including a prisoner exchange and lower oil prices. Furthermore, the increase in Iranian oil exports was a boon to mitigate the cost of new oil sanctions against Russia.
Iran indirectly supports Hamas, even though its role in Saturday’s brutal attacks remains unclear and inconsistent with the country’s strategy. It’s worth remembering that the Shiite-Sunni conflict has killed more people in the Middle East than the conflict between Muslims and Christians or Jews combined. It’s challenging to imagine Washington maintaining its hands-off approach to Iran for much longer. The Islamic Republic also supplies weapons to Russia for its war in Ukraine, and the key to this support lies in oil revenues.
The extra barrels from lax sanctions enforcement have translated into a massive windfall for Tehran. According to some analysts, Iran is earning approximately an additional $1.5 billion per month at current oil prices. Over a year, this amounts to about $18 billion, and the current debate in Washington over the $6 billion of South Korean money transferred to a Qatari bank to allow Iran to buy food and medicine seems like a diversion.
If Washington were forced to clamp down on Iranian oil exports, Riyadh would be in a position of strength. Saudi Arabia could significantly increase production while keeping oil prices near $100 per barrel. Currently, the market, thanks to the smuggling of Iranian and Russian barrels, doesn’t require additional Saudi oil. However, a crackdown on Iranian deliveries would allow Saudi Arabia to pump more without sacrificing the other red line: high prices.
Closer ties with Tehran and integration into the BRICS could significantly shift the balance of power to the detriment of a discredited West. For Prince Mohammed, this is a far cry from the situation he found himself in before Vladimir Putin invaded Ukraine in 2022, when he was a near-pariah after the murder of journalist Jamal Khashoggi. The surge in energy prices has created a windfall for Riyadh. While the rest of the world struggled, the Saudi economy grew 8.7% in 2022, the fastest among G20 countries.”