Iran called on all members of the OPEC oil cartel last week to take united action against the U.S.’s ramping up of sanctions on the Islamic Republic. The statement from its President Masoud Pezeshkian followed Donald Trump’s instruction to his key cabinet colleagues to increase sanctions on Iran to reduce its oil exports to zero. President Trump had earlier called for Saudi Arabia and OPEC to increase their oil production to push oil prices down. So how will OPEC members respond to Iran’s call to action and what is the West’s strategy to handle the situation from here?
The worst-case scenario for the West is that OPEC members embargo oil exports to the U.S. and its key allies. These members account for around 40% of the world’s crude oil output, about 60% of the total petroleum traded internationally from their oil exports and just over 80% of the world’s proven oil reserves. OPEC was specifically mandated upon its foundation in 1960 to ‘co-ordinate and unify the petroleum policies’ of all its member states – effectively fixing oil prices. An OPEC-wide embargo of oil exports to the West has been done before when OPEC members – plus Egypt, Syria, and Tunisia – began an embargo on oil exports to the U.S., the U.K., Japan, Canada, and the Netherlands in response to their collective supplying of arms, intelligence resources, and logistical support to Israel during the 1973 Yom Kippur War. As global supplies of oil fell, the price of oil increased dramatically, exacerbated by incremental cuts to oil production by OPEC members over the period, as analysed in depth in my new book on the new global oil market order. Gas prices also rose, as historically around 70% of them are comprised of the price of oil. By the end of the embargo in March 1974, the price of oil had risen around 267%, from about US$3 per barrel (pb) to nearly US$11 pb. This, in turn, stoked the fire of a global economic slowdown, especially felt in the net oil importing countries of the West. Coming at a time when the West is still readjusting to the loss of significant oil and gas supplies from Russia following its 2022 invasion of Ukraine, there is no reason to think that the results of such a widescale embargo now would be any less dramatic on the oil price.
That said, up until very recently there was little chance that the key players in OPEC would heed such a call for action by Iran. A similar request from the Islamic Republic last November for Muslim OPEC members to impose such an embargo went unanswered, and this was during former U.S. President Joe Biden’s term in office. He was regarded with such contempt by the major powers in OPEC that the crown princes of Saudi Arabia and the UAE disdained even taking a telephone call from him when he called for their help to bring oil prices down just after the 2022 invasion of Ukraine. Even before Donald Trump formally took office on 20 January, a notable softening in attitude from these same leaders and others in OPEC towards the U.S. and its leadership position in the world had taken place. Although many observers in the West expected a continuation in Trump’s second presidential term of the neo-isolationism evident in several key respects in his first term, the early indications are that this is not going to be the case. Instead, it seems much more likely that Trump’s second term is going to be about reasserting the primary influence of the U.S. and its allies in the world through whatever means necessary in order that he can be seen by his voters as keeping his promise to ‘Make America Great Again’. In essence, it will be a bold reassertion of the original 1992 Wolfowitz Doctrine, and has been noted by the major Middle Eastern powers. This was evident in Saudi Arabia’s early tribute to the new president of US$600 billion of investment into the U.S.
However, at that point an indication came that the relationship between the U.S. and its former great ally in the Middle East might not settle back into the comfortable one it had been based on the 1945 Foundation Agreement or the later Trump Version of that, as also examined in my latest book on the new global oil market order. Back in the Oval Office, Trump made it clear that he wanted much more money to come from Saudi Arabia in return for its being protected from regional and global threats by the U.S. He also reiterated his desire for Saudi Arabia to sign a relationship normalisation deal (‘Abraham Accord’) with Israel as quickly as possible, despite the longstanding fierce objections to this of Saudi Arabia’s King Salman bin Abdulaziz Al Saud. And he reconfirmed that he expected Saudi Arabia and OPEC to increase their oil production to keep oil prices on the lower side of the ‘Trump Oil Price Range’. For key economic and political reasons analysed in my latest book Trump has never wanted to see oil above the US$75-80 pb of Brent level. With his plans to dramatically increase U.S. production and to encourage more output from elsewhere, it is clear he wants the oil price even lower than this in his second term as president. Meanwhile, Saudi Arabia’s 2025 budget breakeven oil price is US$98 pb of Brent, according to the IMF. This divergence in oil price targets between the U.S. and its allies and Saudi Arabia and its OPEC brothers is another major potential problem between the West and the Middle East.
All these factors are fissures in this relationship and the catalyst for the cracks to deepen may have come last week in Trump’s plan to take over Gaza and resettle the 2.1 million Palestinians living there. It is difficult to think of an idea more abhorrent to any Arab and Islamic state than accede to the final withdrawal of their claims to the land they believe was stolen from the Palestinians by the Jewish state of Israel after it won its war for independence in 1948. It is not for nothing that the event is known in the Arab and Islamic worlds as al-Nakba (‘the Catastrophe’). Trump’s additional comments that he might use force to achieve this aim will also be music to the ears of all radical Islamist militias across the entire Middle East, spurred on by an increasingly corned Iran and Russia, with China still able to provide additional resources as and when required. Of course, in the fluid world of business negotiation that characterised Trump’s first political term in office, this ‘Gaza Gambit’ may simply be the opening position towards a broader settlement across the Middle East. In this he may seek to trade the Gaza resettlement idea for a tougher new nuclear deal with Iran that this time also has Israel’s backing. Indeed, shortly after his announcement on Gaza, Trump posted on his Truth Social platform his desire for a “verified nuclear peace agreement” with Iran. In such a deal, the Arab and Islamic countries of the Middle East would not see the Palestinian claim to Gaza revoked, Israel would have Iran’s nuclear ambitions rigorously stymied by U.S. inspections, and Saudi Arabia might also feel the security situation had softened sufficiently to sign an Abraham Accord with Israel. In this event, the Kingdom might also see fit to keep the oil production of OPEC at a level which is still under the ‘Trump Oil Price Range’.
By Simon Watkins for Oilprice.com