The Organization of Petroleum Exporting Countries (OPEC) came to a surprise agreement at informal talks this September to reduce global oil production by between 200,000 and 750,000 barrels. However, final negotiations will not be held until the official OPEC meeting in November and many wonder if regional rivals, Saudi Arabia and Iran, can make a compromise on oil production stick. The Cipher Brief sat down with Robert Richer, the Former Associate Deputy Director for Operations and Former Chief of the Near East Division at the Central Intelligence Agency (CIA,) to find out what lies behind these tangled OPEC negotiations.
The Cipher Brief: As you know, OPEC came to an agreement this September to negotiate an oil supply reduction deal during their next official meeting in November, which was quite surprising given pessimistic Iranian statements going into the negotiations. Looking at relations between Saudi Arabia and Iran – the two key players at this meeting – what do you think led to this decision?
Robert Richer: Here’s what’s interesting about this decision. As far as I understand it, Russia (a non-OPEC producer) is the only country that has actually committed to this agreement. Now, even after the statements made at informal talks this September, it is still unclear whether everyone’s going to agree at the official meeting in November to keep oil prices at a mutually acceptable level – probably somewhere around the $52 a barrel mark.
It is also unclear what Iran will do. Tehran has put out multiple tenders for oilfield development and product development in the wake of the Joint Comprehensive Plan of Action (JCPOA) nuclear deal lifting some oil export sanctions on the country. Iran needs as much money as it can get to help rebuild its infrastructure. In many ways, the country is only a little more modern than Cuba is today, after 50 plus years of embargo and sanctions.
So, number one, Iran will need to balance its infrastructure needs and its desire to move forward as a regional economic and political power against taking a deal, which is more in Saudi interests than in Iranian interests. With the escalation of events in the region, like the firing of ballistic missiles at U.S. naval vessels by Iran-backed Houthi rebels in Yemen, and the escalation of rhetoric from both sides, but especially from Saudi Arabia towards Iran, it’s going to be a contentious discussion in November, even though the outline of the decision has been made in term of oil production. I’m not completely optimistic that Iran will play by whatever is decided at that session.
There is a lot at play here. Riyadh is essentially trying to convince its people that the oil boom is not going to be here forever, and that the country is going to need to make some major reforms going forward. The young Deputy Crown Prince of Saudi Arabia, Mohamed bin Salman, has put out his “Vision 2030” plan for Saudi Arabia which does just that. Iran, on the other hand, has not done that. Iran’s leadership is promising prosperity and modernization. That dialogue in Iran does not necessarily fit well with the idea of keeping oil production levels at a point that may not sustain short-term spending.
TCB: Given that the Iranians don’t have much interest in cutting production, and in fact have insisted on their right to return oil production to pre-sanctions levels, what concessions do you think that the Saudis are ready to make? Why is it in their interest to broker this deal?
RR: I hate to take a phrase from (Presidential candidate Donald) Trump, but it really is about the art of the deal. What goes on behind the doors, politically, in the bilateral discussions between Saudi Arabia and Iran, are probably more important than what goes on in terms of the actual oil production levels. We should expect that the Saudis and Iranians will have backdoor discussions, talking about Yemen, and what can be put on the table to make the Saudi deal more palatable to the Iranians.
There is this political dynamic at play here, and as we’ve seen in the past, the Iranian negotiators are very shrewd. They are the ultimate Bazaaris – hardnosed merchants of Middle Eastern bazaars – they are the best negotiators in the world. They will come with a full portfolio of political things that they need from Saudi Arabia. They don’t need this to be public, but there will be concessions that make it easier for the Iranians to say “we’ll handle our internal problems in terms of changing expectations for growth, for wealth, for modernization. However, in return, you will need to give us something.” And that something is primarily going to have to deal with Yemen. The Iranians may also be willing to give up a little ground on their support for the regime of Bashar al Assad in Syria, but this doesn’t really hurt Iranian interests since Russia has already taken on much of the burden of supporting Assad militarily.
TCB: How important do you think that those political concessions are for the Saudis?
RR: The Saudis want an oil price that can act a marker. A price that hovers somewhere around the $50-52 mark, which then gives them enough money to fund their economy and the Vision 2030 reform plans of the Deputy Crown Prince, but also gives them a solid marker around which they can plan their new budgets and economic reform initiatives. That is very important. Any uncertainty in oil price will be a huge problem for Riyadh, because they are looking to build more realistic budgets in the long term.
The Iranians, on their side, have the potential to say, “look, we’ll help you get that sustainability, but you’ve got to help us politically.”
TCB: If they do come to a deal in November, roughly along the lines of what’s been talked about, how do you think this agreement will affect the geopolitical balance between Saudi Arabia and Iran?
RR: I think it will have a great effect. However, if there is a significant diplomatic incident, either side may say that they are going to disregard the deal and increase production. What we sometimes miss when we look at this situation is what has happened in Syria and oil production in the region during the embargo on Iran. The Iranians have a huge underground market where people can buy their product, despite sanctions or restrictions. The Iranians can always play that game again, because there are people who will buy their crude. If need be, they can go back to selling oil under the table, and there’s very little you can do to stop that, there’s very little you can do to enforce it.
