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Will Iran Or Saudi Arabia Blink First?


International Business

WILL IRAN OR SAUDI ARABIA BLINK FIRST?

Mideast oil probably is not among President-elect Bill Clinton's chief worries. After all, the gulf war is yesterday's news, and oil is increasingly cheap and plentiful. But trouble is brewing again in the vast oil patch in and around the Persian Gulf, where thousands of wells pump almost one-third of the planet's total oil output.

As never before, the OPEC oil cartel is rent by a bitter rivalry between its two leading powers, pro-American Saudi Arabia and radical Iran. Some of that strain will be evident on Nov. 25, when OPEC oil ministers meet in Vienna to discuss how to divvy up needed production cuts. To increase revenues and their clout within OPEC, Saudi Arabia and Iran are spending billions to boost production capacity--and each is pumping record amounts of oil. Thanks to that flood of black gold, OPEC output is now at a 12-year high. And in the background, millions of barrels of Iraqi oil are being kept off the market by United Nations sanctions that one day will be removed. The result: The price of benchmark Brent crude dipped below $20 a barrel for the first time since last spring.

GOOD NEWS? Although both oil behemoths profess the need to cut production to bolster prices, neither wants to be the first to budge. And few analysts expect any agreed-on cuts to be deep enough to cope with a steep seasonal drop in demand for OPEC oil expected early next year. "To get the upper hand, each one is trying to prove how much it can produce," says Fadhil J. Chalabi, a former acting OPEC secretary-general who is now executive director of the London-based Center for Global Energy Studies. "Yet if OPEC doesn't agree on a quota system, prices will collapse," he cautions.

While that would be good news for consumers, collapsing prices could stoke the simmering political rivalries in the gulf. Complicating the equation this time around are the uncertainties cropping up in the U.S.-Saudi relationship now that George Bush is leaving office. Since the mid-1980s, Riyadh has kept the U.S. awash in cheap oil. This policy has made the desert kingdom the top supplier of oil to the thirsty U.S. market, where it accounts for a fourth of such imports.

Now, Saudi oil officials worry that Clinton could change the ball game. The Clinton team's emphasis on environmental problems, Riyadh thinks, will inevitably result in oil--and, specifically, imported oil--being made a likely target. And the need to reduce the federal deficit will make some kind of energy tax extremely attractive. "For the first time since the Nixon era," says Pierre Terzian, head of Paris-based Petrostrategies, "we will have a U.S. President who really wants to reduce dependence on imported oil."

POWDER KEG. Meanwhile, the situation in the gulf is potentially more explosive than ever. Iran and Saudi Arabia are spending billions on arms. At the same time, Qatar, Bahrain, Iraq, Saudi Arabia, and Yemen are all squabbling over boundaries, while Iran claims a piece of Qatar's offshore North Dome Field, the world's largest hoard of natural gas. In recent weeks, skirmishes between Oman and the United Arab Emirates and between Qatar and Saudi Arabia have resulted in bloodshed. "That's why it's going to be difficult for all these countries to agree on oil quotas when they are all fighting like mad dogs over their borders," says a French oil executive. And that's one more reason Clinton may have to give more attention to the gulf than he thinks.John Rossant in Rome


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