Israel doesn't like it, nor do hawkish U.S. Republicans, and in Canada, the loonie gave President Obama's rapprochement with Iran a big thumbs-down. Canada stands to lose greatly from a weakening of trade sanctions against the Islamic Republic, thanks to the prospect of more Iranian oil on the market.
However, the key player in the outcome of this great game may not be in Jerusalem, Washington or even Tehran. Saudi Arabia is quietly raging over the American overtures to Iran, and the question is how the world's biggest oil exporter will react to an unleashed Iran. Does Saudi Arabia retreat and allow Iran to recover its market share, or does it declare economic war, keeping the spigots open as the price of crude oil plummets?
The latter would send a clear message – not just to Tehran, but to every North American oil producer – that America's traditional OPEC ally is not pleased at being sidelined by the administration in Washington. The Saudi royal family fears the Shiite theocracy that rules Iran, and is actively supporting the insurrection against the Assad regime in Syria to which Iran has given support and encouragement. The Saudi anxiety stems from deep-rooted ethnic and religious differences but there is also a geopolitical dimension.
For decades, Saudi Arabia has profited politically from its status as a moderate force in OPEC and in Middle East politics, generally. The kingdom's diplomatic and political conservatism has been useful to America, even after the 9/11 attacks revealed the extent of support within Saudi Arabia for fanatical Islamism. However, the Obama administration has shown itself prepared to ignore traditional Middle East allies in pursuit of wider goals and this infuriates Riyadh.
In a recent interview in the Wall Street Journal, Prince Alwaleed bin Talal, the tycoon and member of the Saudi royal family, notes that the Saudi government is putting huge pressure on Washington to reject "the President of Iran's soft talk." He adds that, "for the first time, Saudi Arabian interests and Israel['s] are almost parallel."
The oil market is hedging its bets. The price of crude dipped only a couple of dollars when news of the interim nuclear deal emerged. The initial rapprochement does nothing to lift the ban on Iranian oil exports to Europe, but Tehran is confidently predicting a much bigger removal of sanctions next year. If that were to happen, it could add a further 400,000 to 500,000 barrels of crude a day into the export market. That amount alone could be accommodated, but the Saudis feel other pressures.
Iraq is ramping up production and additional Libyan and Venezuelan oil should come to the market next year, as will other non-OPEC oil output. Together, this could add 2.5 million barrels per day of additional oil supply. In the absence of accommodating cuts by the major OPEC producers, we could expect an oil price plunge to $60 (U.S.).
According to the Centre for Global Energy Studies (GGES), Saudi Arabia needs an oil price of $86 a barrel to balance its budget. The CGES also points out, however, that the kingdom has been enjoying substantial budget surpluses, due to recent high oil prices as well as its efforts to replace the recent falls in Libya's output. Therefore Saudi Arabia could afford to endure a period of budget deficits, if it chose to send a message to the world that it was displeased by the new political map being drawn in Washington.
The kingdom has the power, if it wishes, to make this a costly venture for Iran as well as North American producers of tight oil, deep-water crude and oil sands. However, the main immediate effect would be the deferral of new projects. The cost of maintaining existing production is much lower than the $80- to 90-a-barrel fully depreciated price of the marginal barrel of non-OPEC crude.
The push for a new political settlement in the Middle East, in which Iran plays a role not as villain but as ally, is an extraordinary consequence of the shale revolution. Energy abundance at home has allowed America to dare to snub old allies and forge new alliances. But it will not be an easy transition, and we could see oil used once again as a political weapon.