Analysis

Saudi Arabia Reminds Iran Who’s Boss

The Saudi oil minister declares that the kingdom will make up for a drop in Iranian oil production “almost immediately.”

Saudi Arabia on Monday warned Iran that using oil as a weapon against the West would be futile. The world’s top oil exporter and second largest producer said that it could lift production by some two million barrels per day “almost immediately” to make up for a reduced Iranian supply.

In an interview with CNN, the kingdom’s oil minister declared that all he needed to do was “turn valves” to boost production.

“This spare capacity is to respond to emergencies worldwide,” Ali bin Ibrahim Al-Naimi explained. “That is really the focus. Our focus is not on who drops out of production but who wants more.”

The announcement came a day after Iran warned Gulf Arab oil producers against increasing production to offset a drop in Tehran’s crude exports. The government’s OPEC governor was quoted in an Iranian newspaper on Sunday saying that attempts by other countries to replace Iran’s output with their own would make them an “accomplice in further events.”

Saudi Arabia is the only petroleum exporting country with a sizable spare capacity. It keeps production below capacity to sustain a price of roughly $100 per barrel. If the price of a barrel of oil drops below $80, Saudi Arabia’s government would be in financial trouble. Countries like Iraq and Russia, by contrast, need oil to trade over $100 per barrel to balance their budgets.

Iran is heavily dependent on oil revenue but its export market is limited. European countries are expected to enact an embargo which would reduce Iran’s oil sales by roughly 15 percent. China and India are its two other main buyers and take a 16 and 13 percent share respectively. Japan and South Korea also import oil from Iran but have been under pressure from the United States to suspend their trade.

Iranian oil production was an historic low before the boycots. Whereas Iran produced six million barrels per day before the overthrow of the monarchy in 1978, today, production is roughly half that number while global oil demand has only increased and prices with it.

In response to international sanctions against its uranium enrichment program, which Western countries suspect is designed to build a nuclear weapon, Iran has threatened to shut access to the Persian Gulf. The Iranian navy staged exercises in the Strait of Hormuz earlier this month to demonstrate its ability to close the narrow waterway through which passes some 40 percent of the world’s seaborn oil transports. Saudi Arabia, which exports the bulk of its oil through the Gulf, fears that a skirmish in the region could hurt its economy.