April 3, 2000

April 3, 2000 | Commentary on Middle East

The Real Reason for OPEC's Newfound Muscle

Remember OPEC? The oil cartel that ratcheted up world oil prices in the 1970s is back, tightening production controls and sending prices soaring.

The recent decision by oil ministers of the Organization of Petroleum Exporting Countries to boost output, while it will provide mild relief at the pump, only proves how powerful the cartel has become. The Clinton administration had to practically beg for the production increase.

Driving OPEC's resurgence is renewed cooperation between Saudi Arabia and Iran. Relations between the cartel's two largest oil producers and long-term archrivals had been hostile since Iran's 1979 revolution, but a growing detente has been crucial in restoring OPEC's effectiveness.

This rapprochement is no accident but stems from the declining credibility of the Clinton administration's Persian Gulf policies.

The administration's weak and drifting policy toward Iraq has encouraged the nervous Saudis to cultivate Iran, both as a counterweight to Iraq and as an insurance policy in case U.S. credibility continues to decline.

Iran consistently has been an OPEC price "hawk," advocating high oil prices to maximize its short-term oil revenue and provide for its rapidly growing population of 65 million.

Saudi Arabia, with only 21 million people but a lot of oil (260 billion barrels of proven oil reserves, roughly one-fourth of the world's supply, compared with Iran's 93 billion barrels) has a much longer time frame for maximizing oil revenues.

The two OPEC heavyweights, which together control more than 40 percent of OPEC oil production, have clashed repeatedly at OPEC conferences. In November 1997, Riyadh went so far as to threaten to flood the oil market unless Iran agreed to a higher OPEC production quota for Saudi Arabia.

In addition to its economic reasons for maintaining relatively moderate oil prices, Saudi Arabia had a strong geopolitical rationale for such prices in the 1990s. It faced serious security threats from both Iran and Iraq and sought to constrain their military buildups by minimizing their oil income.

Iraq's vengeful dictator, Saddam Hussein, despised the Saudis for cooperating with the United States in the 1991 Gulf War. The radical Islamic regime in Tehran, meanwhile, resented Riyadh's support for Iraq during the 1980-1988 Iran-Iraq war and for its long-standing "special relationship" with the United States.

The Iranians sought to overthrow the Saudi royal family, attempted to radicalize religious minorities in Saudi Arabia's oil-rich eastern province and exported terrorism to Saudi Arabia, including the 1996 bombing of the Khobar Towers housing complex that killed 19 Americans.

Saudi-Iranian relations gradually improved following the 1997 election of reformist Mohammad Khatami as Iran's president. By 1998, Saudi Arabia's fear of Iran was eclipsed by its fear of a resurgent Iraq.

The collapse of the Clinton administration's Iraq policy following Hussein's ending of U.N. weapons inspections in November 1998 undoubtedly alarmed the Saudis and strengthened their geopolitical incentives for improving cooperation with Iran.

Economic incentives for bilateral cooperation also peaked when oil prices fell to $10 a barrel in December 1998 due to a mild winter in the Western Hemisphere and plummeting oil use in recession-ravaged Asia.

In early 1999, the Saudis and Iranians held a series of meetings to reach a consensus on oil production issues that was later rubber-stamped by OPEC at their March 1999 meeting.

The Saudis stunned observers by slashing production to 7.4 million barrels a day, far below the "line in the sand" of 8 million barrels a day Riyadh previously insisted was its production floor.

Non-OPEC oil exporters Russia, Mexico, Norway and Oman also agreed to reduce production, creating a 2-million-barrels a day shortfall in world oil supplies that drained inventories and pushed prices up to $34 a barrel in March.

Although the Iranian and Saudi oil ministers issued a joint statement in early March promising OPEC would provide "adequate and timely supplies to balance the market," many analysts fear the increases announced on March 27 will be too little, too late to avoid U.S. gas prices as high as $2 a gallon during the peak summer driving season.

The United States must restore its credibility in the Persian Gulf by demonstrating that it is serious about overthrowing Saddam Hussein, not just containing him.

The Clinton administration has neglected to provide adequate support for the Iraqi opposition for the past seven years. This passive approach encourages the emerging Saudi-Iranian rapprochement, enhances OPEC solidarity and allows international pressure to build for lifting economic sanctions against Iraq.

To be sure, lifting sanctions would ease oil prices by permitting an expansion of Iraqi oil exports. But it would also strengthen Saddam Hussein and fuel an Iraqi military buildup that ultimately could provoke another Persian Gulf crisis, severely threatening U.S. energy security and triggering even higher oil prices.

James Phillipsis a research fellow specializing in Middle Eastern affairs in the Davis Institute for International Studies at The Heritage Foundation, a Washington-based public policy institute.

About the Author

James Phillips Senior Research Fellow for Middle Eastern Affairs
Douglas and Sarah Allison Center for Foreign and National Security Policy

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