The price of a barrel of oil is now under $70. Depending on the source you believe, Russia needs around $110 and Iran a little more per barrel to balance their budgets and keep their economies from severe retrenchment…or even outright collapse. Russia has foreign reserves in the hundreds of billions so they can live off this capital fat for a while. Iran has no real cushion so the economic pain will start immediately. Both nations are under crippling Western sanctions that have seen their banking, industrial and energy sectors contract dramatically. This new oil shock is only weeks old. The long term effects are unknown, but desperation, political instability and a military response cannot be ruled out.
Since Saudi Arabia supplies the world with almost 12 million barrels a day — approximately the amount of Iran and Russia’s output combined — they’re the price setter. The Saudis can turn on or off the tap and could, at least in the past, dramatically affect the price of oil. The Saudis have almost a trillion dollars in currency reserves so they have the luxury of playing the long game. That game being what happens to other producers and the U.S. shale industry at these low per barrel prices. The Saudis cost of production is about a third of Russia’s and far less than Iran’s. Their population is also the smallest and are under no international sanctions. Their current decision to allow the price of oil to be set by the market is of far more consequence to the other oil producing states than themselves.
On August 2, 1990 Iraq invaded Kuwait. Oil was the reason. Saddam Husaine accused the Kuwaites of both stealing oil from his fields and violating their OPEC quota. He said, “such behavior amounts to military aggression.” He also intoned something about a “poison dagger aimed at Iraq.” At that time, Iraq was in the same situation as Russia and Iran are today. They needed to sell oil at $20/barrel and the Kuwaites, then the world’s second largest supplier, stood accused by Iraq of causing the price to fall to $13/barrel. The U.S could not let the invasion stand so entered the war on the side of the Kuwaites, eventually evicting the Iraqis.
The Russians and Iranians have a close alliance. As leaders of the anti-U.S, anti-Wwestern club, they cooperate on all sorts of military and economic fronts. Russia is deeply intertwined in Iran’s energy policy and the Russians have built a nuclear reactor for the Iranians. Both countries have devolved into dictatorships and, however complex their official political structures are, they are de facto ruled by the whims and visions of a supreme leader who cannot be challenged. Neither leader has ever faced a crisis of this magnitude.
In both nations, their currency’s value has fallen to crisis levels. This imports inflation, and diminishes the spending power of their people. With both nations under sanctions and Russia imposing its own in the agricultural sphere, shortages, bottlenecks and humanitarian crises are going to happen.
Oil around $70 makes that inevitable. It seems inconceivable that either Russia or Iran will back down from the provocative behavior that has landed them on the sanctions list. Can anyone imagine Russia leaving Ukraine and un-annexing Crimea? Putin has gone too far down the nationalist military road for that.
By rejecting the world’s offer to modify their nuclear plans, Iran just signed on for more pain. Clearly they want the capability to make a nuclear bomb, so the isolation continues. The oil shut-in, now at vastly lower prices, tightens.
They also are locked into a 13-century long fight with the Sunni Saudis, with Syria the latest battleground in that struggle. Iran has little to lose by more aggression. In fact, creating a new military front is a tried and true ploy to remain in power.
Put it all together and the possibility of Gulf War III between Iran, Russia and Saudi Arabia becomes real. Omnipotent leaders who have created desperate times, can and often do desperate things. They have invaded other countries over low cost oil before. With oil prices too depressed to support their regimes, they may blame oil-rich neighbors for their suffering. This bears close watching and perhaps a proactive set of policies to prevent it.