"Wars are not fought with weapons, but with knowledge and understanding."
—Ferdowsi, Persian poet and writer
In the midst of the insistent Ukraine war and the ominous Iran-Israel conflict, volatility prevailed through the year. Uncertainty chased oil prices higher as the conflicts threatened to polarise regional politics and disrupt supplies through the Strait of Hormuz. There exists a wide chasm between perceptions and reality as rational afterthoughts temper valuations. With the route intact, the risk premium was contained.
Tel Aviv’s efforts to unseat the present regime in Tehran are reminiscent of a similar agenda decades earlier. The closure of Suez Canal after the Arab-Israel war in November 1956 lasted five months. It had a catastrophic effect on the British and French energy situation. The strategic waterway facilitated two-thirds of Europe’s oil movement, and Egypt’s nationalisation of this conduit prompted the UK and France to align with Israel in a plan to overthrow President Gamal Abdel Nasser.
West Asia’s dominance in oil at that time left no option but international mediation. The disruption had ramifications for Europe and Asia alike. With UN intervention, US President Dwight Eisenhower prevailed upon Britain, France, and Israel to withdraw. The crisis dented British and French influence as it permanently impacted the region’s power equation. Nikita Khrushchev’s opportune support to Egypt was the beginning of the Soviet Union’s friendship with Arab nations, thereby impacting global dynamics for decades.
Despite sectarian and political differences, OPEC members align in the face of existential crisis. Whether to ward off the threat of oligopolistic Anglo-American oil majors in the 1970s, or to ensure price stability in the late 1990s and early 2000s. However, over the past decade, geopolitics motivated the members to engage in solipsistic pursuits. Azerbaijan, a predominantly Shiite Muslim OPEC+ member, remains a key provider of energy to Israel despite international criticism, meeting 40 percent of the latter’s demand while seeking military defence systems and support. Azerbaijan’s 10 percent stake in Tamar, Israel’s large gas field, indicates deeper interests.
Beijing endorsed diplomacy as it mediated a Saudi-Iran rapprochement in 2023, counterbalancing Washington’s declining influence in West Asia. However, China shied away from providing territorial security to Iran in the recent Israel-Iran conflict despite its relationship with the Islamic republic that blossomed as sanctions were re-imposed during Trump’s earlier presidency.
Saudi Arabia and Iran hold 28 percent of the global oil reserves and provide a third of China’s imports. With the signing of a purported 25-year Comprehensive Strategic Partnership in 2021 between Tehran and Beijing, the latter is investing in Iran’s infrastructure, seeking a steady flow of heavily-discounted Iranian crude.
The highly-fragmented oil production and emerging frontiers in South America and Africa underscore Tehran and Riyadh’s shared vulnerability. Notwithstanding ideological differences, Tehran is privy to the relevance of forging economic relations with Arab Gulf States to negotiate through Western sanctions and emerge from isolation. Iran’s non-oil exports to Saudi Arabia rose 99 times in March-December 2024. But a cautious trust pervades their yet-fragile accord as Riyadh remains apprehensive of Tehran’s nuclear ambitions.
Iran and Saudi Aramco produce light to heavy crudes of similar grades. Though the Iranian crude has a higher sulphur content, the two largest producers are aware of their distinct presence in products much favoured by refiners for better processing gains. Iran’s ageing hydrocarbon infrastructure needs investments in excess of $250 billion, with $150 billion in oil alone, for the next decade and a half to enhance production to 5.5 million barrels per day. Last week, Iran’s state oil company Petropars started development of Farzad B, a key gas field it shares along the kingdom’s maritime borders in the Persian Gulf. These factors could alter Iran-Saudi relations and induce Tehran to gradually steer away from China’s ‘debt trap diplomacy’ as it succumbs to the allure of Riyadh’s growing economic power.
This is the right time for the US to review its economic policy. Revisiting the 1954 Consortium Agreement that led to the nationalisation of Iranian oil companies and Shah Reza Pahlavi’s exit in 1979 could offer US oil majors an opportunity to re-enter the territory. Iran could be a gateway in their endeavour to shore up profits and scout for low-cost, high-yield projects. Washington’s recent reprieve to Syria and a 1.65-million-barrel Saudi oil grant to Damascus could also revive Iran’s access to Baniyas, Syria’s largest refinery and, historically, a port for oil exports to Europe. The evolving amity between Washington and Riyadh provides Tehran a chance to capitalise on its chary embrace of the kingdom.
China’s efforts to galvanise the Shanghai International Energy Exchange for global oil trade and establish a stronger yuan-oil equation should spur America to be progressively inclusive in the Gulf. With a prolonged face-off between Washington and Tehran, the field is clear for China to pursue regional partnerships. A tactical Iran-US parley would be America’s chance to reclaim dominance in the region in line with economist C Fred Bergsten’s ambitious G2 concept. A coercive stance vis-à-vis the traditional oil tsars could be a political faux pas as fossils continue to fuel economies, as ever.
Ranjan Tandon | Senior markets specialist and author
(Views are personal)
