Azernews.Az

By Sara Rajabova

The recent deterioration in relations of Saudi Arabia and Iran raised discussions whether the feud between the two energy-rich countries will lead to increase in the global oil prices or the miserable oil prices will complicate the situation even more.

Crude prices rose in Asia after Saudi Arabia cut diplomatic ties with Iran following Tehran’s condemnation of the Kingdom’s execution of Shia cleric Sheikh Nimr al-Nimr and protesters’ attacks on the Saudi embassy in Tehran.

Some expected that if the relations between Saudi Arabia and Iran continue to worsen, then it can help oil prices to recover after the nearly 70-percent fall since mid-2014.

However, many experts believe that the recent developments between the two OPEC countries, which have long had cool relations, will not lead to significant changes in oil prices.

The oil prices that saw some increase right after the diplomatic scandal kept on slumping further eventually dropping to $32 on January 6. Global oil benchmark Brent prices, currently, stood at $33.87 per barrel, while WTI Crude Oil is $33.34 per barrel.

Kamran Dadkhah, a professor of economics at Northeastern University in Boston, Massachusetts believes that if this dispute remains at diplomatic and propaganda level that have been observed so far, it won’t have any effect on oil prices.

“Witness that both WTI and Brent declined on Wednesday. Because of high volume of output by Saudi Arabia and Russia, as well as increased production by the United State, there has been an increase in oil inventory. On the other hand, China’s economic slowdown foretells of stagnant demand. In response to the current dispute, most likely Saudi Arabia will continue its high level of extraction to deny Iran any substantial increase in its oil income following the nuclear agreement. Thus, we should expect short term volatility in oil prices, medium term stability and long term slow increase,” the expert said.

Iran produces 2.8 million barrels of oil per day and exports 1.1 million barrels of this volume per day, while Saudi Arabia produces more than 10 million barrels of oil daily and exports more than seven million barrels per day.

Dadkhah went on to say that if, however, the two countries engage in actual warfare or face intensified terrorist attacks (for example, in Iran or Saudi Arabia’s oil fields) then the story will be very different.

“So far the turmoil in the Middle East hasn’t resulted in open war between different sovereign states and most likely it will not happen; because, in that case, everyone would be a loser,” he underlined.

Yevgeny Satanovsky, the president of the Russian Independent Scientific Center "Institute of the Middle East" also does not share the opinion that the Saudi Arabia-Iran row will somehow affect the growth of oil prices.

Noting that currently, oil prices dependent on the volume of oil production and the volume of the market, he said if the Iranian and Saudi Arabian oil is not supplied to the market any more, it means that Venezuelan oil, Russian oil or oil of any other producer will replace it.

The recent diplomatic scandal has deeply impacted the already soured relations between Saudi Arabia and Iran. The economic relations between them downgraded.

Iran and Saudi Arabia took further steps to sever commercial ties on January 7, intensifying a feud between the regional rivals, as Tehran announced a ban on imports from Saudi Arabia and Saudi groups called for boycotts of Iranian products.

Iran-Saudi Arabia trade turnover stood at $146 million from March to September 2015. Iran exported $113.1 million worth of goods to Saudi Arabia during the first seven month of the current Iranian fiscal year (started March 21, 2015), meanwhile imports accounted for $33.1 million.

Dadkhah believes that direct economic impacts of this row for the two countries will not be enormous.

He noted that trade and investment relations between Iran and countries that severed their diplomatic ties with it are very limited.

“These countries include Saudi Arabia, Kuwait, Bahrain, and Djibouti. In addition, Qatar recalled its ambassador from Iran. Iran has extensive connections with the United Arab Emirates; but that country hasn’t joined the dispute. Thus, the direct effect on Iran’s economy won’t be substantial,” he said.

However, Dadkhah emphasized that there could be strong indirect effects.

“Many companies that are interested in investing or trading with Iran have extensive relations with the aforementioned countries. They may feel that becoming friendly to Iran could be detrimental to their interest in Saudi Arabia, Kuwait, Bahrain, and Qatar. Given the hope generated by the conclusion of nuclear agreement with P5+1, Iran would have been better off if it had avoided this crisis,” the expert underlined.

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Sara Rajabova is AzerNews’ staff journalist, follow her on Twitter: @SaraRajabova

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