2 min read.Updated: 17 Sep 2019, 12:27 AM ISTLivemint
As crude oil prices are sent soaring by a drone strike on Saudi oil facilities, uncertainty looms over global markets. Stability would depend on which way US-Iran relations go
As global crude oil prices spike, so do tensions between the US and Iran. A weekend drone attack on key oil facilities of Saudi Aramco, Saudi Arabia’s state-owned oil company, has more than halved its output. Some 5.7 million barrels per day, about 6% of the world’s total, have been knocked off Aramco’s usual daily volume of 9.8 million barrels, and it could be weeks before supplies are restored. Even that may not contain volatility in oil prices, given how closely they track West Asian geopolitics. While responsibility for the strike has been claimed by Iran-backed Houthi rebels that a Saudi-led coalition is battling in Yemen, both Riyadh and Washington have sought to pin the blame on Tehran, which has been chafing under US sanctions. Saudi Arabia, which has rarely had its vulnerability exposed so dramatically, appears to favour punitive action against its West Asian rival across the Gulf. However, it’s the response of its ally, the US, that will determine whether the oil fields that were set ablaze go down in history as just another unfortunate episode, or as the spark of a wider conflagration.
Short-term supply shortages of oil are not hard to tide over. Several countries have strategic reserves. Also, crude oil tends not to stay above $60 per barrel for very long, as higher prices attract a gush of North American shale oil from suppliers that turn profitable at such elevated levels. Risk premiums in the market have surged, though, and this is because of uncertainty over what comes next. In this, the Iran factor is of utmost significance. It is also the least predictable. Ever since US President Donald Trump’s administration withdrew from the 2015 nuclear deal struck with Iran and re-imposed clamps on the latter’s trade relations with other countries, Tehran has watched its oil exports choke and economy crash. In protest, Iran has resumed uranium enrichment and issued veiled threats of churning out the sort needed for nuclear weapons. While the US’s official stance is to maintain “maximum pressure" on what it considers a rogue state, Trump has signalled a willingness to start talks with Tehran. In this lie hopes of a peaceful resolution to the problem.
The nuclear deal of 2015, put in place by the Obama administration, capped Iran’s nuclear programme in exchange for letting it forge commercial ties with the rest of the world. This was widely welcomed as a patch-up of US relations with the Islamic republic that the 1979 revolution had snapped. Importantly, it was a win-win deal. Trump tore it up, however, saying America had been short-changed. Whatever the case may be, the White House should move quickly to reopen negotiations with Tehran and offer Iranian leaders a revised commercial package as an inducement to keep off nukes and disarm its militant proxies in the region. It has been clear since 2015 that the rulers of Iran count its economy as top priority. They want sanctions lifted before starting talks, but should be realistic enough to realize that Trump cannot accept such a major precondition. That the US president has expressed a desire to meet his Iranian counterpart Hassan Rouhani is an overture in itself. With perseverance, the US may yet be able to arrive at a bargain that secures the world from a serious threat and thus provides stability. The art of such a deal lies in what Churchill called jaw-jaw, as opposed to war-war.