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Saudi Arabia vs. Iran: What Does It Mean For Oil?

(appeared on investing.com on January 5, 2016)

The already strained relationship between Saudi Arabia and Iran took a turn for the worse in the new year, after Saudi Arabia executed a Shi’a cleric, Nimr al-Nimr. Al-Nimr was arrested two years ago during protests in eastern Saudi Arabia, which is home to Saudi Arabia’s tiny Shi’a minority population. Although the Wahhabis consider the Shi’a practice of venerating historical figures and imams idolatrous, the Saudis tolerate their presence and their religious practices, unlike those of Christians and Jews.

Al-Nimr was arrested for inciting anti-government protests amongst Shi’as in 2011 and 2012. The Saudi government considered his actions akin to terrorism and sentenced him to death. This past January 2, along with 43 other terrorists (most of whom were Al Qaeda members convicted of engaging in terrorist plots in Saudi Arabia) the Saudi government executed al-Nimr and three other Shi’as.

Iran’s Supreme Leader, Ayatollah Khameini, called attention to al-Nimr’s execution by declaring him a Shi’a martyr and claimed that the cleric had not incited violence but only criticized the Saudi government. He claims Saudi Arabia will face “divine revenge” for its actions. None of this rhetoric is anything out of the ordinary for Iran. Khameini uses similar rhetoric regularly against Israel and the United States, both on Twitter and in speeches.

In the case of al-Nimr, however, protesters in Iran surrounded the Saudi embassy in Tehran, launched Molotov cocktails at the building, then stormed its gates. Saudi Arabia responded quickly, announcing that it would sever diplomatic ties with Iran and gave Iranian diplomats 48 hours to evacuate the kingdom. American and British media have described Saudi foreign minister Adel al-Jubeir’s actions as “surprising” and Western governments have condemned Saudi Arabia’s execution of al-Nimr.

Although the barbarism of executing someone for speech seems to have captured the imagination of Western media, it is not, in fact, relevant to the politics and geopolitics at play. Saudi Arabia is a totalitarian society in which speaking out against the ruling family is against the law. Al-Nimr violated those laws, regardless of whether he incited others to violence. King Salman was sending a message to his subjects when his government executed al-Nimr and terrorists convicted many years ago: neither terrorism nor dissent will be tolerated. Salman has only been king for a year and is doing what monarchs have always done to display strength and power. Salman marked the beginning of his reign by awarding his subjects with gifts that flaunted his financial strength, and now he is reminding them of the supreme power he commands.

Similarly, Ali Khameini’s incitement of anti-Saudi sentiment was also about domestic power and Iranian politics more than international antagonism. Anti-Americanism has been a cornerstone of Iranian ideology since the Islamic Revolution. The regime regularly uses anti-American and anti-Israel rhetoric to enthuse its base. Saudi Arabia’s actions were just another opportunity to engage the Iranian populace in similar sentiments against a regional rival – the Saudis. Provoking anti-Sunni sentiment has the same political effect for Khameini as fomenting anti-Americanism. The difference is that while the U.S. is hesitant to respond, Saudi Arabia reacted swiftly and decisively and has now been joined by its neighbor allies.

What does this situation mean for oil? Unrest in the Middle East always translates into spiking oil prices and we should expect the market to reflect that speculation. In fact, we will likely see Iran and Saudi Arabia trading insults more frequently and should expect such spikes regularly for at least a while, particularly as Iran’s return to the global oil market approaches.

Will it come to war? – Not likely. Neither Iran nor Saudi Arabia has the capacity to fight a war beyond its borders, nor do they have any incentive to try. We are much more likely to see minor incidents cropping up between Iranian and Saudi ships in the Persian Gulf with any actual fighting occurring through proxies in Yemen or Syria.