The Fuse

OPEC’s Top Two Producers Turn the Page

October 26, 2017

Guest Post by Matthew M. Reed | @matthewmreed

Matthew M. Reed is Vice President of Foreign Reports, Inc., a Washington, DC-based consulting firm focused on oil and politics in the Middle East.

After more than a quarter-century of estrangement, Saudi Arabia and Iraq—OPEC’s top two producers—have finally managed to turn the page in 2017. The two sides are urgently making up for lost time. But why now? The timing of this year’s historic breakthrough says a lot about where the two countries stand as neighbors but also major oil producers.

It was after Saddam Hussein ordered the invasion of Kuwait in 1990 that the oil-rich Gulf Arab states severed ties with Baghdad. Just years before they had backed Saddam to the hilt in his bloody war against revolutionary Iran. But even after Saddam was ousted in 2003, Saudi Arabia took a hands-off approach to its neighbor. Iraq, as a fledgling democracy reflecting the will of its Shi’a majority, drifted into Iran’s orbit over time, making the Saudis even less inclined to engage.

Looking back, it seems King Abdullah concluded that Iraq was doomed to be a puppet of Iran, at least until late 2014. It wasn’t until Nouri al-Maliki’s disastrous premiership ended in September of that year—with ISIS controlling one-third of the country—that Saudi-Iraq ties seemed ready for a reset. The new administration in Baghdad came with a mandate to save the country and heal sectarian wounds that enabled the rise of ISIS. That enormous burden fell on the shoulders of the new prime minister, Haider al-Abadi, a Shi’a politician from the same party as Maliki, but with none of the baggage or bravado.

The new administration in Baghdad came with a mandate to save the country and heal sectarian wounds that enabled the rise of ISIS.

King Abdullah broke the ice by hosting Iraqi President Fuad Masum in November 2014. But the king died only two months later—before much progress was made. Throughout 2015, his half-brother and successor King Salman laid the groundwork for reopening the Saudi embassy in Baghdad. A new ambassador arrived early in 2016. However, he only lasted until August that year. His critique of Iranian-backed militias (formed by Iraqi authorities to fight ISIS) were hugely controversial, and shortly thereafter the ambassador made it clear he did not feel safe in Iraq.

Despite getting off on the wrong foot last year, both sides remained committed to improving relations, with steady behind-the-scenes encouragement from the U.S. That effort paid off this year with a series of high-profile meetings starting in February, when Saudi Foreign Minister Adel al-Jubeir visited Baghdad. Contacts gained pace throughout the summer as President Masum attended the Arab-Islamic-American summit, held in Riyadh in May, and the king hosted Prime Minister Abadi in June. In July, Shi’a cleric Muqtada al-Sadr of Iraq—the ex-firebrand-turned-nationalist—met with Crown Prince Mohammed bin Salman in Jeddah. (Although Sadr holds no official post, his political influence is considerable.) Then in August Iraqi Oil Minister Jabbar al-Luaibi led an energy delegation to Saudi Arabia, where he and his counterpart, Khalid al-Falih, discussed OPEC matters and oil prices.

This month marked the first meeting of the Saudi-Iraqi Coordination Council in Riyadh, which was co-chaired by King Salman and Prime Minister Abadi. U.S. Secretary of State Rex Tillerson also attended. While officials inaugurated the Council, Falih opened the Baghdad International Exhibition conference with a speech hailing the potential and necessity of improved ties. It was the first speech delivered by a high-ranking Saudi official to an audience in Baghdad since at least 1990.

Now that the existential threat posed by ISIS has receded and major cities have been liberated, Baghdad is just starting to reckon with the crushing economic toll of victory.

Now that the existential threat posed by ISIS has receded and major cities have been liberated, Baghdad is just starting to reckon with the crushing economic toll of victory. Urban areas have been turned to rubble and infrastructure is in terrible shape. That’s where the Saudis come in. They have the capital and know-how needed to help rebuild Iraq, whether it’s state-backed initiatives or purely private enterprise. The best insurance against a resurgent ISIS will be to provide opportunities and security to underserved Sunni Arab populations, from which ISIS recruits hopeless young people. Some of those same communities have long-standing tribal and geographic ties to Saudi Arabia. Thus, the Saudis are natural partners. Simple fixes like direct flights and reopened border crossings should make a huge difference.

For Saudi Arabia, Iraq is an overlooked market just next door. It also serves as a playing field to bloodlessly counter Iran. The Saudis see an opportunity at this juncture not only because Iraq needs help but also because Iran seems to have overreached. More than a few Iraqi politicians have come to chafe under Iran’s thumb in recent years. Those like Sadr won’t take orders from Tehran. Abadi, for his part, is proud of his independent streak, while others have criticized Iran’s outsized influence. To invest in Iraq now is to bet on renewed nationalism as a counterweight to Iran. The extent to which Iranian influence can be rolled back remains to be seen. But at the very least the Saudis are done sitting on the sidelines.

Last year, combined Saudi and Iraqi output amounted to nearly 15 million b/d or 45% of total OPEC production.

OPEC, as an organization bound by consensus, also stands to gain from improved Saudi-Iraqi ties. Iraq eclipsed Iran as the second-largest producer in OPEC back in 2012, when harsh oil sanctions throttled Iranian output and investments in Iraq started to pay off. Five years later, Iraqi production has doubled since then and the 5 million barrels/day (b/d) mark is within reach; Iranian production in the post-sanctions era has plateaued just shy of 4 million b/d.

Last year, combined Saudi and Iraqi output amounted to nearly 15 million b/d or 45% of total OPEC production. OPEC and its kingpin Saudi Arabia need Iraq to lead by example. That became clear this year when OPEC and non-OPEC producers teamed up to cut supplies and boost prices. Iraq’s compliance has been called into question and its answers haven’t always been convincing; more than once, Iraqi officials have sent mixed signals regarding exports and production targets this year. Besides economic gains and better security coordination, closer ties could result in fewer miscues for oil markets and enhanced credibility for OPEC.

“The best example of the importance of cooperation between our two countries is the improvement and stability trend seen in the oil market,” Falih said in his historic Baghdad speech on October 21. To some degree, that quote is still aspirational. But these two are just getting started.

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