Prior to the 1979 Iranian Revolution, Iran and Saudi Arabia maintained generally cordial relations based on mutual strategic interests, regional cooperation and shared alignment with the West.[1] However, in the aftermath of the 1979 Iranian Revolution, relations took a downhill route, as Ayatollah Khomeini established a Shia theocratic state in Iran, condemned the Saudi monarchy as corrupt and vowed to spread his revolutionary principles throughout the region.[2] Relations between Saudi Arabia and Iran deteriorated in the 1980s, during the Iran-Iraq War when Saudi Arabia supported Iraq against Iran.[3] Tensions escalated after Iran attacked Saudi oil tankers in 1984 and Iranian protesters stormed the Saudi embassy in Tehran in 1987, resulting in the death of a Saudi diplomat.[4] As a consequence, diplomatic ties were severed in 1988.[5] However, in the 1990s, Iraq under Saddam Hussein mediated the restoration of relations, leading to the signing of a General Agreement for Cooperation in Trade, Economy, and Cultural Exchange and a Security Cooperation Agreement in 1998 and 2001 respectively.[6] But relations worsened again in 2016 after Saudi Arabia executed a Shia cleric and critic of the Saudi regime Sheikh Nimr al-Nimr, sparking protests and attacks on Saudi missions in Iran.[7] Throughout this time the two sides’ engagement in proxy conflicts against each other in the region heightened, such as the Yemen Civil War, where Saudi Arabia supported the Yemeni government, and Iran backed the Houthi rebels.[8] In March 2023 in a watershed moment, China brokered a peace accord, restoring diplomatic relations after four days of talks in Beijing.[9] This article attempts to understand how the Saudi-Iran rapprochement brokered by China marks a significant shift in their bilateral relations. It will analyze the impact of this shift on other oil exporting countries in the Middle East, China’s potential benefits from the possible restoration of oil ties between Saudi Arabia and Iran and the diminishing role of the United States in the Middle Eastern oil market.
Saudi-Iran Rapprochement: China as the Key Mediator
After seven years of strained relations, China was able to mediate between Iran and Saudi Arabia to restore their diplomatic relations on 10th March, 2023.[10] Following the restoration of relations, both countries reopened their embassies in each other’s countries by August 2023, flight operations between the two were resumed, trade of Iranian steel to Saudi Arabia was restored, and Iranian President, late Ebrahim Raisi visited Saudi Arabia to attend the Gaza summit in 2023.[11] Moreover, the General Agreement on Cooperation and the Security Cooperation Agreement were restored and both countries agreed to respect each other’s sovereignty and refrain from interfering in each other’s internal affairs.[12] In the aftermath of the rapprochement and the Israeli genocide on Gaza since October 7th, 2023, Saudi Arabia and Iran have also held joint naval drills in the Sea of Oman in October this year and Saudi armed forces Chief of Staff visited Iran to meet his Iranian counterpart and discuss regional security issues in the aftermath of Donald Trump’s election to the US Presidency and Israel’s continued assault on Gaza.[13] Simultaneously, China achieved a significant diplomatic win by mediating the Saudi-Iran rapprochement, positioning itself as a counterbalance to the United States’s perceived diminishing influence in the Middle East. Gulf states had grown wary of U.S. involvement in the region, particularly after the Biden administration’s fraught relations with Saudi Arabia, USA’s withdrawal from the Iran Nuclear Deal, and the pullout from Afghanistan and Iraq.[14] In this context, China capitalized on the power vacuum, facilitating the restoration of relations between both nations and asserting its influence in the region, meanwhile bagging major economic advantages considering Saudi Arabia and Iran are China’s major oil exporters and trading partners.
Implications for Middle Eastern Oil Market and OPEC
Despite US sanctions, as a founding member, Iran continues to remain a member of the Organization of Petroleum Exporting Countries (OPEC). OPEC which includes countries like Saudi Arabia, Qatar, Iraq, Iran, UAE, Nigeria etc. is an intergovernmental organization that helps set production targets for each member oil producing country to stabilize global oil prices.[15] As the third largest producer of oil in OPEC, Iran’s influence is not the same as Saudi Arabia which as the world’s largest oil exporter and leader of OPEC has often taken the initiative in OPEC’s decision making at the behest of Iranian interests.[16] For example, during the lifting of sanctions on Iran in 2016 after the Iranian nuclear deal, when Iran wanted to boost its oil production to compensate for less oil exports prior to the deal, Saudi Arabia was adamant at initiating an oil production freeze across OPEC to stabilize oil output levels after they dropped to 30 dollars a barrel.[17] Countries like Iraq, Kuwait and the UAE had also found themselves to be a part of the fray between Iran and Saudi Arabia as both countries tried to maintain their influence in OPEC and attempted to administer strict production cuts or regulatory policies as they pleased.[18] With the normalization of ties, the dynamics of OPEC and the broader Middle Eastern market are expected to change. It is anticipated that the two countries especially in the aftermath of the Russian war on Ukraine and Russia’s reduced oil exports, will be able to find common ground on oil production levels, leading to stronger collective influence over global oil prices and ensuring the maximum interests of both.[19] Additionally, as Saudi Arabia looks towards diversifying its economy and reducing its reliance on oil exports under Vision 2030, Iran could prove to be a positive counterbalance to any future unilateral Saudi oil cuts within OPEC.[20] Moreover, Saudi Arabia and Iran possess 37 percent of the world’s oil reserves, meaning that both countries could cooperate and invest in each other’s oil infrastructure, considering that Iran’s oil and gas industry needs more than 100 billion USD in reinvestment.[21] This could not only ensure an increase in oil production and offsetting of global price fluctuations but would also allow other states in the Middle East particularly UAE, Oman, Kuwait and Qatar that had been wary of investing in Iran’s oil infrastructure or engaging with Iran because of Saudi pressure to restore ties and benefit from oil pipelines, exploiting joint oil and gas fields and oil related infrastructure development.
Implications for China in the Oil Sector
Receiving 40 percent of its crude oil imports from the Gulf, China as a manufacturing powerhouse could benefit from stability in the Middle East.[22] China imports 90 percent of Iran’s sanctioned crude oil through barter trade or third-party countries such as Malaysia, where the Iranian crude oil is rebranded and then supplied to China via ‘teapots’ or small independent refineries.[23] Similarly, Saudi Arabia is China’s second largest crude oil supplier after Russia and Saudi oil exports to China have increased at an annualized rate of 11.4 percent since the past 5 years.[24] In the aftermath of normalization of ties, greater stability in the global oil market would mean a more consistent flow of oil to China, facilitating its economic expansion and ensuring energy security. Having already invested 273 billion USD in energy sector in the region from 2005 to 2022, the Saudi-Iran rapprochement means that China can now leverage its strong presence in energy infrastructure development to support projects in both countries whether it be oil pipelines or refineries, while also including other Gulf countries to be part of these projects.[25] This could allow China to further its Belt and Road Initiative (BRI) into the MENA (Middle East and North Africa) region allowing China to offset US dominance in the Middle East. Another positive consequence of Saudi-Iran normalization of ties could also be a stem in the civil war in Yemen which was exacerbated in 2015 after Saudi Arabia’s decision to carry out airstrikes against the Iran backed Houthi rebels, since then approximately 377,000 people have been killed.[26] After the rapprochement there are chances that a new life will be breathed into direct negotiations between Riyadh and the Houthis.[27] This means a win for Saudi Crown Prince Muhammad Bin Salman as Saudi Arabia would be able to protect its oil infrastructure from Houthi attacks such as the one on Aramco oil infrastructure in 2019 which knocked out half of Saudi Arabia’s oil production or five percent of global oil output.[28] A diminished Houthi threat would secure the Strait of Hormuz and Gulf of Aden, critical for 37% of global seaborne oil trade, from Houthi airstrikes, benefiting China’s energy security.[29] In 2023, Iranian and Saudi oil accounted for 22% of China’s seaborne supply, making uninterrupted access crucial.[30] Moreover, since China has already launched the Shanghai International Energy Exchange (INE) allowing oil to be traded in Yuan, by establishing yuan dominated oil contracts between Saudi Arabia, Iran and OPEC, China could provide an alternative to the US dollar-based Brent and West Texas intermediate system.[31] Increased Chinese engagement in the oil sector in the Middle East in the aftermath of the rapprochement, could mean a move towards trading oil in Yuan, allowing China to slowly replace the Petro-dollar with the Petro-Yuan. This would mean strengthening of the Chinese Renminbi, a future tilt towards de-dollarization of global economy and challenging USA’s hegemony on the international stage.
USA’s Fading Oil Monopoly and Influence
Increasing Chinese role in the Middle Eastern Oil Market could mean reduced US leverage and ability to influence oil production under OPEC+ thus weakening its role in stabilizing global energy markets.[32] Moreover, any Chinese push for trade of oil in Yuan and investments in the Middle Eastern oil infrastructure would not only mean a challenge to the dominance of the Petro-dollar but also to the USA’s role as the central energy player in the region. Geopolitically, Beijing’s success as a mediator between Iran and Saudi Arabia has positioned it as an alternative to Washington for conflict resolution in the Middle East. Thus, reducing the region’s reliance solely on the US for security guarantees and arms sales.[33] With Donald Trump’s re-election there are chances that he would reimpose his maximum pressure policy on Iran, but this time around owing to the rapprochement and Saudi engagement with Iran diplomatically and economically, Washington’s strategy of isolating Tehran might face increased resistance much to the dismay of the US and Israel.[34] Although the US still maintains considerable bases and troops in the Middle East and overturning its influence in the Middle East is not that simple, this détente has become a first step towards China wielding its role in the region.
Conclusion
The Saudi Iran détente holds potential to alter Middle Eastern dynamics, enable oil production stability, investment and joint OPEC influence, while augmenting regional oil exporters and China’s role in the market. Although it may challenge US influence, this rapprochement offers opportunities for regional stability, economic cooperation and global market resilience. Therefore, sustaining this newfound peace requires trust-building, ending proxy conflicts, confidence building measures, and resolving disputes, paving the way for a cooperative Middle East.
[1] “Saudi-Iranian ties: A history of ups and downs,” Reuters.com, accessed November 24, 2024, https://www.reuters.com/world/middle-east/saudi-iranian-ties-history-ups-downs-2023-04-06/.
[2] Ibid.
[3] Syed Zafar Mehdi, “From Hostility to Rapprochement: Timeline of Iran-Saudi Arabia Ties,” Anadolu Ajansı, last modified April 7, 2023, https://www.aa.com.tr/en/middle-east/from-hostility-to-rapprochement-timeline-of-iran-saudi-arabia-ties/2865440.
[4] Ibid.
[5] Ibid.
[6] Ibid.
[7] “Timeline: Iran and Saudi Arabia, from Rivalry to Rapprochement,” Al Jazeera, last modified March 10, 2023, https://www.aljazeera.com/news/2023/3/10/iran-and-saudi-arabia-from-rivalry-to-mending-ties-a-timeline.
[8] Ibid.
[9] Ibid.
[10] “Iran and Saudi Arabia Agree to Restore Relations,” Al Jazeera, last modified March 10, 2023, https://www.aljazeera.com/news/2023/3/10/iran-and-saudi-agree-to-restore-relations.
[11] Giorgio Cafiero, “A Year Ago, Beijing Brokered an Iran-Saudi Deal. How Does Détente Look Today?,” Atlantic Council, last modified March 6, 2024, https://www.atlanticcouncil.org/blogs/iransource/iran-saudi-arabia-china-deal-one-year/.
[12] Ibid.
[13] “After joint naval exercise, Saudi armed forces chief of staff holds talks in Iran,” Arab Weekly, last modified November 11, 2024, https://thearabweekly.com/after-joint-naval-exercise-saudi-armed-forces-chief-staff-holds-talks-iran.
[14] Robert Barron and Michael Yaffe, “Five Takeaways from Biden’s Visit to the Middle East,” United States Institute of Peace, last modified July 21, 2022, https://www.usip.org/publications/2022/07/five-takeaways-bidens-visit-middle-east.
[15] Adam Hayes, “Organization of the Petroleum Exporting Countries (OPEC),” Investopedia, last modified September 9, 2024, https://www.investopedia.com/terms/o/opec.asp.
[16] Ibid.
[17] Anisseh Tabrizi, “The ‘Oil War’ Between Iran and Saudi Arabia,” Royal United Services Institute, last modified June 15, 2016, https://www.rusi.org/explore-our-research/publications/commentary/oil-war-between-iran-and-saudi-arabia.
[18] Ibid.
[19] Vladimir Milov, “Oil, Gas, and War: The Effect of Sanctions on the Russian Energy Industry,” Atlantic Council, last modified May 23, 2024, https://www.atlanticcouncil.org/content-series/russia-tomorrow/oil-gas-and-war/.
[20] Ahmed Lathif, “Saudi Arabia’s Strategy with the OPEC+,” Orfonline.org, last modified August 1, 2024, https://www.orfonline.org/expert-speak/saudi-arabia-s-strategy-with-the-opec.
[21] Farzad Bonesh, “The Normalization of Saudi – Iran Relations: Economic Capacity, Trade Potential and Outlook,” Middle East Briefing, last modified August 14, 2023, https://www.middleeastbriefing.com/news/the-normalization-of-saudi-iran-relations-economic-capacity-trade-potential-and-outlook/.
[22] Keith Bradsher, “China’s Economic Stake in the Middle East: Its Thirst for Oil,” The New York Times, last modified October 11, 2023, https://www.nytimes.com/2023/10/11/business/china-oil-saudi-arabia-iran.html.
[23] Kimberly Donovan and Maia Nikoladze, “The Axis of Evasion: Behind China’s Oil Trade with Iran and Russia,” Atlantic Council, last modified March 28, 2024, https://www.atlanticcouncil.org/blogs/new-atlanticist/the-axis-of-evasion-behind-chinas-oil-trade-with-iran-and-russia/.
[24] Florence Tan, “Saudi crude oil supply to China set to rise to 46 mln bbls in Oct, sources say,” Reuters.com, last modified September 12, 2024, https://www.reuters.com/business/energy/saudi-crude-oil-supply-china-set-rise-46-mln-bbls-oct-sources-say-2024-09-12/.
[25] Erin Hale, “Can China Replace the US in the Middle East?,” Al Jazeera, last modified April 25, 2023, https://www.aljazeera.com/features/2023/4/25/can-china-replace-the-us-in-the-middle-east.
[26] “War in Yemen,” Global Conflict Tracker, accessed November 24, 2024, https://www.cfr.org/global-conflict-tracker/conflict/war-yemen.
[27] Emily Milliken, “The Saudi-Iranian Rapprochement and the War in Yemen,” New Lines Institute, last modified September 15, 2023, https://newlinesinstitute.org/strategic-competition/the-saudi-iranian-rapprochement-and-the-war-in-yemen/.
[28] “MBS: The Dark Side of Saudi Arabia’s Crown Prince,” Al Jazeera, last modified March 9, 2020, https://www.aljazeera.com/news/2020/3/9/mohammed-bin-salman-the-dark-side-of-saudi-arabias-crown-prince.
[29] “What Does the Iran-Saudi Normalisation Mean for Oil?,” Kpler, last modified November 22, 2024, https://www.kpler.com/blog/what-does-the-iran-saudi-normalisation-mean-for-oil.
[30] Ibid.
[31] Fei Lv, Chen Yang, and Libing Fang, Do the crude oil futures of the Shanghai International Energy Exchange improve asset allocation of Chinese petrochemical-related stocks?, (International Review of Financial Analysis, 2020), https://doi.org/10.1016/j.irfa.2020.101537.
[32] Carla Norrlöf, “The Decline and Fall of the Petrodollar?,” Project Syndicate, last modified July 5, 2024, https://www.project-syndicate.org/onpoint/saudi-petrodollars-do-they-matter-for-us-currency-hegemony-by-carla-norrlof-2024-07.
[33] Waleed Hazbun, “China, the United States, and the Reconfiguration of Middle East Geopolitics: New Possibilities for Conflict and Order,” Security in Context, last modified August 31, 2024, https://www.securityincontext.org/posts/china-the-united-states-and-the-reconfiguration-of-middle-east-geopolitics-new-possibilities-for-conflict-and-order.
[34] Erfan Kasraie, “What Can Iran Expect from a Potential Trump Presidency?,” Dw.com, last modified July 19, 2024, https://www.dw.com/en/what-can-iran-expect-from-a-potential-trump-presidency/a-69713011.
