Iran and Saudi Arabia Square Off

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Yesterday afternoon, the U.S. government charged Mansoor Arbabsiar, a dual U.S.–Iranian citizen, and Gholam Shakuri, an alleged member of the Iranian Quds Force (a division of the Revolutionary Guards), with conspiracy to assassinate the Saudi Arabian ambassador to the United States, Adel Al-Jubeir, and to attack both the Saudi and Israeli embassies in Washington, D.C. Although the nature of Iranian government involvement remains to be seen, the indictment is just the latest story in the intricate cold war now developing between Iran and Saudi Arabia. 

The two countries, at odds since the 1979 revolution in Iran and ever more so in the wake of the Arab Spring, are competing for dominance in global energy markets and nuclear technology and for political influence in the Persian Gulf and the Levant. Their conflict, with its sectarian overtones, has the potential to weaken pro-democracy forces in the Middle East and North Africa, empower Islamists, and drag the United States into military interventions. To avoid all this, the United States will need strategic imagination to devise ways to mitigate and manage the rivalry between Riyadh and Tehran.

Iran and Saudi Arabia are neither natural allies nor natural enemies but natural rivals who have long competed as major oil producers and self-proclaimed defenders of Shia and Sunni Islam, respectively. Until the Iranian revolution in 1979, their rivalry was managed and controlled by the United States, with whom they were both strategic allies. But after the Shah was overthrown, Saudi Arabia’s leadership became frightened by the Ayatollah Khomenei’s denunciation of the Saudi monarchy as antithetical to Islam and his ambition to export to the revolution to the Arab world. Saudi Arabia remained an ally of the United States; Iran became an implacable foe. Thereafter, the rivalry between Iran and Saudi Arabia became defined by the new U.S. strategy -- ally with Saudi Arabia to offset Iran.

As a result, Iran sees Saudi Arabia as a wealthy, ambitious proxy of the United States and Saudi Arabia views Iran as a major source of instability in the region, believing that it seeks to establish a so-called Shia Crescent to dominate Arab Sunnis. The rivalry has shaped both countries' policies as they have attempted to contain and combat each other’s influence. They have accused each other of blatant interference in their internal affairs, including indirect support for acts of terrorism against each other.

This struggle has played out most prominently in the energy sector, in which both Iran and Saudi Arabia are major forces. At first glance, Iran would seem to be on par with Saudi Arabia; the two countries’ combined oil and natural gas reserves are roughly the same, and Iran has the strategic advantage of sitting between the Caspian Sea and the Persian Gulf, as well as controlling the 34-mile wide Strait of Hormuz, through which roughly 40 percent of the oil traded worldwide is transported.

But U.S. sanctions on Iran have severely restricted its oil production and hindered foreign investments, handing Saudi Arabia the competitive edge. As a result, Saudi Arabia is winning the competition for preeminence in the global energy market. It is the leading member of the Organization of Petroleum Exporting Countries, a position held by Iran under the Shah. It controls $538 billion in foreign reserves, compared to Iran’s $105 billion. Saudi Arabia's nominal GDP totals $567 billion, far exceeding Iran’s $475 billion despite having a population only a third of the size of Iran’s. Saudi Arabia thus enjoys a level of economic clout that Iran can only envy, and, as a result, has no incentive to foster improved relations between Washington and Tehran.

Riyadh has used its influence in the energy markets to tame Tehran, lowering oil prices and attempting to limit foreign investment in Iran's oil and gas industries to cripple its already ailing economy. Saudi Arabia can easily compensate for lower oil prices by increasing its oil production and its total oil revenues, but Iran cannot; it lacks the capability to increase its oil production. With the growing demand for energy in emerging markets, the price of oil has not fallen much in the recent years and is unlikely to dip sufficiently to harm Iran. Moreover, Saudi Arabia has had little success in persuading China and India to decrease their involvement in Iran's energy sector. But a large decrease in oil revenues could have devastating economic consequences for Tehran.

On the political front, however, Tehran has outmaneuvered Riyadh. This success has been most apparent in Iraq, whose transformation from a Sunni- to a Shia-controlled country has shifted it from Riyadh’s orbit into Tehran’s. This represented a monumental setback for Saudi Arabia and an unintended strategic gift for Iran, which saw Iraq transform from an enemy into an ally. Iran has capitalized on the new Iraq to greatly expand its influence; the two countries are developing joint oil fields, and, according to the American Enterprise Institute, trade between them now stands at nearly $8 billion per year.