Saudi Arabia, the world’s largest oil producer and holder of the largest oil reserves, is readying itself and acting in a more overt manner against Iran than in the past. In light of the harsher sanctions imposed against Iran, the Saudi royal family is trying to minimize damages caused to the global economy. In particular, they are trying to reduce the implications of a possible Iranian response, should Iran try to harm oil exports by blocking off the Strait of Hormuz.
With 80% of its export earnings coming from oil, Iran expected that the sanctions imposed on it would result in an increase in oil prices. However, oil is now at a new low: from $125 per barrel in March to just above $80 as of July. This is due in part to a certain decline in demand (a result of the global recession), but primarily due to an increase in output from Saudi Arabia, Kuwait, and the United Arab Emirates – the largest oil exporters in the Gulf.
Saudi Arabia is increasing its output due Iran, Iraq, and Venezuela’s refusal to increase OPEC's output quota. The kingdom's actions reduced the fear of price increases, and contributed to the pricing level that allowed the European embargo to enter into effect. The sanctions have hurt Iran’s oil exports so much that Iran has already lost some substantial revenues from the decrease in export of 2.5 million barrels per day to only 1.5 million barrels per day.
On the other hand, Saudi Arabia’s oil production is at a thirty-year record with more than 10 million barrels per day. For the short term, this increases pressure on Iran and reduces the potential harm to Western economies. This will be especially true if oil prices increase now that the European oil embargo has entered into effect. Saudi Arabia is the only country whose production is in a state of considerable swing capacity, which currently stands at 2.5 million barrels per day – a capacity that surpasses Iran’s total oil exports.
In addition to increasing oil production rates, Saudi Arabia is also simultaneously working to fix old oil pipelines passing through its territory so that greater oil quotas can bypass the Straits of Hormuz and be transported to terminals in the Red Sea. Saudi Arabia has also secretly fixed the Iraqi IPSA pipeline passing through its territory, which hasn’t been used since Saddam Hussein invaded Kuwait in August, 1990. Saudi Arabia confiscated the pipeline in 2001, which can transfer at least 1.7 million barrels per day.
This step might be an indication that Saudi Arabia has assessed that the harm to the strait’s freedom of navigation is higher than in the past, and that it must try to prevent market shortages. Another pipeline that bypasses the Strait of Hormuz and runs through the United Arab Emirates could begin pumping oil as early as this month. At an early stage, the pipeline could transfer 1.7 million barrels per day outside the gulf. In addition, for the first time, Saudi Arabia’s national oil company, Saudi Aramco, announced that it was seeking to produce oil and gas from the area of the Red Sea.
Given its dependence on oil revenues, inflicting damage to Iran’s faltering energy industry may not only change its policy, but could even threaten the stability of the regime. However, the ability to establish a "critical mass," which would bring Iran to change its policies on the issue of its nuclear project, also depends on the ability to rally key countries like China, India, and Japan into the circle of countries sanctioning Iran (the US granted temporary exemptions to these countries after they decreased imports of Iranian oil).
The problem is that oil may be the last significant non-military lever that can be used to pressure Iran.