Why the Saudi Arabia-Iran Spat Means ISIS Is Here to Stay

Low oil prices mean Iran's promised riches will not materialize, and Saudi Arabia will be weakened. Here's what all that will cost us.

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Former crown prince, now king, Salman.
Former crown prince, now king, Salman.Credit: AP
David Rosenberg
David Rosenberg

Welcome to the New Middle East.

It’s not the one Shimon Peres famously envisaged 25 years ago of mutually beneficial trade and investment, a happy marriage of Israeli knowhow and Arab capital, Israelis eating hummus in Damascus and Arabs shopping in Tel Aviv.

That New Middle East has become the butt of jokes. The real New Middle East taking shape today unfortunately has nothing funny to commend it.

It started with the outbreak of the Arab Spring, which turned the region into a cauldron of chaos and violence. It took further shape with America’s withdrawal from an active role in the region in the wake of the Iraq war, leaving Russia, Saudi Arabia, Turkey and Iran all trying to fill the vacuum. The last 18 months added a third element in the form of plunging prices for oil, the stuff that greases the wheels of the region’s economy.

Now, with the Iranian nuclear deal going into effect this week, the final element of the New Middle East has come into place.

Let’s look at the three big powers in the New Middle East and their strengths and weaknesses.

Tehran in flux

The big question mark now hovering over the region is what kind of Iran is going to emerge from the nuclear deal.

Right now, the country’s hardliners and moderates are in a contest from which a clear winner has yet to emerge, which explains Iran’s contradictory behavior over the last weeks. Tehran met the terms of the nuclear accord far earlier than anyone expected (five points for the moderates), conducted ballistic missile tests in defiance of a United Nations ban (two points for the hardliners), fired rockets threateningly close to American warships (half a point for the hardliners) and seized American sailors and issued propaganda photos of them (one point for the hardliners) and then freed them quickly (half a point for the moderates).

The moderates are ahead on points right now, but they aren’t likely to keep their edge. The elections next month are almost certainly going to be stacked against them, leaving everything but the presidency in the hands of the hardliners. The institutional barriers erected by the hardliners to economic reform and foreign investment are immense, so that flood of foreign investment moderates are counting on to get the economy moving and enhance their standing won’t happen.

We’ll see a burst of news of trade and investment deals, like the giant Airbus deal announced over the weekend, and the economy will rebound since it’s starting from such a low point. But it will all flame out quickly as the realities of doing business in Iran become apparent to Western investors.

Newly muscular in Riyadh

Meanwhile, Saudi Arabia has become an assertive regional player as never before. As always, it’s using its oil profits to quietly spread its influence as it always has, but now it’s pursuing its goals in a much more upfront and aggressive fashion -- bombing Yemen, breaking off relations with Iran and working to bring down Bashar Assad. Riyadh can’t rely on Washington any longer to keep order in the region as the Saudis would like it, so it’s taken on the role itself.

King Salman, who came to the throne a year ago, seems to relish this new, muscular Saudi Arabia, but the reality is that the Saudis have feet of clay. Their economy is about oil and not much else. They don’t have any industrial capacity to speak of and despite an investment program in the hundreds of billions of dollar to build universities, hospitals and infrastructure, the nation remains a (wealthy) Third World country. A third of the population are expatriates who keep its stunted private sector alive. It’s got one of the world’s biggest defense budgets, but except for a police action in Bahrain and a bombing campaign in Yemen it is untested and in all likelihood ineffective.

But when all is said and done, the real power in the Middle East is oil, and it’s going to check everyone else’s ambitions.

Without petroleum profits, Saudi Arabia is a weakling. The International Monetary Fund estimates that Riyadh begins running budget deficits when oil is below $98 a barrel so that the $30 a barrel of oil is selling for right now won’t be able to finance wars in Yemen and Syria, keep Egypt afloat and shower the Saudi masses with handouts indefinitely.

Iran is less reliant on oil but the government is counting on it to generate the money it needs because otherwise it is a pretty poor country. The frozen funds, estimated at as much as $100 billion, that Iran is due with the end of the sanctions regime will mostly end up being used as first aid for the damaged economy, not to pay Hezbollah’s missile bills.

The oil riches Iran has been hoping for won’t be forthcoming. Thanks to the Saudis, who have been pumping like mad, the world is awash in oil. Now the Iranians are angling to add another 500,000 barrels a day to the supply at a time when China’s economy is slowing.

In other words, the supply-demand imbalance is not going to change, and cheap oil is here to stay. The Middle East will remain the chaotic place it is today and maybe become even more chaotic because neither Iran nor Saudi Arabia have the resources to fight their battles any more effectively than they do now. They may even have to pull back.  Syria will remain a standoff, Iraq will have to live with Islamic State, and Egypt will struggle to stay afloat economically and keep its Islamists at bay.

This New Middle East isn’t the kind that visionaries like Peres dream about, but the fact is the chaos has been better for Israel than anyone could have expected.  Our enemies have been distracted and weakened by war amongst themselves and the side effects, namely the mass exodus of refugees from the region, have been suffered mainly by Europe, Turkey and Jordan.

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