Saudi & Iran Re-establish Relations – What Happens Now to their Relations with the Rest of the Middle East?

By Ashwaty Nambiar

Across the Middle East, and even beyond, the recently announced Saudi-Iran deal has been met with mixed reactions across the Middle East and beyond. While some see it as a positive step towards resolving regional tensions, others remain sceptical of its long-term implications. Indeed, it is important to consider the potential impact of the deal on the Middle East as a whole and, more specifically, its impact upon the region’s economic dynamics.

First, we must understand the economic context in which the deal was brokered. Both Saudi Arabia and Iran have, along with the rest of the world, been hit hard by the COVID-19 pandemic and the global oil price slump that followed. As two of the world’s largest oil producers, the decline in demand for oil has had a significant impact on their respective economies – the significant falls in said aggregate demand has resulted in recessionary effects such as falling price levels, high unemployment levels and, consequently, widespread deteriorating welfare. Saudia Arabia has faced significant fiscal pressures as a result of the pandemic, as well as the ongoing conflict in Yemen. In this context, then, it is not surprising that the two nations are looking to cooperate on economic issues.

The reopening of embassies and the commitment to cooperation on trade are positive signs for the region’s economic prospects. Saudi Arabia and Iran are both members of OPEC and OPEC+; the two nations could potentially work together to stabilize oil prices and boost production. The OPEC+ alliance, , has already shown a willingness to cooperate on oil production cuts, and the Saudi-Iran deal could provide further impetus for cooperation in this area.

In addition, the deal could open new opportunities for trade and investment in the region. Saudi Arabia is the largest economy in the Middle East and is home to some of the world’s largest companies, including Saudi Aramco and SABIC. Iran, meanwhile, has a large and diverse economy with significant potential for growth in sectors such as oil and gas, petrochemicals, and agriculture. With the lifting of sanctions on Iran, there is a significant opportunity for trade and investment between the two nations.

However, there are also significant challenges to the economic cooperation between Saudi Arabia and Iran. The two nations have a long history of political and ideological differences, and it remains to be seen whether they can set aside their differences and work together on economic issues. In addition, the role of China in brokering the deal raises questions about the long-term implications of the agreement. China has been seeking to expand its influence in the Middle East, and the Saudi-Iran deal could provide an opportunity for China to increase its economic and political leverage in the region.

Another factor to consider is the impact of the Saudi-Iran deal on other regional players. The rivalry between Saudi Arabia and Iran has been a key driver of conflict in the Middle East, and the resolution of this conflict could potentially have a positive impact on other countries in the region, both macroeconomically and for the residents of both countries. However, it is also possible that other regional players, such as Israel and the Gulf states, could feel threatened by the emergence of a closer Saudi-Iran relationship. This could potentially lead to increased tensions in the region, producing further destabilising macroeconomic effects such as deflation, falling aggregate demand, and further unemployment in a cyclical fashion.

The Saudi-Iran deal also has implications for global oil markets. Both Saudi Arabia and Iran are major oil producers, as seen by their respective positions in OPEC. This presents the significance of both of their holdings and how consequently, any changes in their production levels could have major impacts on global oil prices. As seen during the pandemic specifically through a negative oil price example, oil price changes cause widespread market effects as supply chains of all markets are subject to the state of the oil market. Therefore, oil price changes can be seen to be highly significant to the health of its own market, as well as being the root of knock-on effects to its associated markets

Considering the short-term implications of the Saudi-Iran deal, it is posisble that it could lead to increased oil production and lower prices, as the two nations seek to boost their economies through increased exports. This is a component of aggregate demand, which, when boosted, results in higher levels of employment, increased output to meet increased demand, and overall, low and stable inflation – a macroeconomic goal.

On the other hand, in the long term, it should be considered that the deal could potentially lead to reduced production and higher pricesas the two nations seek to maintain stable prices and protect their economies, countering the prospect of any of the said above goals.

To conclude, the Saudi-Iran deal represents a significant shift in the economic and political dynamics of the Middle East. While there are certainly challenges to economic cooperation between the two nations, the potential benefits of increased trade and investment are significant.

Image Source: Saudi Press Agency, via Reuters

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