Much like the recent developments, the oil crisis in the mid-1980s had its roots in Saudi strategic interests toward the region as well as toward oil markets. As OPEC’s swing producer, Riyadh had absorbed massive production cuts in the early 1980s in order to maintain prices in a period of falling demand and expanding non-OPEC supply. Saudi exports sank to 2.15mbpd in 1985, approximately half of its formal OPEC quota and a mere 25 percent of its 1980 exports, even as its OPEC partners routinely disregarded their quotas. After a futile effort to persuade non-OPEC producers to cut back, the Saudis began ramping up production, and over a nine-month period beginning in August 1985, OPEC production ballooned by 4mpbd, with the kingdom responsible for approximately half that increase.
Then, as now, the Saudis struggled to deal with the ripple effects of a production surge that they helped initiate.
The decision coincided with the spillover of the Iran-Iraq war into the Gulf, via Iraqi attacks on Iran’s oil infrastructure and Iranian counter-attacks on Gulf oil exports and other shipments transiting the strategic waterway.
The combination was catastrophic for Iran, whose oil revenues plummeted from $21.2 billion in 1983 to $13.7 billion in 1984 and $6.3 billion in 1986. Meanwhile, Iran’s economy began to grind to a halt—the GDP crashed, and key sectors such as manufacturing and construction were disproportionately hit. Iranian officials saw Saudi production increases as a deliberate effort, with Washington’s active collusion, to cripple Iran’s economy and its military capability. Then-President Ali Khamenei, who is now Iran’s supreme leader, warned Riyadh that “the price war is no less important to us than the military war at the front.” Tehran tried to push back within OPEC but made little headway.
As is the case today, the Saudi strategy in the mid-1980s was neither irrational nor purely punitive toward Tehran. In fact, Riyadh’s 1985 production increases reflected an attempt to address two profound concerns: the kingdom’s massive fiscal requirements for domestic development and its international initiatives. In addition, the Saudis feared a long-term erosion in market share, weakened geostrategic preeminence, and mounting Iranian regional ambitions. They even sent quiet overtures to Tehran about the possibility of a ceasefire and sought to break the Iranian alliance with Syria.
In the 1980s, the oil strategy proved a partial success, and an incredibly costly one, for Riyadh. While the kingdom managed to claw back market share, the crisis did not generate sustained OPEC unity, nor did it produce near-term progress on subduing Tehran. The price crash hurt Riyadh’s diplomatic sway regionally and internationally, generated terrible blowback for the Saudi leadership, and caused its oil income to plummet to a mere $18 billion in 1986—a $100 billion drop from five years earlier. As one Saudi government oil economist remarked: “Everyone suffered, Saudi Arabia most of all. It was a very bad time.”
Eventually, the 1985-86 oil war subsided, as both Tehran and Riyadh came to appreciate that their interests were better served by mutual compromise. The Saudis sought an exit strategy to stem the price erosion as well as the ongoing damage to their relations with smaller producers, including the United States. Facing an inflection point in its war with Iraq, Tehran also yielded, even conceding a temporary boost for Baghdad’s production. Hubris on both sides was eventually run aground by economic realities. Mohammed bin Salman may soon learn a similar lesson.
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