The impasse over India’s growing debt to Iran has taken a new turn. India has been unable to pay Iran for oil imports due to international sanctions on Iran, leading to an Iranian threat to cut off its supplies to India. The threat was so vaguely worded that it seemed like a bluff. Saudi Arabia has now called that bluff, offering to boost its oil production and send its oil to India to balance any Iranian cutoff. It’s consistent with Saudi Arabia’s history of attempting to stabilize world oil markets–and that’s how they’re justifying it. However, it’s also consistent with the Kingdom’s attempts to isolate and weaken Iran due to the growing threat it poses. It’s doubtful that the Iranian cutoff will actually go through, but this move by the Saudis weakens their hand in negotiations with the Indians. Iran may now be forced to accept payment in rupees–a currency it has little use for–or to continue allowing India to run up debt. Each would further weaken Iran’s economy, making it harder to develop fancy new toys for the military, pay wages to the bloated public sector, and keep the people quiet.
There’s an interesting detail to this. The Saudis offered to replace “some,” not all, of the 400,000 barrels Iran supplies to India. This gives credence to the rumor that the Saudis don’t really have significant excess oil production capacity, or at least not excess capacity that can be brought online on short notice. That excess capacity is the global oil economy’s insurance policy–it minimized the impact, for instance, of the loss of Libya’s significant oil production due to the revolution. If people begin to lose faith in the Saudi excess capacity idea, oil prices could see a small but permanent increase.