[LONDON] Suddenly the tables have been turned on Saudi Arabia.
The biggest oil exporter has swapped its traditional role as price dove with regional foe Iran, for years Opec price hawk. The government in Riyadh is now offering a deal - including its first output cut in eight years - to boost prices; Tehran is dragging its feet. At the centre of the reversal is their contrasting thresholds for enduring economic pain.
"Both countries are coming from different positions," said Jason Tuvey, Middle East economist at consulting firm Capital Economics. "Iran has been under sanctions until recently, so it's getting an economic boost as investment returns and oil output rises. Meanwhile, Saudi Arabia is facing steep fiscal cuts."
The contrast between the two countries is stark. Iran, never as dependent on oil revenue as its neighbour, has seen prospects boosted by rapprochement with the west. In Saudi Arabia, tentative moves toward economic reform haven't prevented two years of weak prices causing financial havoc: it's burning through foreign exchange reserves, government contractors have gone unpaid and civil servants will get no bonus this year.
Saudi Arabia will suffer a fiscal deficit equal to 13.5 per cent of gross domestic product this year, compared with one of less than 2.5 per cent of GDP for Iran, the International Monetary Fund estimates. The IMF says the Saudis need oil close to US$67 a barrel to square the books. For Iran, it's lower, at US$61.50.
Brent crude, the global benchmark, was down 0.4 per cent at US$47.18 a barrel as of 1:18pm in Hong Kong.
When it comes to economic growth, Saudi Arabia is slowing sharply to 1 per cent while Iran is accelerating toward 4 per cent. The current account - a broad measure of a country's economic relationship with the world - tells the same story. Saudi Arabia faces a double-digit deficit this year; Iran's is nearly balanced following economic reforms in 2012 and 2013 to weather the impact of international sanctions over its nuclear program.
While Iranian President Hassan Rouhani faces elections next May and is under pressure over the country's economic performance since sanctions were lifted, it's already been through the austerity that's only starting in Saudi Arabia, according to Amrita Sen, chief oil analyst at consultant Energy Aspects Ltd.
"Iran has already been through so much pain, incrementally they aren't really worse off," she said.
Saudi Arabia led Opec in November 2014 to defend market share, notably against US shale oil producers, at the expense of high oil prices. A month after the policy shift, Ali Al-Naimi, then Saudi oil minister, told the trade journal Middle East Economic Survey that "sooner or later" rivals would run into financial difficulties. The kingdom had "the ability to hold out" for a long time, he said.
Nearly two years later - and under a different oil minister - Riyadh is now signalling it may be ready for a U-turn.
Saudi Arabia has told other Opec members it's willing to reduce production to January levels, according to Algerian Energy Minister Noureddine Boutarfa. That effectively would mean a cut of 500,000 barrels a day.
Iran, meanwhile, is refusing to freeze its production at the current level of 3.6 million barrels a day, aiming instead to lift output to about 4 million barrels a day, the level before sanctions halved exports.
When the oil slump started, few would have anticipated that Saudi Arabia would be seeking a deal to boost prices and Iran would resist it. Beyond the economy, other factors are at play, including regional politics. Both countries are on opposite sides of the Syrian and Yemeni civil wars. Then there's pride - Iran wants to return to pre-sanctions production.
For the last two years, as oil prices plunged from more than US$100 a barrel to a 12-year low of less than US$30 a barrel in January, the Saudis have drawn on their huge currency reserves to cushion the impact. It spent US$115 billion last year and between January and July this year it used up another US$52 billion.
Worried about a looming insolvency if the kingdom continued to spend way above its oil income, Riyadh sought to staunch the financial bleeding.
Subsidies, long a political taboo, are being cut, as are the salaries of government ministers by 20 per cent. Infrastructure projects have been delayed, and a value-added tax is mooted for 2018.
If Saudis have continued spending as they did last year, Mohammed Al-Sheikh, a financial adviser to the crown, told Bloomberg in April the country would have gone "completely broke" by early 2017.
On the other side of the Persian Gulf, there isn't the same sense of crisis.
"Tehran would love to have higher oil prices, but Iran is the Opec country that had to do fewer budget sacrifices due to cheap oil," said Olivier Jakob, an analyst at Petromatrix GmbH in Zug, Switzerland.
"They feel they have a strong hand."