12/20/2013 01:50 pm ET Updated Feb 19, 2014

Iran Nuclear Deal Widens United States-Bahrain Rift

The potential for an Iran nuclear deal is causing serious friction between the U.S. and Bahrain. While the Bahrain government's official response to the interim deal was a restrained welcome, describing it as "consistent with its stances and policies, which advocate diplomatic solutions to maintain stability," Crown Prince Salman bin Hamad al-Khalifa was quoted by the UK Daily Telegraph as attacking Washington, calling its approach "schizophrenic ... transient and reactive"

The Crown Prince's office reacted sharply to the piece, saying it "rejects the misleading comments ascribed to the Crown Prince in the article on this basis and in the context they were presented," but there is no denying an increase in tension.

The Telegraph piece came just a few days after U.S. Defense Secretary Chuck Hagel had visited Bahrain and assured it and its Gulf neighbors that the U.S. wasn't going to abandon them, but the Iran deal is worrying for Bahrain and Bahrain's reaction to it worrying for the U.S.

Bahrain has been hit by almost continuous protests since major demonstrations broke out in February 2011. The government has reacted with a severe crackdown, jailing peaceful opposition leaders and thousands of others. Dozens of people, including some police officers, have been killed. Promises of reform have largely failed to materialize, leaving Bahrain an increasingly unstable and embarrassing ally for the U.S., which anchors its Fifth Fleet there. This latest outburst deepens the diplomatic rift, with the Telegraph quoting the Crown Prince as pointedly noting that while "...the US cannot sit from afar making condescending judgments, ... the Russians have proved they are reliable friends".

Part of Bahrain's political instability is the result of a shaky economy, and the Iran deal could make thing much, much worse for Bahrain if Iranian oil is allowed back onto the market. International financial experts warn of a Bahrain budget over dependent on a high oil price. In a May 2013 analysis of Bahrain's economy the International Monetary Fund determined that

"The economic outlook depends on progress on the domestic political front, and is subject to oil price risk.... in the absence of an enduring political solution, private sector investment is expected to remain weak, implying only moderate non-oil growth, below 4 percent in 2013 and over the medium term...Bahrain's fiscal breakeven price has reached critical levels--$115 (per barrel of oil) in 2012--rendering Bahrain vulnerable to a sustained decline in oil prices."

It's this drop in oil price that is immediately threatening. This week's pre-deal price of around $111 a barrel wasn't high enough to make the breakeven of $115, and the announcement of the deal resulted in an instant drop to $109. And this was only at the prospect of Iranian oil coming onto the market next year sometime. If it really does, it's likely to drive the price down even further, leaving Bahrain's finances much weaker, fuelling unemployment and political protest.

In September this year Moody's Investors Service already lowered Bahrain's sovereign rating by one notch to a Baa2 rating, just two levels above junk territory, and Moody's also assigned a negative outlook based on a dependence on oil revenue and political and social tensions. Economic growth slowed in the third quarter this year and last week international investor intelligence service S&P noted that the economy remains "constrained by Bahrain's unresolved domestic political tensions and its fiscal dependency on sustained high oil prices..."

A partial thaw between Tehran and Washington could also reduce the importance of Bahrain as the first line of defense against Iran. The Bahrain government has insisted that Iran is playing a part in its domestic unrest, and last this month four men were sentenced to life and six others to 15 years in jail on charges of establishing a militant cell linked to Iran's Revolutionary Guard.

So far, the U.S. government's muted response to Bahrain's violent repression is believed to be in part because of Bahrain's strength as an ally against Iran -- not unlike the 1970s and 1980s when South Africa was an embarrassing U.S. ally but successfully played a valuable anti-Soviet role for the U.S. in Cold War tensions. Bahrain knows that if (and it is a big if) Iran recedes as a threat in a new détente with the U.S. Manama's hand will be weakened. The Iran threat might not disappear but it might just matter less, taking away a trump card for Bahrain. This in turn could encourage the State Department to take a more vigorous diplomatic approach in pushing for reform in Bahrain. The Bahrain regime could turn out to be a major loser from a thaw with Iran.