The changing geopolitics of oil in the Middle East

One in every three barrels of exported crude petroleum still comes from the Middle East. Yet significant shifts in this sector are transforming the geopolitical equation of oil in the region:

• The US is not as reliant on the region as it once was, as its shale gas revolution has made it relatively energy independent.
• Iran could once again become a regional competitor in the sector, if its diplomacy efforts with the US succeed.
• Energy prices are volatile, frequently hitting budget-busting lows.
• Chinese demand will become significantly more relevant for the region.
• Two former large producers, Libya and Iraq, are in deep crises and producing well below potential, with no quick-fix solution in sight.
• Extremists control vast swathes of territory across Syria and Iraq and sell crude oil at steep discounts. Though not enough to significantly impact the oil market overall, this factor is sufficient to ensure a steady influx of money that will continue to create havoc in the region and slow down trade and pipe lines.
• Saudi Arabia has found itself in a tight spot in this new context and its allegiances are becoming more muddled by the day – over ISIS, over Syria, over Iran and over the global oil regime by using oil prices to defend their market share and position themselves politically.

So what do these shifts mean? Well, for one, they mean that energy policies will have to adapt, as will the overall policies of regional powers. A sound and forward-looking energy policy that pays due diligence to the local and regional environment is as critical to national security as it is for uninterrupted energy access.

This concern was a key takeaway from sessions at the recent World Economic Forum on the Middle East and North Africa.

So too was the idea that the region’s governments must reverse the traditional thinking that strict security measures and state control are the fundamental ingredients to ensuring socioeconomic sustainability. Instead, they must realize that socioeconomic sustainability and a sense of social inclusion is paramount to improve the security of the region. At times, oil-dependent governments have announced economic reforms when the commodity price has been depressed, but when prices recover, implementation is deprioritized or halted, keeping meaningful socioeconomic development an illusion. But reform is more needed than ever before.

The largest obstacle to achieving the above is the lack of good and transparent governance, legal certainty and physical security in the region. Multinationals have the luxury of managing operations at a portfolio level and choose to invest in regions where it is easier to work. While regional businesses can navigate regional complexities better, the stark lack of stability and transparency in most of the region are still huge obstacles to them, too.

Coherent energy policies are critical for the economies of much of the region, given the sector’s revenue windfall, but de-politicization of these policies is even more crucial to advancing stability in the region. To do this, the role of government and the private sector must be reconfigured. Governments still control most of the energy sector as a means to manage their economies, but tend to do so in rather inefficient and opaque ways. Governments would be well advised to limit their roles to clear and fair regulation, to allow the private sector to maximize the energy industry’s performance. This in turn will provide governments more wealth to invest in essential public service entities and projects.

As highlighted in the shifts described above, the global ramifications of developments in the Middle Eastern energy landscape are significant, and what happens globally will impact the future of the Middle East. The politicization of oil prices in general and the current drop in value could hurt the shale oil boom in the US and Canada. Chinese energy demand is likely to further offset the decrease in demand created by the US shale gas revolution, so although economic diversification is a necessity for socioeconomic development in the Middle East and North Africa region, the bulk of the wealth of much of the region will continue to derive from petroleum.

Half of China’s energy consumption is industry-related. Hence, when China’s consumer demand increases, which appears inevitable given its exponentially increasing middle class, its demand for energy will grow as well. And although China is boosting R&D spending on alternative energy sources, the progressive alternative energy policies of Europe still demonstrates that fossil fuel dependency does not disappear overnight. Furthermore, Japan’s energy demand is going in reverse as energy security, following Fukushima, has gained more relevance. It seems fair to expect that as the US dependence on the region recedes, Asian powers will find themselves obliged to take a stronger role vis-à-vis the Middle Eastern political and security challenges.

Thus, given the reality that the energy sector will continue to dominate the Middle East region for some time, it is important that the sector develop a transparent model for public-private partnerships. In a tumultuous geopolitical landscape, those in the Middle Eastern energy sector have an opportunity to play a positive role in both ensuring greater economic security through diversification and socioeconomic development. In short, as the energy sector transforms, energy politics in the region must change from being divisive to being an enabler of sustainable and inclusive economic growth, which is critical to security in the region and beyond.

Authors: Espen Barth Eide, Head of Centre for Global Strategies, Member of the Managing Board, World Economic Forum and Anja Kaspersen, Senior Director, Head of Geopolitics and International Security, World Economic Forum.

Image: Workers check the valve of an oil pipe at Nahr Bin Umar field, north of Basra, southeast of Baghdad, November 16, 2014. Picture taken November 16, 2014. REUTERS/Essam Al-Sudani