In the late 2012 the Arab World looks very different from what it was just two years ago. The presidents of Tunisia, Libya, Egypt and Yemen, who ruled their respective countries for decades, had been toppled. In Syria, tens of thousands of people had been killed in what is increasingly becoming a civil war between the rebels and the Assad regime. In Bahrain, the majority Shiites have sought to reform the regime and gain political and economic rights. Other Arab countries such as Morocco, Algeria, Jordan and the Arab states on the Persian Gulf have pursued different strategies to contain opposition.
These unprecedented upheavals are likely to have profound impact on the region’s economic and political development. The full impact of these changes is yet to be assessed. The energy sector is, by far, the most vital one in almost all Arab countries (for both consumers and producers). This essay seeks to explore and identify the initial impact of these political upheavals on the region’s energy sector. These political and economic dynamics will be examined within the broader strategic global system. In other words, the essay analyzes the alteration of energy consumption, production and investment patterns in response to political changes in the Arab world, within the context of global financial crisis and comprehensive economic sanctions against Iran.
According to the latest report by the British Petroleum, the Arab states hold approximately 714.6 billion barrels of proven reserves (43.3% of the world’s total) and 46.9 trillion cubic meters (22.5% of the world’s total).1These massive hydrocarbon resources are great blessing. The full and sustainable utilization of these resources, however, depends more on what happens “above the ground” than what is available “under the ground.” In other words, the question is less about geology and more about geo-policy and geo-economy.
Consumption: The high level of energy consumption in the Arab world cannot be divorced from the region’s strong tradition of under-pricing energy. In most countries of the region, subsidies for fuels and electricity constitute a significant share of government spending. Indeed, Arab countries, particularly oil producers, are among the largest energy subsidizers in the world. To be sure, most countries in the world subsidize energy in one way or the other. According to the International Energy Agency (IEA) fossil-fuel consumption subsidies worldwide amounted to $409 billion in 2010, up from $300 billion in 2009, with subsidies to oil products representing almost half of the total.2 Recent analysis by the Organization for Economic Cooperation and Development (OECD) and the IEA indicate that phasing-out fossil fuel subsidies could lead to a 10% reduction in global greenhouse-gas emissions in 2050 compared with business-as-usual.3
Policymakers and energy analysts have adopted different stances on the controversy over subsidies. Yousef Alyousef and Paul Stevens define a subsidy as the “difference between the market price and the real opportunity cost of the commodity.”4 United States Congress Joint Economic Committee describes it as “any government assistance, in cash or in kind, to private sector producers or consumers for which the government receives no equivalent compensation in return, but conditions the assistance on a particular performance by the recipient.”5
The debate over subsidies has intensified in recent years. In response, several Arab states have considered implementing policies to address resource-misallocation and reduce subsidies. Despite political sensitivity, new laws and regulations have been enacted in Morocco, Egypt and other Arab countries. The goal is to bring petroleum products in line with market prices. These policies, however, have faced new complications since the early 2011. In Saudi Arabia and the United Arab Emirates (UAE) the authorities responded to popular discontent by increasing public spending. The rise of populist leaders in Egypt suggests that reducing fuel subsidies (which will certainly lead to higher prices) will be cautious and gradual. In short, political uncertainties in much of the Arab world is likely to slow down any efforts to reform energy prices. This means that unlike the United States and most of Europe (where energy consumption has declined in recent years), consumption in the Arab world is likely to rise in the foreseeable future.
Supply: The impact of the so-called Arab Spring on energy sector cannot be understood in isolation of the changes in the global economy that have significant implications on the two sides of the energy equation – supply and demand. Several technological and political dynamics have recently re-shaped the supply side. First, technological advances and innovation (i.e. fracking and horizontal drilling) in North America have contributed to substantial increase in oil production particularly in the United States. Second, the upheaval in Libya that toppled the four-decade long rule of Muammar Ghaddafi brought production to a stand-still. However, despite slow return of political and security stability, the new Libyan authority has been able to bring production back to the pre-upheaval level in a short period of time. Third, Iraq is another major contributor to the increase in global oil production despite sectarian and ethnic conflicts. Fourth, the comprehensive sanctions imposed on Iran by the United States and Europe and endorsed by the United Nations Security Council have substantially reduced Tehran’s oil production. However, Saudi Arabia (and other Arab countries on the Persian Gulf) has made up for the falling Iranian oil production. The combination of all these developments suggests that the overall OPEC crude production capacity is likely to rise in the next several years.
Demand: The bulk of Arab oil production is exported to Asia, the United States and Europe to meet these regions’ heavy demand and lack of indigenous hydrocarbon deposits. In recent years the demand in several Asian, European countries and in the United States has declined for a variety of reasons including slow economic growth, deep financial crisis and improved energy efficiency. Against this background the analysts at the London-based Chatham House have argued that the world is not running out of oil, rather, the demand “may be nearing a plateau, at least in developed countries.”6
The deep financial crisis in the Euro zone has negatively impacted the prospects of economic growth in individual state-members such as Greece and Spain and in the entire European Union. The demand for oil (and other energy sources) is closely linked to economic growth. Higher growth leads to more demand. It is not clear when Europe will be able to overcome the severe economic challenges it is currently facing. The American economy, the largest in the world, is doing a little better than the European and has been struggling to overcome the prolonged recession of the last several years. On the positive side, in both Europe and the United States energy efficiency has steadily improved in the last few decades. Stated differently, generally the Europeans and Americans consume less energy to produce the same product or deliver the same service. This combination of slow (or zero or even negative) economic growth and improved energy efficiency has led to a decline in energy demand in most member-states of the Organization for Economic Cooperation and Development (OECD).
Non-OECD countries are projected to overtake the OECD in economic weight in the next few years and to account for nearly 52% of worldwide wealth by 2017, as China overtakes the United States as the world’s largest economy (at 18.2% and 17.5% of global gross domestic product, respectively, on a purchasing power parity basis). Accordingly, by 2017 the non-OECD share of global oil demand is forecasted to reach 53%, up from just 36% as recently as 1996.7 These prospects of rising Asian oil demand should not be exaggerated. China is projected to experience a period of declining demand for oil due to slow economic growth and improved energy efficiency. The credit problems in the European Union and other OECD countries have trickled through to Asian industrialized economies including China. In other words, given how well-integrated the global economy is and the interdependence between major global economies (i.e. Europe, US, Japan and China) economic slowdown in Western economies was bound to impact the Chinese.
This less shinning global economic forecast has prompted the International Energy Agency (IEA) to trim its projection of global demand. In its most recent forecast (October 2012) the IEA projects that global demand for oil will be much slower over the next several years than previous projections. This gloomy projection is due to the fact that OECD demand is expected to keep contracting while non-OECD growth looks somewhat less robust than previously expected. The Organization of Petroleum Exporting Countries (OPEC) in its most recent World Oil Output shares similar sentiments and gloomy projection. This projected decline in global demand for oil will increase economic and political pressure on oil producing and exporting countries in the Arab world and elsewhere.
Prices: For many years energy analysts and policymakers have identified energy security as the diversification of energy mix and reducing dependency on oil. While most consuming countries have successfully reduced their heavy dependency on oil and added natural gas, coal, nuclear and renewable to their energy mix, producing countries have been less successful. Most producers, including those in the Arab world, are still heavily dependent on oil revenues and have made little progress in diversifying their economies away from oil. Within this context, price volatility and fluctuation have long-term impact on the economic prosperity and political stability in the region.
Political instability and security uncertainties in several Arab countries since the second half of 2010 have led to disruptions of supplies in Libya, Egypt, Yemen and Syria. Similar disruptions have taken place in Sudan due to border disputes with the newly established South Sudan. Many oil analysts were concerned about similar disruptions in the Gulf Cooperation Council (GCC) producing countries in light of sectarian violence in Bahrain. In order to overcome these psychological impediments and to avoid price volatility, OPEC members, led by Saudi Arabia, have increased their production.
It is too early to accurately assess the impact of the political upheavals that have swept the Arab world since 2011. However, a key outcome of the Arab uprisings has been a significant increase in the prices needed by the producers to manage their fiscal positions.8 Stated differently, the surviving Arab regimes (mainly Algeria and Persian Gulf producers) and the new ones (i.e. Libya and Egypt) need to meet the basic needs of their population. Failure to meet these expectations would contribute to the growing radicalization and opposition. Such a strategy requires increasing public spending on crucial socio-economic necessity such as jobs, and subsidies.
The oil market currently suffers serious contradictions. In addition to the shrinking global demand and rising production by Saudi Arabia and Iraq, there is a great uncertainty regarding Iran. Economic sanctions have already cut Tehran’s volume of oil production and export. More importantly, for the last several years, Israeli leaders have threatened to strike Iran’s nuclear facilities. Top US officials have repeatedly stated that “all options are on the table”, meaning that military attack has not been ruled out. In response, Iranian leaders have vowed to retaliate against any military attack by Israel and/or the United States. Potential targets include Israel and US military bases in the Persian Gulf. Furthermore, Iranian leaders have occasionally threatened to close the Strait of Hormuz. There is no way to provide an accurate assessment of how a potential Israeli/US attack on Iran’s nuclear facility would impact regional and global oil markets. Such an attack would certainly add significant uncertainty to oil supplies and volatility to prices.
Conclusion: The deep financial crisis in Europe, uncertainty regarding economic recovery in the United States and potential slowdown of Chinese economy as well as the prospects of a military attack against Iran’s nuclear facilities and political upheavals in the Arab world have all contributed to the unpredictability of oil markets and prices. Still a few predictions and conclusions can be suggested. First, for the foreseeable future oil prices are likely to remain volatile. This volatility is driven more by geo-political and geo-economic uncertainties and less by financial speculation. Second, while the Arab world (and the broader Middle East) is expected to continue to occupy the driver’s seat as a major oil producer and exporter, the rising domestic demand and refining capacity will keep more crude oil in the region and reduce the available exports. Third, crude oil and petroleum products are the largest traded commodities in the world. Traditionally, most of this trade was between the Arab world as exporter and American and European markets as importers. In the last several years a fundamental shift has taken place. Chinese, Indian, Japanese, South Korean and other Asian markets have emerged as the major importers of Middle Eastern oil. It is unclear how surviving and new Arab regimes would perceive the United States and Europe and what role these Western powers will play in the region. These strategic uncertainties aside, the volume of oil trade between the Arab producers and Asian consumers is certain to expand.
About the Author
Dr. Gawdat Bahgatis professor of National Security Affairs at the National Defense University’s Near East South Asia Center for Strategic Study. He is an Egyptian-born specialist in Middle Eastern policy, particularly Egypt, Iran, and the Gulf region. His areas of expertise include energy security, proliferation of weapons of mass destruction, counter-terrorism, Arab-Israeli conflict, North Africa, and American foreign policy in the Middle East. Bahgat published eight books including Energy Security (2011), International Political Economy (2010), Proliferation of Nuclear Weapons in the Middle East (2007), Israel and the Persian Gulf (2006), and American Oil Diplomacy (2003). His work has been translated to several foreign languages. Bahgat served as an advisor to several governments and oil companies
1. British Petroleum, BP Statistical Review of World Energy, London, 2011, pp. 6 & 20.
2. International Energy Agency (2012), World Energy Outlook, available at http://www.iea.org. Accessed 21 July, 2012.
3. International Energy Agency (2010), Analysis of the scope of energy subsidies and suggestions for the G-20 initiative, available at http://www.iea.org. Accessed 16 June, 2010.
4. Yousef Alyousef and Paul Stevens (2011), The cost of domestic energy prices to Saudi Arabia, Energy Policy (39) 10, October 2011: 6900-6905.
5. Cited in Benedict Clements, Rejane Hugouneng, and Gerd Schwartz. (1995) Government subsidies: concepts, international trends and reform options, IMF Working Paper, September 95/91, Washington, DC, International Monetary Fund, p.5.
6. John Mitchell, Valerie Marcel and Beth Mitchell, (2012) What next for the oil and gas industry? London: Chatham House, p.1.
7. International Energy Agency (2012), Medium-term oil market report, Paris, p.14.
8. Paul Stevens and Matthew Hulbert, (2012) Oil prices: energy investment, political stability in the exporting countries and OPEC’s dilemma, London: Chatham House, p.4.