Middle East – A Saga of Geopolitics around Oil and Gas

What happens when the propensity of a national government collapses because of a political uprising? It increases the likelihood of subsequent changes which hinder the economic growth of the country. In other words, the economic growth and the political growth of a country run hand in hand and either one of them has a direct impact on the other. Any uncertainty as a result of a political conflict reduces investment and economic growth of the region, and any hindrance in the economic growth may lead to government collapse or political unrest. Middle East, the land of ancient civilizations, culture, exotic places, and decades of war, has been a constant reminder of this inevitable affair. The incessant crisis in the region seems to dismiss every form of logical understanding or solution, and all this political disarray, the drumbeat of war can ultimately be narrowed down to the most valuable substance – Oil.

The Past – A glimpse of how it all began

To understand how the biggest asset of the region led to the shattering of the region’s economy, we need to travel only a hundred years in the past. Almost a century ago, the region’s map looked a lot different than today. Please note that we are talking about the Middle East of the times when there was no Iraq, no Israel, or Jordan, or Lebanon. The Ottoman Empire broadly enveloped the whole region till the outbreak of War in 1914, which happened soon after the riches of the empire, particularly Oil, piqued the interests of the powerful, industrialized European nations. It led to the Ottoman Empire’s alliance with Germany and gave Britain and other imperial powers opportunities to traverse the region and avail benefits.

A new agreement led to the division of Iran and Turkey in 1915. This wasn’t the end of it. Amid what was already happening, Britain encouraged Arab to revolt against the Ottoman Empire, promising it that if they win, it would lead to a united Arab nation, expanding to the Red Sea and the Persian Gulf. Towards the end of it, the government realized that it would be easier to manage small, divided Arab nations than a large, independent Arab republic. France took over Syria and Lebanon, while Palestine and Mesopotamia were taken by Britain. Further divisions happened as the new countries called for boundaries, eventually leading to the formation of Kuwait and Iraq. The riots, politics, protests, coups, and seizures since then have been never-ending, with the most recent example being the Arab Spring, 2010. No other industry faced a direct impact as did the oil and gas industry. The Brent price, already suffering in the aftermath of the global crisis, took an unprecedented dip causing the market to face frequent instability.

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The Ultimate Concern

Let us recall the Arab Spring movement which began with the self-immolation of a street vendor in Tunisia, back in December 2010. The event acted as a catalyst in the whole situation and paved the way for the Tunisian Revolution which further spread vigorously to five other countries, namely, Libya, Egypt, Syria, Yemen, and Bahrain, where the governments were overthrown, or colossal uprisings and violence occurred, including civil wars and insurgencies. In other words, it was retaliation to the perpetually growing economic plight and injustice.

Now here’s how the spreading instability across Middle East and North Africa (MENA) shook the whole world. According to Global Data, Saudi Arabia, Iraq and the UAE rank in the list of top 10 countries for having the largest remaining crude and condensate reserves. The region accounts for 65.5% of global proven crude oil reserves and nearly a third of global oil production. In addition to this, MENA is also possessing over 47% of the world’s proven gas reserves. The region’s reliability as oil producers and suppliers has, hence, emerged as a key topic for the policymakers, yet again.

The political uprising that breached the walls of Middle-east has reignited a major concern for the whole world – Are the Middle-east countries, since their subjection to the Arab Spring’s timeless dolour, reliable enough to maintain their standing in global oil production and supply?

With the political grounds of Middle East unstable, the growth of the region got directly influenced. The eventual instability had negative effects on the productive economic decisions of the country, say, investments and business alliances as the future of government policies stayed highly inconsistent and unpredictable. The risk-averse economy agents hence chose to either halt the union or take the exit door.

The Present – From slow recovery to reshaping of the industry

In the last decade, there have been sudden shifts in the geopolitical climate of the Middle East, and a considerable amount of discussion over the geopolitics of Oil. Despite the fact that the movement of energy resources from one country to another is very often punctuated by the political interests, the predictions of the relationship between petroleum prices and political events, including wars, riots, sudden coups d’etat, have always been beyond risky. The last few decades have witnessed how the record highs and lows in Oil have affected international relations and other political developments.

Nevertheless, the short-term effects of the tumultuous period have been far less dramatic than feared. The year 2016 marked itself as nemesis for oil and gas industry, distinctly in the Middle East, and the year 2017, as the year of balance and checks, witnessed optimism slowly returning by the summer.

In the words of The National, a Middle East daily, “A handful of new producers in the market and the same kind of changes in the policies will definitely bring balance by March 2018.” The year 2017 witnessed that the Brent price performed more or less steady by the monthly quota of cuts implemented by the OPEC members. The price stayed at a constant US$50 across the year, except in the fourth quarter of the year when it rose to $64 in November, stimulated by the Kurdish referendum fallout which witnessed disrupted resource supplies. Nonetheless, for the Arabian Gulf producers, the Brent price has been satisfactory to radically streamline their policies and strategies. Saudi Aramco, world’s largest oil company, hired investment banks namely; HSBC, JP Morgan, and Morgan Stanley to prepare a public offering of 5% shares of its $2 trillion estimated value by 2018. Other key-players like Petroleum Development Oman and Iraq’s State Organization for Marketing Oil are also following the practice. This New Year, the UAE oil major, falling into the footsteps of Aramco, has great plans to create an oil trading unit which would result in boosted revenues.

Not all business parties are sure whether this is the right time for investment for the oil and gas industry in the Middle East. The coming year, however, is expected to have less volatility in the market, resulting in fair prices and the return of investments. What the world is looking forward to is that the Gulf Producers are willing to spend big in near future, in addition to the emerging role of Chinese and Asian producers in the upstream sector. Despite the rising geopolitical tensions, major players have prepared to place themselves in high reserve/low-cost areas. There are no doubts about the fact that a lot of them have shifted most of their capital to the short investment cycle in the US, fearing the peak demand and stranded assets. But the fact that the Gulf will continue to remain one of the oil juggernauts in the near future and continue to attract investment, is a given. The Aramco floating is something that the region will be eyeing and the coming year will observe how it shapes the energy industry for good. Till then, all we can do is hope for a better business environment across the world and pray that geopolitical conditions in the world let oil and gas industry progress.