The Middle East: Is oil the way forward?
'The oil market is altered drastically by America's movements and changing technologies'
Dominic Lunt | 7 November 2015

One of the biggest steps towards modern society for the Middle East was in 1908, when oil was first discovered in Persia (now Iran). It was soon realised that the Middle East possessed the world’s largest, easily accessible reserves of crude oil, the most important and essential commodity of the 21st century. From the Middle East, Western (largely American) oil companies pumped and exported the vast majority of this oil, in order to satisfy growing demand, stemming from an expanding car industry. However, this still left behind wealthy Kings and Emirs in the countries of Persia, Saudi Arabia, Libya and Algeria. At the time, this gave them the ability to consolidate their power over the region and its resources.

The next major step forward for the Middle Eastern oil industry was in 1960 when OPEC was formed. The Organisation of the Petroleum Exporting Countries was created in an effort to secure the best possible price, from major oil corporations, for the crude oil in their respective nations. The principal behind OPEC was to unify and coordinate the way in which its members produced and priced their oil. Largely led by Saudi Arabia, issues with non Middle-Eastern countries occasionally arose; most notably perhaps in 1992 when, unwilling to pay a $2 million membership fee and feeling OPEC’s quotas were limiting its potential, Ecuador withdrew. Today OPEC operates as one of the highest earning organisations in the world, taking around $1 trillion in annual revenue.

Owning one fifth of the world’s conventional oil reserves, Saudi Arabia’s interest in the oil industry is, understandably, unrivalled. Saudi Aramco, the Saudi Arabian national Oil Company, was last estimated to have total assets of around $30 trillion. However, an attempt to break the back of the American shale industry, by drastically reducing prices, has failed - proven by the unchanged sales of shale oil despite price free falls. This is thanks to American engineering and technical innovation in providing a forceful and dramatic push to reduce prices of shale oil production. Through technological innovations they have succeeded in reducing the costs involved in exploiting their shale oilfields. Meanwhile, Saudi Arabia has failed to keep up, due to their naturally static costs of production. Furthermore, the oil price drop has actually accelerated these processes and will result in a ‘survival of the fittest’ price war within the shale industry. The decisive outcome will be that the remaining shale firms will have a long-term competitive advantage over Middle Eastern producers, with their costs of production being significantly reduced.

Further bad news comes for the Middle East comes in the form of the US Government’s stated policy: they plan to reduce external, international, energy dependence. This is key after, in 2013, the USA had its first year of energy balance equilibrium, after decades of dependency on potentially unstable import sources. This has essentially meant, coupled with their now strong and dependable shale oil fields, America’s withdrawal from the global crude oil market in order to be self-sufficient. The USA was, unsurprisingly, a huge player in this industry, at one point importing almost 10 million barrels a day, the majority of which came from OPEC.

Saudi Arabia is furthermore unable to sustain a prolonged price drop given OPEC’s capped maximum production. Coupled with large social payment obligations across the Middle East to Syria and Iraq, where fighting continues, Saudi Arabia cannot sustain such output quotas. They would have to raise either domestic or foreign loans to cover a projected 20%+ budget deficit, but this would then impact the liquidity of both local and foreign currency in Saudi Arabia. So the new quandary for Saudi Arabia amounts to this: if it reduces production, to try to increase prices, it won’t necessarily maintain market share. This could quite easily be taken on by American shale oil producers or by Iran, when it re-enters the marketplace after sanctions are lifted (expected in 2016).

The most prevalent impact for Middle Eastern countries now is a spread of economic discontent, outward from Saudi Arabia. This is due to a regional similarity of their economic structures and dependence on cross-border investment. This will likely mean a start to direct, or indirect, taxation in/across the GCC (Gulf Cooperation Council). The alternative policy would be a removal/reduction in subsidies. This has already begun in the UAE where fuel subsidies have stopped across the country.


For the Middle East, the last century has brought the wealth and prosperity related to ‘Black Gold’. The region is now home to the country with the highest GDP per capita – Qatar - and according to Forbes the 5th most popular tourist destination in the world, joint with Dubai. In short, investment of oil money has led to prosperity and opportunity in the region. Although, the area may soon begin to suffer, as the landscape of the oil market is altered drastically by America’s movements and changing technologies. However, one must hope that this area, which pioneered the global oil trade, will maintain its wealth and continue to develop even if it is with less focus on the oil industry.

 

Image sourced under the Creative Commons License 

James Routledge 2016