Oil politics

Shahid M Amin

An observer once said that if you dig deep into Middle East politics, you will find oil. He probably meant it as a pun, but it is true that much that has happened in the Middle East in recent times is, in one way or the other, related to oil politics. The leading Western countries (USA, Britain and France) sought to dominate the Middle East politically, since early in the 20th century, with a view to exploit its immense oil resources. Britain dominated Iran to control its oil till the 1950s. When the nationalist government of Dr. Mosaddegh sought to nationalise the oil industry, he was overthrown in a CIA/British intelligence coup in 1953. The Shah of Iran thereafter worked hand-in-hand with the USA and received full American backing till the Islamic Revolution in 1979. In the case of Saudi Arabia and the Persian Gulf countries, oil was the main pivot on which the US and Europe developed their relations. The US support for Israel has also been, in part, related to safeguarding its oil interests in the Middle East.
Oil was first discovered in USA in 1859. The first find in the Middle East was in 1908 at Masjed Soleiman in Iran. The economic uses of oil became apparent with the growth of the automobile industry, but its military uses came to the fore in the First World War. Ever since, oil is regarded as a crucial resource in warfare. American oil companies were mainly responsible for the discovery and commercial exploitation of oil in the Persian Gulf region. In 1932, oil was struck in Bahrain. The search for oil in Saudi Arabia was time-consuming till the first discovery was made near Dammam on March 3, 1938. Oil was commercially exported after the Second World War. Oil was later also found in Kuwait, Abu Dhabi, Qatar and Oman.
Today, 64% of the global oil reserves are in the Persian Gulf: 25% in Saudi Arabia, 11% in Iraq, 8% in Iran, and 9% each in Kuwait and UAE. If Libya and Algeria are added to the list of Middle Eastern countries, their share of the world’s oil reserves and exports becomes even greater. In 1980, the Carter Doctrine was announced which stated that any attempt to hinder the flow of oil from the Persian Gulf would be resisted by the USA, if necessary by military force. The world is so heavily dependent on the continued flow of oil from the Gulf that its stoppage could cause the collapse of economy of the industrial nations in the West, China, Japan and India, apart from other countries, and could even lead to the Third World War. Iran is seen at times as posing a threat to the flow of oil from the Gulf.
The Arab world used the “oil weapon” both in the 1967 and 1973 Wars with Israel, with better results in the latter war. Their oil embargo did soften France and other European countries who have since adopted an even-handed policy in Arab-Israel issues. The oil embargo can be more effective if OPEC (Organisation of Petroleum Exporting Countries) takes a common stance. Even then, there are non-OPEC oil-producing countries that can frustrate the effectiveness of an oil ban. Within OPEC, there have always been divisions among those who press for higher prices without ceilings on oil production and those, headed by Saudi Arabia, who want to control supply and demand. More often, Saudi Arabia has been a moderating force in the oil market.
Oil prices had been deliberately kept low till around 1973 by oil companies controlled by Western states. Following the Arab oil embargo, the oil price shot up and quadrupled to $12 per barrel in 1974. It has continued to rise, reaching a peak of $140 in 2010 where after it has fallen sharply, coming down to $28 early this year. It has stabilized at present (mid-2016) at about $50 per barrel. Higher oil prices were ruinous for poorer countries while the present level of prices is a boon for countries like Pakistan. The main reason for fall in prices is that there is too much supply of oil in the market.
Many observers put the responsibility for the oil glut on Saudi Arabia, the single largest oil-exporter, which has refused to cut down its production. Saudi Arabia pumps one out of nine barrels of oil produced in the world. There seem to be some political motivations behind this oil price war-of-attrition. Saudi Arabia has bad relations with Iran: lower oil prices hit Iran, which is now resuming full production with the lifting of economic sanctions following the nuclear deal. Low oil prices are also hurting Russia and Venezuela, two countries that are not on good terms with the US. Moreover, low oil prices lessen competition posed by oil substitutes like shale whose production had earlier been rising in USA and elsewhere.
Despite the pleas of other oil-producing countries, Saudi Arabia has not cut down its production, arguing that it was leaving it to market forces to stabilise the price. Lower oil prices have also hurt Saudi Arabia but it has huge monetary reserves. They are depleting at an alarming rate, but the Saudi calculation could be that, in the process, its adversaries are hurting much more. An economic issue is being clearly affected by a political issue viz. the cold war between Iran and Saudi Arabia. In the process, Saudi business groups are being forced to lay off foreign workers. This affects jobs and remittances of many Pakistanis in Gulf countries. But the alarmist reports about an imminent crash of Saudi economy are premature.
Firstly, Saudi Arabia has the ability to bring a rise in oil prices whenever it chooses to do so. Secondly, for years, Saudi Arabia has sought to build alternate sources of income generation. Two state-of-the-art industrial cities, Yanbu on the west coast and Jubail on the east coast, were set up some time back. Thirdly, inspired by Deputy Crown Prince Muhammad Bin Salman, it has been announced that four more mega economic cities will be set up under the ambitious Vision 2030 scheme that aims to restructure the Saudi economy by producing additional sources of income generation, apart from oil.
— The writer served as Pakistan’s Ambassador to Saudi Arabia, the ex-Soviet Union, France, Nigeria and Libya.

Share this post

PinIt
    scroll to top