Two events that have of late come to pass are likely to exercise a profound impact on the Middle East as well as world politics. One is the attack on Saudi oil installations; the other is China’s announcement to invest $400 billion in sanctions-hit Iran, mainly in the petroleum sector. Thus oil, which together with sectarian schism has been the principal driver of Middle East politics, lies at the heart of both developments.
In order to appreciate the significance of the two events, it’s important to understand the role oil plays in shaping the geostrategic dynamics of the Middle East as well as the contribution of the region to the global production and export of arguably the world’s most critical commodity. Of the world’s top 10 oil producers, five – Saudi Arabia, Iraq, Iran, the UAE, and Kuwait – are from the Middle East. In 2018, they together accounted for 28 percent of the globe’s oil output. Overall, the region makes up one-third of the world’s oil production.
The US and China, which are the top and fifth oil-producing nations respectively consume the commodity far more than they produce. In 2018, US oil output was 17.87 million barrels per day (bpd), while its consumption was 19.69 million bpd. Likewise, China’s oil output and consumption were 4.82 million bpd and 12.79 million bpd respectively. The production-consumption lag makes each country dependent on oil imports to keep the wheels of the economy moving.
At the other end of the scale, in the case of the Middle East countries, oil production significantly outstrips consumption. In 2018, Saudi Arabia produced 12.79 million bpd and consumed only 3.30 million bpd. Iran produced 4.47 million bpd and consumed 1.8 million bpd. In both cases, the excess oil output is exported. Saudi Arabia exports nearly 75 percent of its oil and is ranked the commodity’s top seller, while Iran sells close to 60 percent of its oil.
In the case of Saudi Arabia and Iran, oil abundance has been both a blessing and a curse – the latter because it has held them back from diversifying their economies. In the case of Saudi Arabia, the petroleum sector accounts for more than half of the total economic output and about two-thirds of the export revenue. The share of oil and gas in Iran’s GDP and export earnings is 25 percent and 70 percent respectively. A fall in world oil prices or demand invariably casts its shadow on both the economies. Over decades, oil revenues have enabled the Gulf states to persist with their monarchical form of government by providing substantial subsidies and other benefits to the people in lieu of denying them greater political and civil liberties.
Not only that, the oil ‘curse’ has contributed to making the Middle East a hotspot of international politics. This is for two fundamental reasons. One, ensuring secure energy supplies commensurate with the size and growth of their economies has remained a priority of world powers. Two, the fact that exploration, extraction, transportation, and refining of oil is technology and capital intensive has made the energy-rich but technology-deficient countries dependent on foreign state-owned or multinational enterprises.
During the cold war, the Soviet Union enjoyed an overriding advantage over its Western rivals: while the former was self-sufficient in oil production, the latter depended on imported oil for economic and defense purposes. The birth of the present-day Saudi petroleum giant Aramco (originally named Arabian-American Oil Company and later re-named Arabian Oil Company) in 1944 set the direction of oil politics in the post World War-II international political order and marked the beginning of the Saudi-American strategic alliance. The following year, the two countries struck an agreement, which gave Aramco the monopolistic right to explore Saudi oil resources, while Washington undertook to safeguard the kingdom’s security. In Iran, in the early 1950s, Prime Minister Mossadeq paid the price in the form of his dismissal for having nationalized the country’s oil reserves.
Oil being the lifeblood of Middle East economies, one of the most effective ways to throw them into a tailspin is to make a hole in their enormous oil revenues. An economy that is on the whack will usher in a double whammy for these countries. One, resource crunch will put the skids under the state’s ability to continue providing generous subsidies to the people thus racking up their discontent with authoritarian regimes. Two, it will put a damper on the regional ambitions of these countries, particularly, Iran and Saudi Arabia, which make for expansive foreign policies.
That’s what the US did when in May 2018 it unilaterally opted out of the 2015 Iran nuclear deal and re-imposed stringent sanctions on the country, which, inter alia, are calculated to preventing it from selling its oil and gas. The six-month waiver granted by Washington to eight principal buyers of Iranian oil – China, India, Japan, South Korea, Taiwan, Turkey, Italy, and Greece – expired in May this year, thus setting the stage for a showdown between the world’s largest economy and military power and the Islamic republic.
In the wake of the waiver’s termination, tensions ballooned up in the Gulf as Tehran put on hold some provisions of the nuclear agreement and threatened to block the shipment of oil through the Strait of Hormuz. The underlying message was that if Iran was stopped from exporting oil, it would prevent its Gulf neighbors from doing so.
Yemen provides one of the several springboards where the Middle East’s two big powers are at loggerheads. Therefore, although Iran denied and the Houthis claimed responsibility for the act, the September 14 strikes on Saudi oil fields were instantly set down to Tehran by both Washington and Riyadh. The US secretary of state called the attacks ‘an act of war.’ The incident must have brought a cold sweat to the stakeholders for both short-term and strategic reasons. The strikes slashed Saudi oil output to a half but more than that caused the vulnerability of a tremendously pricey and highly acclaimed security system. As the argument goes, if without nuclear capability Iran can be so lethal, the danger that a nuclear Iran will pose to the region must be out of bounds.
Later, the key US European allies including the UK, Germany, and France also pointed a finger at Iran for the September 14 strikes. The three European countries which are signatories to the Iran nuclear deal and had earlier been critical of the Trump administration for pulling out from the treaty have also begun toeing the American line and have advised Tehran to renegotiate the nuclear deal.
While exerting ‘maximum pressure’ on Iran for its ‘clandestine’ activities, the Trump administration also unleashed a trade war with its strategic rival China, which is an export-driven economy in a way few other countries are. In a word, an attack on Chinese exports amounts to mothballing the Asian giant’s strategic ambitions. Amid an escalating trade war with the US, China has announced to invest $400 billion in Iran to upgrade a 25-year old partnership signed in 2016. Understandably, the investment will focus on Iran’s petroleum sector. In return, Chinese firms will have the right of first refusal to participate in any petrochemical project in Iran.
It’s not clear how much of that Chinese investment will be debt-creating (a loan which will have to be repaid with interest). However, its size and duration do signal Beijing’s strong commitment to Iran in the face of US sanctions. They convey a clear message to Washington that it can’t have it both ways, i.e., putting the curbs on Chinese exports and at the same time expecting Beijing to become a party to the attempts to isolate Tehran or bring the country’s oil exports to zero.
Although there are no treaty obligations on China to underwrite Iran’s security, such a heavy and long-term partnership sets up the donor’s high stakes in the recipient’s stability and well-being. For the moment at least, Iran seems to be on firmer ground than it was until recently.
This article was originally posted here.