Global Energy Power Play US, Middle East & the World

Perspective

Oil is the most voluminously traded commodity worldwide. Any hindrance in the daily affairs of the Middle East and consequential dent to world oil prices will set economies of the world dependent on oil imports from the Middle East in frenzy

The United States aims to declare energy independence by 2030 due to its bountiful crude oil reserves. The world is facing a challenging and unique energy scenario now. Through ancient times, the Middle East has been at the heart of world affairs due to its strategic geographic location and the abundance of essential natural resources such as crude oil. A region that has historically been energy-affluent ever since crude oil was discovered in the interiors of its tectonic plates now faces an economic and political dilemma in the coming future as it is quickly losing one of its largest buyers.

Such a paradigm shift in energy politics is, however, far from new to the world. Prior to the World War, Americans were the world’s largest oil suppliers and one of their biggest consumers were the Allies. However, Americans were uncertain of their depleting oil resources and realised the need to secure their energy sources. Since two-thirds of the world’s oil and one-third of the world’s gas seemed to be hiding under a group of Middle Eastern and Northern African countries, there grew an apparent instinct to protect the region from any kind of instability- political or economic.

In the past, oil revenues that flowed in abundance gave a reason for people to stay unified and together make use of the development projects and social welfare schemes being provided by governments of the Middle East. Following World War II, oil began its dramatic rise as the fuel for a recently mobile world. Although the largest concentration of oil reserves are located in the Arab Gulf region, oil consumption has until recently been located primarily in Europe, North America and East Asia.

In the Oil Crisis of 1973, the US had been victim to the erratic increase of oil prices and suffered the brunt of economic collapse. With the Carter Doctrine, it became bluntly evident from 1980 onwards that any attempt by any nation(s) to control the Middle East would be considered as a direct assault to the strategic interests of the United States of America. Carter was a visionary and realised that the constant supply of oil is going to determine the prosperity of nations. The fear that, at any given moment, the United States’ oil supply could be interrupted by a foreign country convinced Washington that its entire approach to energy security should centre on one goal: reducing oil imports from that volatile region. The United States have since attempted to ensure peace, stability and democracy in the region.

Now with the discovery of gigantic potential of untapped oil and gas reserves under their territory and with improvements in drilling technology, the bargaining power of OPEC customers have considerably changed. OPEC’s largest buyer- the United States is focusing increasingly on utilising the gas reserves they have discovered. America now seeing no reason to police the Middle East, countries such as India are left with little option other than to agree with the prices set by the Middle East.

According to current global statistics (2012), the Organisation of Petroleum Exporting Countries (OPEC) accounts for 81 percent of the world’s total crude oil reserves. Out of this 81 percent, almost 66 percent of the crude oil lies in Middle Eastern hands. Oil is among the three main fossil fuels (along with natural gas and coal) that contribute to 80 percent of the world’s energy mix. For years now, the Middle Eastern oil cartel OPEC has swayed global oil prices in their favour by controlling production. Holding almost absolute monopoly over the resource, whenever they feared that the prices were dropping, governments would instruct companies to cut down production and the result would be a worldwide price hike. Dependent countries would have no other option but to succumb to often exorbitant prices of imported oil since oil is a commodity that stipulates inelastic demand.

Oil is the most voluminously traded commodity worldwide. Any hindrance in the daily affairs of the Middle East and consequential dent to world oil prices will set economies of the world dependent on oil imports from the Middle East in frenzy. Currently, the once monopolistic Middle Eastern oil is being challenged by increased domestic oil production in countries such as the US, China and Russia. It is also being challenged by the arrival of new enhanced drilling technology that can drill oil, which was previously expensive and tough to drill. The growing utilisation of unconventional gas - i.e. shale is slowly increasing as well. Whether shale gas will be a successful energy substitute in the future or not is uncertain because the technology presently used to tap shale causes a multitude of environmental hazards. This is met by protests from environmental lobbyists due to the lack of a solid solution to prevent the harm done to the environment. There is also a considerable rise in investment in renewable energy sources such as off-shore wind power and nuclear energy by more and more governments around the globe. The presence of new, tech savvy players in the market has put the importance of the Middle East in uncertain territory. A part of the world will surely be dependent on oil imports from the Middle East, but the question is - how much?

Countries outside the Organisation for Economic Cooperation and Development (OECD) such as India have an all-time high demand for oil today and are heavily dependent on imports from the Middle East. With major economies such as the US, Russia and China investing more in drilling out their domestic reserves, they are going to fall back on supplies from the region significantly lesser than they have in the past. Among all the prolific consumers that the Middle East presently caters to, the US shows maximum promise of near-oil independence in the close future. This is going to leave huge surplus reserves for other consumers. With the US and the Middle East competing to serve world requirements, India is bound to be affected economically and more importantly - politically? Will China get an upper hand over the Middle East once American influence in the region gradually wanes? The quest for energy security is going to change dynamics very rapidly in international politics and countries must brace themselves for it.

In the race to alleviate competition from other emerging energy powers and recently exploited oil substitutes, the Middle East must find a way of diversifying its economy so that it has something to fall back on when oil demand falls lower. Several challenges lie ahead for regions that import oil due to the fear regarding the Middle East’s political stability and the simultaneous introduction of new drilling technologies.

The problem with the US is not the shortage of oil. It has significant domestic reserves itself and is also aiming to reduce its dependence on oil in general. However, the problem the US and many other oil producing countries outside the OPEC face is the inability to control the prices in the market since the region runs an upper hand in global prices. When such a large chunk of oil is administered by a few countries, it becomes a major challenge for other individual players to enter the market and make a difference to the business.

OPEC roughly satiates about 75 percent of the world’s energy need. According to current estimates, more than 81 percent of the world’s proven oil reserves are located in OPEC Member Countries, with the bulk of its reserves in the Middle East, amounting to 66 percent of the OPEC total. OPEC Member Countries have made significant additions to their oil reserves in recent years, for example, by adopting best practices in the industry, realising intensive explorations and enhancing recoveries. As a result, OPEC’s proven oil reserves currently stand at 1,200.83 billion barrels.

This trend of Asian nations demanding huge amounts of oil showcases an obvious parity between the producer nations and the consumer nations or the ‘have’s and the ‘have not’s. Overall, major producers as per today mainly compromise of Middle Eastern nations and the biggest markets for oil can be found in the Asian continent.

Rising economies such as China and India are developing so rapidly but do not have reserves to satiate their own needs completely. China still has a significant quantity of proven reserves to partly use for its own needs; however many Asian nations in boom such as India, Japan and South Korea are heavily dependent on foreign oil imports. Their economies are bound to be severely hit in case of any instability in the Middle East that leads to price hikes. However, Asian nations are not the sole oil importers. European markets in Belgium, Spain, Italy, and the Netherlands, etc are also engulfing vast quantities of oil. They are also diversifying widely into renewable sources of energy and may not be as severely hit as their Asian counterparts due to smaller demands and stronger economies.

The American Factor

President Barack Obama’s State of Union Address emphasised America’s goal of energy independence and steps he would take to cut red-tapism to catalyse growth in the sector while taking steps to prevent climate change.

The US has been re-shoring, i.e. bringing production back home. Energy rates in the US are cheaper than their European or Japanese counterparts. Gas prices in Europe are three times higher than their American counterparts. The EIA predicts that by 2035, they will still be thrice as high. American energy independence would hard hit economies that export significant amounts of oil to the US and derive a valuable percentage of Gross Domestic Product (GDP) out of it. Increased production of American industries coinciding with wage rates increasing in China, the US energy scenario seems la vie en roses.

The US under the Obama Administration has, in its pursuit of energy independence, introduced its ambitious Energy Agenda that also has in its purview Energy Security, both of which aim to reduce oil and gas prices by fuelling up domestic production, making vehicles more energy efficient and protecting the American consumers from price hikes. This plan has a set of policy approaches and targets which if followed religiously, should considerably bring down American energy imports in the near future. To the rising fear of oil producing countries that the US was previously heavily dependent on, Obama’s plan of energy efficiency and independence seems to be shaping well. Growing global demand and volatility in the political sphere lead to high prices. Over the course of 10 years, the trust will provide $2 billion in research dollars from federal oil and gas development revenue. Obama’s plan is elucidated below in further detail.

The graphs below demonstrate the success of the plan through increased production and reducing oil imports. This can be illustrated as:

The graph above shows the gradual increase in the domestic oil production. In 2012, production reached a 15 year high of producing 6.5 million barrels of crude oil per day. Data below is also empirical evidence that it is since the last few years that the US has kept up its continued efforts to reduce oil dependence.

The world is at an unprecedented threshold now. As shown by the graph above, oil dependence in the US will drop significantly. From importing 60 percent of the oil it utilises, these figures have dropped down by a whole 11 percent in 2010. Post-2010, the net imports of oil have been forecasted to remain fairly stable as the US struggles to keep dependence low to increase economic growth and reduce economic vulnerability. The graph depicted below shows steady decline of net imports by the US as domestic production increases.

According to data published by the White House, the US has continually been advocating oil independence in order to cut trade deficit, create jobs, increase national income, bring up standard of living, and expand development; not just solely for the purpose of national security strategy. In 2012, President Barack Obama upgraded the previous goal of cutting oil imports by one-third to cutting them down to one-half by 2020. Analysts say that the US is on track for achieving this highly ambitious goal, as depicted above, if it continues to strictly follow policies that will help achieve it.

The US aims to achieve this agenda through three steps. These are:

Increasing Domestic Production of Oil

The US government has been extensively funding research activities in the past to drill out oil, which was previously unfeasible or difficult to drill. Solutions arising from the research have now made it possible to accomplish targets and aided private companies with the introduction of new enhanced drilling technology. The result has been oil and gas boom - for over the past four years, domestic oil supply growth has accounted for over one-third of global oil production growth.

Total US crude oil imports have fallen to their lowest level in 12 years. According to 2012 statistics, imports from Nigeria, Venezuela and Mexico have dropped while there has been a rise in imports from Saudi Arabia and Canada. The US now imports oil from Canada through rail and therefore, imports have seen a 12 percent rise since 2010. A 10 percent rise was seen in oil imports from Saudi Arabia. This was the highest since 2008. Imports from Nigeria saw a direct 22 percent decline - the lowest since 2002. At the same time, total US imports fell about 3 percent or 0.3 million bbl/d to 8.9 million bbl/d. That marked the lowest annual level of crude oil imports for the United States since 1999.

If current estimates are to be believed, by 2020 the United States will surpass the oil production of the Middle East and it will gain energy independence by the year 2030. This is made possible due to alternative fuels, reduced demand and new drilling technologies.

Developing Substitutes for Oil

This includes almost doubling the production of bio-fuels since 2007 – to a near all-time high. It also aims for the substitution as a transportation fuel of oil with natural gas, production of which increased by 25 percent to an all-time high in 2012. The US has also diversified into utilising benefits of unconventional gas- shale.

The graph below shows the future of US’ energy mix. It shows a mere 1 percent dependence on oil and other liquids but a major dependence on coal, nuclear power, natural gas and renewable sources of energy.

Increase Energy Efficiency to Reduce the Use of Oil Overall

With a combination of the stronger fuel efficiency standards and investments in cutting edge technologies, the US currently has the most fuel efficient light-duty vehicle fleet ever. It is also working to increase the efficiency of the medium- and heavy-duty fleet as well.

The growing trend of reductions in oil imports implies that the US’s claim to energy independence is a fairly achievable goal. The graph below depicts America’s swiftly declining dependence on foreign oil. Net imports of foreign oil and petroleum fell to their lowest level in nearly 20 years. The US is now less reliant on oil imports than any time since 1993.

To achieve its recent policy of reduction on foreign oil imports, the White House has been doing its best to achieve targets suggested by analysts to develop into a ‘centre of the resurgence of domestic oil production’.

This is eventually going to lead to a situation where any fluctuation in world oil prices - big or small will not affect the economy of the US, and the Middle East will be left to fend for itself. The OPEC countries will not be able to tolerate low oil prices. This means that the US will not only be spending lesser on the oil it requires, but also only be spending upon primarily US based energy providers. Currently being the world’s largest importer of crude oil, if America eventually stops buying oil, oil prices of the world would considerably suffer. The worst hit would be the oil producing nations. Such a scenario will not occur overnight, however the possibility of a scenario like this emerging is scary to a lot of nations depending on the power play between these nations for a secure energy future.

There is a possibility that no Western nation in the future might be willing to or capable of taking care of the volatile region in the future. This definitely increases the possibility of Chinese incursions. In the past, we have seen how the British tried to control the region and soon exited in the aftermath of the World War II. American presence grew following the exit of the British. A continuous naval presence was maintained in the Strait of Hormuz to protect the oil transiting through the region. Occasionally ground forces were also deployed to protect the source countries.

Should the US decide to stop taking care of the region, the Gulf countries will be in a soup with no superpower to look after their daily troubles. Pressure from Iran will grow and none of the Gulf countries, leaving Saudi Arabia probably, have the necessary arrangements to tackle them. Regional powers may also try and dominate the region.

In this scenario, there is a high probability that China will step in to monitor activities in the region to make sure that its current high dependence on oil imports is secured. So far, Chinese oil imports were secured by the US military’s presence in the Gulf. With America’s growing oil independence, Washington may revise its foreign policy towards the Middle East which was so far, biased due to their dependence on energy. Today, China imports about 55 percent of its oil to satiate its need of 9.9 million barrels per day and smoothly run its energy efficient growth model.

A growing fear plagues the Chinese - the growing American energy independence. Few analysts believe that Washington’s declining dependence on the region will give it enough leverage to ‘disrupt’ the region in a way and consequentially damage Chinese interests. This could be through instigating regime changes in unfriendly countries. However, the US may also not want to risk it position as a dominant external power in such a resource rich region by pulling out since the Chinese will obviously seek to forge a stronger bond with Saudi Arabia in the future.

Almost 85 percent of the oil that passes through the Strait of Hormuz - the world’s most important oil chokepoint - is delivered to markets in Asia. Only about 10 percent of the oil transiting through Hormuz transits to the US. Even then, the US spends billions of dollars in policing the Middle East to keep oil prices in the world stable. As the world’s most important chokepoint, it is important to ensure that the strait is kept free of any obstructions from non-state actors.

A researcher at CNOOC, one of China’s big three national woil companies, echoed similar sentiments about America’s diminishing role in the Arab world:

“We understand that the United States’ presence and influence in the Middle East is a key factor behind that region’s stability, but China is the single greatest purchaser of Middle Eastern oil. The major reason that the United States is seeking energy self-sufficiency is its desire to reduce or even end imports of Middle Eastern oil.

...Nor do we wish to see the United States completely withdraw from the Middle East. We really don’t want to see the Americans ‘transform’ the Middle East or allow the region to fall into disorder once they are no longer reliant upon its petroleum. China has but little influence on the Middle East and even less power to control the region, but we need its oil, and we need a stable Middle East.

The discoveries of American shale gas, Canadian oil sand and Brazilian oil beneath salt beds have made the Americas into the ‘new Middle East’ of the 21st century. In the foreseeable future, it is entirely possible for North and South America to become energy self-sufficient. In other words, the Middle East will no longer be an indispensable source of oil to the United States.”

The other reason why Asia may play a bigger role in future energy politics is because if and when America does decide to pull out of the Middle East, tensions over the Middle East may exacerbate tensions amidst the dispute of the South China Sea since an unknown but suspected large quantity of potential oil and gas reserves might be left unexplored in the region.

With the US military called back, the strategically important chokepoints such as the Strait of Hormuz and the Malacca Strait that are presently kept relatively clean from pirates may face the fear of being plagued with heavy piracy. This may result into ships choosing to take longer routes around the Cape of Good Hope. This would mean an increased spending to deliver the same amount of oil. The problem is not limited to piracy. It extends to homegrown militant groups. The absence of the US military may encourage the proliferation of such groups as they may be more willing to thrive under the absence of foreign power. However, the Arab countries may also be more willing to deal with such militant groups with newfound sovereignty.

Some analysts are of the opinion that imports from the Persian Gulf will decline in the medium term due to an increase in the output of shale oil and reduced consumption rates. They believe that the shale oil surge will eventually fade away in the long run and contribution from the Middle East will rebound. However, statistics prove that even during the popularity phase of the shale oil and gas, the Middle East will remain among the US’ top 3 imports. Some believe that the Middle East is always going to have a stronghold over its markets in the long run.

Apart from US’ energy priorities in the region, the US is also interested in keeping Iran’s nuclear program under control. Iran so far has been claiming that it has been enriching uranium only to the potential that it can satisfy the purpose of nuclear energy. However as the world watches, suspicious of Iranian intentions, Iran might well be on its way to developing weapons grade uranium. To protect US’ staunch ally that lies in the Iranian neighbourhood - Israel, the US is sure to go out of its way to protect the state which itself has an official policy of ‘nuclear ambiguity’. The US’ relationship with Israel could also be the key factor for the continued US presence in the Middle East.

Go to Content Page

Author

Chaarvi Modi

The writer is a freelance writer associated with the School of Liberal Studies, Pandit Deendayal Petroleum University, Gandhinagar, Gujarat

  • +

    References

    1 Luft, G.; Korin Anne (15, 10 2013). The myth of U.S. energy dependence what we got wrong about OPEC’s oil embargo. Retrieved from http://www.foreignaffairs.com/articles/140172/gal-luft-and-anne-korin/the-myth-of-us-energy-dependence

    2 OPEC Share of World Crude Oil Reserves 2012

    3 Nearly 69% of u.s. crude oil imports originated from five countries in 2011. (27, 03 2012). Retrieved from http://www.eia.gov/todayinenergy/detail.cfm?id=5570

    4 Thompson, L. (03, 12 2012). What happens when America no longer needs Middle East oil? Retrieved from http://www.forbes.com/sites/lorenthompson/2012/12/03/what-happens-when-america-no-longer-needs-middle-east-oil/

    5 Reducing America’s dependence on foreign oil as a strategy to increase economic growth and reduce economic vulnerability. (n.d.). Retrieved from http://www.whitehouse.gov/blog/2013/08/29/reducing-america-s-dependence-foreign-oil-strategy-increase-economic-growth-and-redu

    6 Ma, D. (12, 07 2012). Dependence on Middle Eastern oil: Now it’s China’s problem, too. Retrieved from http://www.theatlantic.com/international/archive/2012/07/dependence-on-middle-eastern-oil-now-its-chinas-problem-too/259947/

Back to Top

Diplomatist Magazine was launched in October of 1996 as the signature magazine of L.B. Associates (Pvt) Ltd, a contract publishing house based in Noida, a satellite town of New Delhi, India, the National Capital.

Search