The Arab Awakening and the Pending Oil Pinch

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When U.S. President Barack Obama addressed the Muslim world from Cairo in 2009, he made a point of specifying that America sought to improve its relations with the Middle East. He proposed engaging a wide range of issues including security, education, economic development, and human rights. The president said, “...while America in the past has focused on oil and gas in this part of the world, we now seek a broader engagement.” His statements about democracy, justice, and the rule of law resonated most in the region. In reference to Iraq, Obama stated “no system of government can or should be imposed upon one nation by another.” He went on to elaborate,

That does not lessen my commitment, however, to governments that reflect the will of the people...I do have an unyielding belief that all people yearn for certain things: the ability to speak your mind and have a say in how you are governed; confidence in the rule of law and equal administration of justice; government that is transparent and doesn’t steal from the people; the freedom to live as you choose. Those are not just American ideas, they are human rights, and that is why we will support them everywhere.

In the immediate aftermath of the address, overall reaction to the speech was mixed. Arab commentators acknowledged the President’s sincerity in wanting to improve U.S. relations with the region. As Abderrahim Foukara of the Al Jazeera network noted, the youth in Egypt and across the Arab world had presented the U.S. with the opportunity to ride the region’s wave of “energy and enterprising spirit…despite all the bad vibes in the relationship…”

The post-September 11 world provides numerous benefits for engaging the younger generation in the Middle East. Anti-Americanism can breed violent extremism that is clearly a danger to the U.S. and its regional allies. As the Arab Awakening now demonstrates, President Obama accurately described the desires of many young people across the Arab world. The political turmoil kindled by Mohamed Bouazizi’s self-immolation stemmed from a deep frustration felt by the large population of young adults regarding high unemployment, a lack of personal freedom and human rights, corruption, a lack of government accountability, and dissatisfaction with the economy. These social and governance concerns plague the largest oil-producing nations of the Middle East. These issues may potentially threaten the oil supply that President Obama said would not be the primary focus of American foreign policy. As growing political and social demands among Persian Gulf populations begin to embody the values Obama espoused, the U.S. needs to reevaluate its energy policy and public diplomacy in the Arab world.

The Arab Awakening, though considered positive in some ways, might turn out to be adverse to America’s oil interests. As the Arab Awakening swept across the Middle East in the spring of 2011, the impact on oil prices was almost instantaneous. The sudden outbreak of large-scale anti-government protests in Egypt was the first event to rock global oil markets, as spot oil prices increased nearly 5 percent in a matter of days due to fears that oil traffic through Egypt’s Suez Canal would be curtailed. The announcement that Iran was sending naval ships through the Suez Canal pushed UK Brent prices even higher, to more than $104 per barrel. While the Canal was never closed, pending oil exploration deals were put on hold. Egyptian natural gas operations were disrupted by an explosion at the Arab Gas Pipeline, which led to a month-long suspension of natural gas exports to Jordan, Syria, Lebanon, and Israel. No sooner had the market adjusted to the news from Egypt when civil war in Libya forced the evacuation of foreign oil operators, reducing Libya’s oil output of 1.65 million barrels per day (b/d) by up to 75 percent. Meanwhile, European sanctions on Syria have also reduced Syrian oil exports from 130,000 b/d to almost zero. In Yemen, political volatility has resulted in frequent disruptions in oil output and pipeline capacity since July 2011, and a worsening of hostilities could impact output even further. Overall, oil prices rose from $92 per barrel in January 2011 prior to the unrest in Tunisia to $120 per barrel by April after violence erupted in Libya.

Oil prices stabilized over the summer of 2011 to around $100 per barrel as the global economic downturn slowed demand. Wealthy Persian Gulf nations calmed market fears, quieting their own restive populations with massive financial payoffs including increased subsidies and welfare payments in Oman, infrastructure spending and pension hikes in the UAE, and an announced $130 billion in public spending measures in Saudi Arabia. Nevertheless, the long-term impact on oil production and the political changes that are likely to sweep across the Middle East in the coming years remain to be seen. Patterns of prolonged decline in oil output that have historically followed abrupt political change suggest that if political transformation in the Middle East continues, then oil prices will increase. Furthermore, increased popular influence over economic policy could thwart the massive investments needed to meet oil field capacity in the Persian Gulf in order to ensure the growing global demand for oil can be met in the coming years as the global economy begins to grow again.

The U.S. will need to develop new strategies to address the long-term impact the Arab Awakening may bring to America’s oil supply. democracy, or at least more representative governance, can alter the implicit oil-for-security exchange that has characterized U.S.-Arab Gulf relations for several decades. Khair El din Haseeb notes, 

Transformation of these regimes into democratic ones which incorporate the participation of their peoples in primary decision-making processes will preclude their national security from remaining at the mercy of the United States...The Arab peoples will demand “just” prices for their vital oil and gas resources, commensurate with the price increases of various goods in the West. They will not permit their regimes to continue to sell oil at current prices.

It will certainly create new complications for U.S. diplomacy in the region. Democracy could spawn resource nationalism that could in turn block foreign direct investment in the oil sector or even government spending on oil infrastructure. A government’s survival in a democracy depends on strong popular support; while some countries are quick to accept these changes, even traditional monarchies may be forced to broaden political participation within their borders and widen the distribution of economic benefits and patronage. Government oil revenues may increasingly be siphoned away from the oil sector to social welfare programs and other politically important, high priority public spending needs. This redirection of revenue may leave the national oil industry with insufficient funds for investment in future oil production capacity. This pattern of social spending has already significantly affected oil production capacity in Mexico and Venezuela. Oil production in Venezuela has fallen from 3.5 million b/d when Hugo Chavez came to power in 1998 to 2.2 million b/d today. Mexico’s oil production has dropped from 3.9 million b/d in 2004 to 2.98 million b/d in 2010. In addition, resource nationalism has virtually stopped investment in oil and gas reserves in Bolivia.

In his May 19, 2011 speech, President Obama criticized Bahrain for the incarceration of opposition members and the destruction of Shiite mosques. These and other statements put the U.S. at odds with the Saudi leadership, which was quick to point out that U.S. missteps in the Middle East would leave the kingdom no choice but to forge a more independent foreign policy more conducive to its own interests. Huda al-Husseini, in a commentary for the Saudi controlled newspaper Asharq al-Awsat, drew parallels to the U.S.-supported NATO intervention in Libya, and emphasized that the Gulf Cooperation Council (GCC) intervention in Bahrain was needed to preserve strategic interests and restore international economic security. Shiite unrest in Bahrain threatened to destabilize local stock exchanges. This unrest posed a risk to Saudi Arabia, whose oil fields are situated in its Eastern Province, which is populated by a large proportion of the kingdom’s sizeable Shiite minority. If Saudi Arabia experiences increasing problems in quelling the limited Shiite protests in its Eastern Province, the diplomatic and economic challenges for the U.S. vis-à-vis its oil-producing ally could become exceedingly large. If violence in the Eastern Province expands, the U.S. will be hard pressed to choose between its commitment to political reform and human rights in the Middle East and its strategic interests in seeing the oil production in the Eastern Province flow safely. In the event of an oil crisis, President Obama may have to reevaluate his position that U.S. relations with the Middle East are not centered on oil. The U.S. could face difficulty in communicating its democratic values with regards to the Arab Awakening in light of its long-term strategic interests. Will the U.S. only demonstrate its support for freedom and human rights for Sunni Arabs, but ignore the situation of Shiites whose call for greater political participation is inconvenient to U.S. energy security? What if greater political participation across the Middle East increasingly comes at odds with U.S. requirements for imported oil? What will America’s long-term response be to these challenges?

We argue that as the Arab Awakening unfolds, it is likely to present even larger challenges for global energy security, with important policy implications for oil importing nations like the U.S. The U.S. may need to adjust its national energy strategy to reduce its vulnerability to changes or instability in Middle East oil production capability and long-term investment trends. The U.S. administration’s decision to release 30 million barrels of oil from the U.S. Strategic Petroleum Reserve last summer and to strengthen the dialogue about emergency procedures within the International Energy Agency (IEA) membership is an important first step in addressing this challenge. The U.S. should now build on that momentum within the IEA with added contingency planning for a possible larger oil crisis that might require larger releases of oil from strategic stocks and more extensive national conservation efforts. The administration should also embrace a stronger domestic effort to implement demand reduction strategies that can minimize America’s vulnerability to oil price fluctuations precipitated by the events of the Arab Awakening and consider requirements for minimum gasoline inventory levels to be held by American refiners, in line with policies already in place in Europe and Japan.

Published in The Whitehead Journal of Diplomacy and International Relations.