Is the Middle East only about oil?

Increasing energy demand in the East, decreasing energy demand in the West, and North America’s shale energy revolution have sparked debates regarding the future of OPEC and US-Arab relations.  But focusing on energy risks neglect of non-energy dimensions.  This week’s National Council on Arab Relations discussion hosted by the international law firm Wilkie Farr & Gallagher LLP discussed the myths and realities surrounding US-Arab energy relations. Paul Sullivan of NDU, former Shell President John Hofmeister and former Associate Deputy Secretary of Energy Randa Fahmy Hudome pariticipated.  The discussion focused on the following questions:

1.  Will increasing domestic energy supply cause the the US to disengage from the Middle East, jeopardize US-Arab relations and reduce American influence in the region?

Shale oil and gas have significantly boosted US prospects for attaining energy self-dependence. Projections suggest the US will become a net oil exporter by 2030.  Natural gas will replace oil as the country’s main fuel.  BP goes so far as to declare the US will become 99% energy self-sufficient by 2030. With this increased supply the US has reduced its oil and gas imports from every Arab country except Saudi Arabia and Qatar.

Despite the reduced imports, Middle Eastern stability and protection of the energy resources there remain a US priority. Because the oil market is a global one, the US still has an interest in continuing its role as protector of the choke points, sea-lanes of communication and stability needed to secure world access to Middle Eastern energy resources.

Paul Sullivan emphasized the importance of “virtual energy.” China imports 90% of its oil  from the Middle East.  A disruption in that flow would affect the price and access to imported Chinese goods. Any US import from China (or India, or Japan, or South Korea, or Europe for that matter) is a “virtual” import from the Middle East. Reduced dependence on Middle East energy imports will not end the strategic importance of the Middle East or strong relations with the Arabs for the US.

2.  Is there more to the US-Arab relationship than oil?

The energy dimension represents only one aspect of US-Arab relations. The US and Arab nations cooperate in the defense, military, intelligence sectors, on cyber security and financial markets. If strengthened, these aspects could ensure the survival of strong US-Arab relations despite the decreased relevance of the energy relationship.

Fahmy Hudome noted that OPEC too has begun to invest heavily in renewables. Saudi Arabia plans on generating a third of its electricity from solar energy by 2030, and has formed a joint venture with the US SolarReserve to pursue this goal. The UAE is investing in nuclear energy and signed the 123 Agreement with the US. Fahmy Hudome suggested policymakers view the relationship between the US and the Middle East as cooperative, not adversarial.

3.With the evolution of natural gas as a transport fuel, will OPEC lose its relevance in the energy market?

John Hofmeister was adamant that OPEC’s price-setting days are numbered. He argued that reduced US dependence on oil imports and China’s unilateral approach to energy security through cash-for-oil undermines the cartel.  Natural gas will replace oil as a cheaper, more available alternative. Liquid natural gas could increase train and freight mobility in the US and compressed natural gas could fuel the trucking industry.  Natural gas can also be converted into methanol, a cheaper, more-efficient alternative to ethanol. With natural gas’s comparative practicality and affordability there is no question the cartel will lose relevance, Hofmeister argued.

Hudome was less convinced.  She rejects the idea that the shift in global energy demand and supply represents a zero-sum game between the US and the Middle East. The US and its Arab partners can both gain from the rise of natural gas and renewables.  She argued world energy supply and demand projections base themselves on difficult to predict variables: shale oil, the rise of renewable energy, and the future regulatory environment in the US.  All these factors will influence OPEC’s future role in the global energy market.