The Gulf’s still risky future

Wednesday the Middle East Program at the Wilson Center hosted The Gulf, Iran, and Future Oil Geopolitics, featuring David Goldwyn, President of Goldwyn Global Strategies; Douglas Hengel, Senior Resident Fellow at the German Marshall Fund; Elizabeth Rosenberg, Senior Fellow and Director of the Energy, Economics, and Security Program at the Center for New American Security; and Jean-Francois Seznec, Non-Resident Senior Fellow and Director at the Atlantic Council’s Global Energy Center. Jan Kalicki, Global Fellow at the Wilson Center and Senior Fellow at the Watson Institute for International and Public Affairs at Brown University, moderated the discussion.

Rosenberg discussed how lifting most sanctions on Iran has influenced Iranian politics. While the economy has opened up considerably since January, there are still many obstacles to doing international business in Iran. The prohibition on doing business with the Iranian Revolutionary Guard Corps (IRGC) leaves much of the economy untouchable by foreign investors. Many of the remaining sanctions are secondary, which requires Iranian companies to cut ties to groups like the IRGC that control 20-60% of the Iranian economy.

Iran is currently producing 3.5-3.8 million barrels per day and exporting 2 million. Iran could get up to 4 million per day. Beyond that, Iran would have to make substantial infrastructure investments. Several international oil companies have signed exploratory contracts, but there are still a lot of unknowns. With Iran upping the ante in  Syria and around the region, the future of the broader Middle East is in question.

Goldwyn said that Iraqi oil production had recently reached 1.8 million barrels per day, its highest level ever. This is Iraq’s peak. It will not even be able to maintain this level. Iraq suffers chronic problems:

1. the government is weak and unable to make plans or execute them;
2. failure to resolve ethnic and sectarian conflicts opened the door to the Islamic State (ISIS) and maybe worse in the future;
3. the government is spending a huge portion of its budget on the war effort: $33 billion between 2009 and 2014.

The Iraqi army’s progress in retaking Fallujah is promising, but Fallujah has been liberated many times—each time escalating ethnic tensions to still higher levels.

Iraq will barely be able to maintain production in the coming months. The Iraqi government is spending all of its diminished oil revenue on its military, and low oil prices have limited the government’s ability to function on a basic level—let alone invest in infrastructure to boost oil production. Iraq’s near future looks grim.

Seznec commented on how Saudi Arabia’s deputy Crown Prince Mohammed bin Salman is transforming his country in dramatic ways. His new “Vision 2030” intends to wean Saudi Arabia off oil dependence and diversify its economy. Saudi Arabia intends to maintain its current production of 10.2 million barrels per day, while growing its private sector. To accomplish this, King Salman bin Abdulaziz Al Saud appointed Khalid al-Falih as minister of the newly revamped Ministry of Energy, Industry, and Mineral Resources.

A major component of “Vision 2030” is selling 5 percent of the government’s shares in Aramco. Aramco is currently valued at 2 trillion dollars, so this will likely be the biggest IPO (initial public offering) in history. Part of Mohammed bin Salman’s plan is to revolutionize the workforce. By 2030, the government hopes that women will fill 45 percent of public and private sector positions. There are big changes on the way for the Kingdom, and we will have to wait and see what else the young deputy crown prince has in store for us.

Hengel addressed major factors that will affect all the countries discussed. His bottom line is that dependence on the Gulf will continue. The natural decline in current production means that continued investment in existing oil fields and new discoveries are essential. Hengel predicts that the United States and the world will continue to be dependent on OPEC. There is much uncertainty about the future of consumption. Many countries have started shifting towards electric vehicles and are moving away from their dependence on oil. But the United States continues to lead in consumption with the lion’s share, 10%, of global consumption. Gulf oil supplies are likely to remain important for the foreseeable future.