Tag: Gulf states
Trump’s Middle East: no one really knows
Tuesday night’s election result was shocking for many. Though Clinton’s policy in the Middle East seemed predictable, President-elect Trump’s Middle East policy is a mystery.
To begin to unpack this mystery, the Washington Institute for New East policy convened a panel this morning of Middle East scholars and international journalists to discuss what they expect to see from a President Trump. The panel featured Dennis Ross, a fellow at the Washington Institute, Norman Ornstein, a fellow at the American Enterprise Institute, Jamal Khashoggi, a Saudi journalist and the editor-in-chief of the Al-Arab News Channel, David Horovitz, founding editor of the Times of Israel, and Jumana Ghunaimat, editor-in-chief of the Jordanian newspaper Al-Ghad.
Khashoggi said Saudis were caught off guard by the election, as they were expecting a Clinton presidency. Due to Hillary Clinton’s long track record, they felt they knew what to expect and were ready for what was to come. Saudis are worried about Trump’s support for Justice Against Sponsors of Terrorism Act (JASTA), though they are encouraged by his hard stance on Iran. They are also worried that Trump’s closeness with Putin and softening towards Assad will result in a Syria that is unfriendly to Saudi Arabia.
On Jordan, Ghunaimat said relations between the US and Jordan will likely stay the same. Jordan is a relatively stable and important ally in the region, and nothing Trump has said or done so far indicates that relationship will be in jeopardy.
Horovitz said most Israelis believed that Trump would be best for Israel, but they nevertheless wanted Clinton to win the election. Though they perceived Trump as having more empathy for Israel than Clinton and likely to take Israel’s concerns seriously, Clinton has a long pro-Israel track record. They know they could depend on Clinton to look after Israeli interests whereas Trump is more of a wild card. Israelis are still hopeful that their relationship with President Trump will be better than their relationship with Obama.
Ornstein focused more on the effect that President Trump would have domestically and the factors that led to his election. He blamed the inaccuracy of the polls on the “Bradley effect”—that is, many people were embarrassed to report that they were voting for Trump. The complaints of the white working class are valid and were unaddressed by Washington. This in combination with Clinton’s unpopularity among Democrats led to his election. Ornstein forsees Trump depending on others to make vital decisions, so whom he appoints will be decisive.
Dennis Ross said we know that Trump wants to get rid of ISIS and to improve our relationship with Russia. But defeating ISIS requires the trust of Sunni militias. This trust cannot be cemented in the face of a Putin-Assad-Trump friendship it would guarantee Shiite strength. Trump needs to approach his relationship with Putin—and, by extension, Assad—very carefully and be sure to enforce consequences when necessary. Aside from this, Ross encouraged humility in the face of Trump’s presidency—we cannot presume to know what he will choose to do, since there is simply not enough information available.
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Hopes for a Kingdom reformed
The National Council on US-Arab Relations held its annual conference this Wednesday and Thursday in Washington DC. The conference focused primarily on the changing dynamics between the US and its Gulf allies, particularly Saudi Arabia.
A morning panel on Thursday titled “Strategic Dynamics in Perspective: Looking Closer at Saudi Arabia Vision 2030” picked apart the implications of Saudi Arabia’s planned redesign. The panel featured Ambassador James Smith, former US ambassador to Saudi Arabia, Seema Khan, former Chief Strategy Officer and Senior Advisor for the Saudi Arabian General Investment Authority, Julie Monaco, Global Head of Public Sector Group, Corporate and Investment Banking, Institutional Clients Group and Citi, and Newton Howard, Professor of Computational Neuroscience and Neurosurgery, University of Oxford and Director of the Synthetic Intelligence Lab, Massachusetts Institute of Technology (MIT).
Saudi Vision 2030 is a blueprint for moving Saudi Arabia away from total reliance on oil sales. By 2030, Saudi Arabia plans to attract more foreign investment, diversify its economy away from hydrocarbon exports, develop essential service sectors such as health, education and tourism, and to develop the private sector. The result will hopefully be a more sustainable and successful Saudi Arabia in the face of declining oil prices.
Smith opened the panel by identifying four things to be optimistic about when looking at Saudi Vision 2030 and four things to be concerned about. His four points of optimism were:
- The program builds on over 10 years of investment and commits 26% of the national budget.
- It was planned entirely by young Saudis, who have the biggest stake in the country’s future.
- Saudi Vision 2030 has garnered commitment from the highest levels of government and everyone is holding each other accountable.
- Putting Prince Salman in charge of the project, who is barely 30 years old, emphasizes the importance of young, educated Saudis to the country’s progress.
The concerns were these:
- There is a cultural aversion to risk and failure in Saudi Arabia, which means that innovation isn’t highly valued and new technologies are often brought in from the outside.
- There is also an aversion to letting small, new businesses take root in Saudi Arabia since they have a higher propensity for failure compared to well established international businesses.
- There is a lack of viable policy changes that would attract investment into the country.
- There is no regional organization charged with making the Gulf competitive in the global economy—it is organizations like these that have led to the growth in East Asia.
Khan said that by pursuing Saudi Vision 2030 Saudi Arabia is finally making itself fully accessible to the world. This is incredibly important because the Kingdom is widely misunderstood. One of the key features of Saudi Vision is that is ensures better communication between Saudi Arabia and its allies. This could potentially lead to more effective goal sharing and coordination in the region. Aside from greater accessibility, the plan will result in Saudi Arabia boasting a more innovation-based economy rather than one based solely on investment.
Monaco expressed great optimism for the project, due to the practicality of the plan and the abundance of political will behind it. One potential cause for concern is that Saudi Arabia may not be able to divert enough funding to the project over the next 14 years. They will need to increase taxes, cut budgets, and increase domestic bond insurance in order to ensure long-term funding. They need to maintain a good credit profile as well if they wish to enter foreign debt markets. The Kingdom needs to commit to good governance to ensure that the project is successful.
Howard emphasized that Saudi Vision needs to managed effectively from the top. He said that the government needs to focus on innovation and make good use of the infrastructure that they already have. The government also needs to start working on looking past the beliefs and ethnicities of their personnel and instead focus on their qualifications—doing so will bring Saudi Arabia into the modern age.
For somewhat less sanguine views of Vision 2030 and its implementation prospects, see the last two speakers at this recent Middle East Institute/Johns Hopkins School of Advanced Studies event:
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US strategy in the Middle East
The Center for American Progress held a discussion earlier today about the challenges, trends and setbacks of US strategy in the Middle East. The event began with US army commander for CENTCOM, General Joseph Votel, and broke out into a panel featuring Derek Chollet, a Counselor and Senior Advisor for Security and Defense Policy for The German Marshall Fund of the United States, Brian Katulis, a Senior Fellow at the Center for American Progress, Linda Robinson, a Senior International Policy Analyst at the RAND Corporation, and Michael Singh, the Lane-Swig Senior Fellow and Managing Director at the Washington Institute for Near East Policy.
General Votel listed three major areas of focus for the US strategy in the Middle East:
- Listen to what our partners in the region have to say.
- Reinforce and cultivate relationships with our regional allies.
- Maintain excellent communication with our partners.
With Iranian behavior becoming increasingly aggressive and destabilizing, we must reassure our allies that we will not abandon them. This, however, does not mean that we should cut off communication with Iran. In fact, communication with Iran should be maintained so we can better control our interactions with them.
In terms of fighting ISIS, particularly in light of the ongoing operation in Mosul, General Votel recommends that we maintain momentum and pressure on the group on all fronts. Elimination of ISIS is the ultimate goal for the US military right now. Fortunately, our military coalition campaigns have largely been successful. However, these campaigns need to go hand-in-hand with humanitarian and political solutions. They will be difficult to achieve, but they are absolutely necessary for lasting stability.
The panelists were invited to provide their insight on US strategy in the Middle East. They focused primarily on a report recently published by the CAP Middle East team. Katulis said the Middle East is still incredibly vital to the US, but our goals there cannot be accomplished alone. The new administration needs to increase trust with our traditional partners such as Israel, Jordan, Saudi Arabia and others. However, this should not be an unquestioning embrace of friendship, but rather it should be a friendship of increased communication and goal-sharing.
Robinson echoed this sentiment, but she also brought up that the US needs to bring its attention to non-state partners as well, such as the Syrian Kurds. She emphasized the importance of not relying too heavily on military solutions, but also integrating political and social solutions into the larger operational framework. Most importantly, the US needs to devise a reliable system of local policing for recently liberated areas. A lack of reliable policing is an “Achilles heel.” Perhaps the US and its allies need to formulate an international police force to provide interim policing services.
Chollet noted the US is perpetually in crisis management mode in the Middle East, which might not be in our best interests. The US and its partners do not necessarily share the same goals, so our cooperation with these actors needs to be examined closely. The next president should to step away from defining her/himself by what he/she accomplishes in the Middle East and concentrate on other issues.
Singh highlighted that the US strategy in the Middle East has often been solution-oriented when perhaps it should not be. Our goals should not be focused on solving conflicts or creating governments, but rather providing support when needed. The US shouldn’t “fix” the Middle East, rather it should simply ensure that things don’t get worse and that our allies have back up if they need it. The region, he argued, has a lot of potential if provided with the right support. If we work carefully and patiently with our regional friends, the Middle East could begin to thrive.
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War, not oil prices, challenge the Gulf
Last Tuesday the Middle East Policy Council held their 85th Capitol Hill Conference on “Economic Reform and Political Risk in the Gulf Cooperation Council (GCC).” Speakers were Aasim M. Husain, IMF deputy director of the Middle East and Central Asia; Ford M. Fraker, president of the Middle East Policy Center and former US ambassador to Saudi Arabia; Edward Burton, CEO and president of the US-Saudi Arabian Business Council; and Karen E. Young, senior resident scholar at the Arab Gulf States Institute. Richard Schmierer moderated.
Husain presented data on how different countries of the GCC are adapting to cheaper oil. Prior to the dramatic decline in oil prices in mid-2014, Gulf governments had been raising their spending by expanding energy subsidies, increasing government payrolls, and raising wages. Non-oil sectors were growing at an average of 7 percent throughout the GCC. When oil prices suddenly dropped from $110/barrel to $40/barrel in mid-2014, a GCC average 10% budgetary surplus turned into a 9% deficit overnight. Spending, which had been increasing by an average of 8-10% since 2011, is expected to contract by over 10% in coming years.
Most Gulf states are cutting back their capital spending by starting fewer new projects and slowing and canceling current ones. Many are raising subsidized energy prices—ending the longstanding policy in some countries of providing essentially free energy to their citizens. Some GCC members are also considering a value added tax. Even with these reforms, in the next five years we can continue to expect deficits of 7-10% of GDP. It’s a grim picture, even before you consider how cuts in spending will impact economic growth.
Over the next five years, 2 million youth will enter the workforce across the GCC. Husain predicts that 2/3 of those will find jobs. That optimistic figure relies on the necessity of non-oil sector growth in next five years generating more jobs than in the past.
Fraker emphasized just how dramatic recent changes in Saudi policy have been. He identified the main goals of Vision 2030—diversifying the Saudi economy and eliminating government inefficiency—and added that the biggest change brought about in the months since Salman bin Abdulaziz Al Saud’s assumption of the throne has not been any particular economic policy, but rather an “unprecedented” opening of Saudi government.
Decision-making had always happened behind closed doors without transparency or outside input. The rise to prominence of the Deputy Crown Prince Mohammad bin Salman changed that. He has opened government, for example by putting all government ministers on stage for unprecedented public questioning. Fraker wants the US to welcome these changes. Washington has a strategic interest in a stable Saudi Arabia and should therefore support its allies politically and economically.
Burton elaborated on business opportunities for American investors. Saudi Arabia is the third biggest spender on military equipment in the world. Mohammed bin Salman’s goal to divert 50% of Saudi military spending to domestic contractors would create major opportunities for job-rich growth. Burton also foresees healthcare as a potential growth sector. Saudi Arabia suffers from high rates of obesity, diabetes, and other health challenges. The Kingdom is the Middle East’s largest information and communications technologies market, particularly with its growing youth population.
Young analyzed GCC strategies and policies to make ends meet. Across the region, there has been a dramatic rise in bond issues. In the short term, there is no problem. Gulf countries are not heavily indebted and currently have access to the capital they need. Continued reliance on credit for the next five years could get dicey. This oil crisis is different from the 1970s crises. Over the course of the 2003-2014 oil boom, the Gulf invested in building lasting institutions, which enabled Kuwait and the UAE to adapt to the drop in oil price. The GCC is also much more integrated into the MENA region than it was previously. Egypt and Lebanon are dependent on Gulf foreign direct investment. Jordan and Morocco rely on foreign aid from the GCC to balance their budgets.
All the panelists managed to neglect the economic and political ramifications of GCC involvement in two regional conflicts. Husain talked about massive cuts in capital and social spending to ease the sting of deficits, but ignored the continued climb in Saudi defense spending since 2011, starting with Saudi involvement in funding and training opposition fighters in Syria.
Saudi Arabia will be running up against its biggest planned budget deficit in 2016, despite the slight uptick in oil prices and domestic fiscal reforms. GCC members are heavily involved in proxy wars in Syria and Yemen, so military spending is continuing to rise at an alarming rate. In 2016, Saudi Arabia surpassed Russia as the third biggest military spender, spending $87.2 billion. Qatar and the UAE have also increased their military spending while drastically cutting other spending.
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Continued dependence on Gulf oil
Doug Hengel, formerly at the State Department and now at the German Marshall Fund (and also teaching at SAIS), allowed me to republish his excellent notes for his talk at Woodrow Wilson last week, already posted here:
There is a great deal of uncertainty in oil markets at the moment. The big questions, beyond when the market will rebalance, include:
- Are we in the midst of another boom and bust cycle in the oil market or are there structural changes that define a new paradigm? Has U.S. tight oil changed market dynamics forever?
- Has the Saudi/Iranian rivalry evolved to the point where geopolitics now dominates Riyadh’s approach to oil? Are the Saudis using oil as a weapon?
- Is the Saudi 2030 Vision OPEC’s “obituary notice” as some have declared? Will the Saudis continue to invest in oil or are they pumping all out now due to concerns that oil demand is going away?
- Are we in a “lower for longer” scenario for oil prices? Or have the large cuts in investment by oil companies in the past couple years simply planted the seeds for the next price spike?
As we think about these questions, and more importantly what the future of oil geopolitics might look like, it is helpful to ground ourselves with a few facts. It is important to remember:
- The countries of the Persian Gulf account for almost 1/3 of global oil production and hold roughly 50% of proven oil reserves. They generally have the lowest cost oil to produce.
- About 17 million barrels a day (mbd) of crude oil and refined products move through the Strait of Hormuz, only a small fraction of which could get to market via alternative routes if the strait was blocked.
- Oil fields have a natural decline rate averaging 3-6 percent a year, much higher for U.S. tight oil. This means that every year investment in existing or new fields is needed to bring to market about 4 mbd of additional oil just to keep global production at current levels (not including any increase in demand). Those 4 mbd are equivalent to the total surge in U.S. tight oil production over the 2011-14 period. It also means we need to add the equivalent of a new Saudi Arabia to the market every 3 years.
By one estimate, global upstream project cancellations could create a 4 mbd ‘‘hole” in global oil supplies by 2020. Estimates of production in Brazil, Canada, Mexico and elsewhere in coming years have been revised downwards. There is growing concern that the large reduction in investment by the international and national oil companies will lock in the world’s reliance on OPEC, and in particular on the lower-cost supplies from the Persian Gulf, for decades. The International Energy Agency (IEA) and the U.S. Energy Information Administration (EIA) have pointed to this risk in their most recent global energy outlooks.
Are there structural issues that might mitigate against greater reliance on OPEC and the Persian Gulf? Two are often cited – the U.S. tight oil boom and climate change.
U.S. TIGHT OIL: While U.S. tight oil production jumped by an average 1 mbd per year from 2011 through 2014, over the past year U.S. tight oil production is down about 1 mbd. In the meantime U.S. gasoline consumption has increased sharply and is expected to hit a record in 2016. So U.S. oil imports are growing again. Last year U.S. net crude oil imports dropped to only a quarter of U.S. consumption, the lowest level since 1970. This year it looks like we will need to import one-third of our oil. Some believe that with prices of $50 or more per barrel there could be a renewed surge of U.S. production this year adding perhaps as much as 1 mbd to U.S. output by the end of the year. But that is a very optimistic scenario. And after that? There is no doubt U.S. production could resume an upward climb with higher prices, but almost certainly not enough to offset reduced output elsewhere in the world.
CLIMATE: All scenarios that would reduce carbon emissions enough to keep global warming to 2 degrees or less require a huge shift away from petroleum for transportation. Both Statoil and the IEA have modeled what very aggressive introduction of electric vehicles (EVs) might do to oil demand, in the case of Statoil’s “renewal” scenario new car sales would be 90 percent EVs or hybrids by 2040. Even with such an enormous change in how light duty vehicles are powered global oil demand would still be in the range of 75-80 mbd by 2040 — as much as 20 mbd below today’s consumption but still requiring very large investments to compensate for the decline of existing fields. Supply could well decline much faster than demand.
So what does this all mean for the U.S. and the world?
- We are not in a new paradigm. Oil is not going away and the world’s dependence on the Persian Gulf for global supplies is very likely to increase going forward. Therefore the U.S. will need to play an active role in the region to ensure the oil keeps flowing, including protection of sea lanes.
- U.S. “energy independence” remains a chimera even if we were self-sufficient in oil, which is very unlikely to happen in any case.
- OPEC is not dead. Notwithstanding the Saudi/Iranian rivalry, they are likely to be able to and want to work together to influence the oil market once markets are more in balance. Recent statements by the new Saudi oil minister indicate they will continue to invest heavily in maintaining their production capacity.
- We need to keep our eye on the ball regarding constraining oil demand – continued progress on more efficient vehicles, facilitating the move to EVs, to natural gas for trucking, etc.
- Innovation is essential (e.g., autonomous vehicles), ideally in cooperation with international partners.
- We should continue to encourage and assist new and non-OPEC oil producers seeking to boost their output, in particular Mexico and emerging suppliers in Africa.
- We should not be treating our Strategic Petroleum Reserve as a piggy bank – selling off oil to meet other budgetary requirements. We may need the SPR to cushion a supply disruption, U.S. tight oil is not a substitute. At the same time we should continue to promote cooperation by China and India with the IEA on a coordinated response to an oil supply disruption given their increasing importance to the market (and since they are building their own strategic reserves).
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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:
- the government is weak and unable to make plans or execute them;
- failure to resolve ethnic and sectarian conflicts opened the door to the Islamic State (ISIS) and maybe worse in the future;
- 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.
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