The US Is Turning Its Back On MENA by Rabih Cassis
Rabih Cassis is a marketing professional with an insatiable desire to discover and share fascinating and intriguing facts. He currently divides his time between managing, marketing and exploring around the net, studying Jazz, and running several other projects. Rabih is also the Asia Executive Officer of Fischer, Myers and Associates.
The USA Is Turning Its Back On The Middle East. This is Why. Analysts and politicians alike, from Beirut to Riyadh, Tehran and Cairo are shouting foul to the recent American foreign policy in the Middle East for being unfocused, harmful and “dishonest.” However, taking into account the progressive decline in the political and economic importance of the MENA region (Middle East and North Africa), this policy change was all but unexpected. This policy change is most obvious when it comes to Syria, where the US remains skittish about engaging in a conflict that is drawing in almost every other regional player, Especially long time American allies like Saudi Arabia, Qatar and Turkey. And headlines are rolling, accusing American policy makers of hypocrisy and strategic blundering and foul play. Saudi Arabia, for instance, is certainly feeling a sinking bitterness and betrayal with the renewed dialogue with Iran and the 5+1 group deal about Iran’s Nuclear capacities. These diplomatic changes already reflect a very different Middle East than the one most politicians are all so familiar with. The explanation is simple: Oil. Middle Eastern oil is no longer as attractive as it was to be on the wake of the global conflict during the Cold War and the two decades that followed. At that time, the world was addicted to the region’s black gold and world economy was its hostage. The results of the shale oil revolution is set to make America the world’s biggest oil producer by 2015, and the United States’ shift towards oil reserves in the Western Hemisphere are major factors in the decline of Middle East oil fortunes. Even China has set a 5-year plan to produce 60-100 billion cubic meters of shale gas by 2020. Paul D. Miller, a former National Security Agency specialist noted that “peak oil production in the Middle East is either soon approaching or already behind us”. In fact, although oil production in the Middle East has reached levels unseen in two decades, the IMF recently warned Arab oil producers that they will face deficits by 2016. A convergence of developments—such as rising prices, production costs, declining reserves, and the availability of alternative fuel options and unconventional sources of oil—will decisively undermine the defining role of the Middle East in the global energy market. Further complicating matters is the continued instability of the region, which drives up the price of oil and makes alternatives more attractive. Saudi rulers is clearly worried. Prince Alwaleed bin Talal published an open letter to the Kingdom’s government last spring warning that revenues from oil form over 90% of the Saudi state budget, and the consequences of producing below capacity could be devastating. The strategic importance of the Middle East stems from its comparative advantage in producing oil, a commodity vital to the modern world economy. This comparative advantage is based on two main factors. First, Middle Eastern oil is the cheapest in the world to produce thanks to the geology of the terrain. Middle Eastern oil lies under flat desert, not under an ocean or a rugged terrain. Five years ago, producing a barrel of oil cost between $6 and $28 in the Middle East and North Africa, compared to up to $39 elsewhere in the world and up to $113 per barrel of oil shale. Second, most Middle Eastern oil is a superior product. The chemical properties of Middle Eastern “light sweet” crude oil make it easier and cheaper to refine than the “heavy” crude of Venezuela and Russia for example. These two factors—the Middle East’s comparative advantage in oil production and the world economy’s need for oil to power transport—made the modern Middle East what it is today. The region would not be as strategically important otherwise. This comparative advantage translates into global power and influence because of the modern world economy’s high demand for oil. But the Middle East’s comparative advantage in oil production is eroding. It will always produce a superior product, but the other factors comprising its advantage are disappearing. First, production costs are doomed to rise. Oil is so cheap in the region because it is easy to get out of the ground. But Middle Eastern crude will become more costly to produce. Some fields in the Middle East have been producing continuously for eighty years and are rapidly maturing. Saudi Arabia in particular has a high percentage of mature or maturing oil fields. Thirteen of the twenty largest oil fields in the world are located in the Middle East, and they all entered production between 1928 and 1968. As a field passes its peak, it becomes more difficult and costly to extract its oil. Production costs in the Middle East inevitably will rise in coming years; that is as certain as the laws of geology and economics.The overall picture is gloomy: when unconventional methods of oil development are taken into account, including development of heavy oil, shale oil and oil sands, the Middle East suddenly becomes a minor player. There may be as many as 7.9 trillion barrels of potentially recoverable oil left in the world from all sources, according to the IEA, with more than 90 percent of it outside the Middle East. The Middle East dominates the currently proven, conventional and commercially viable reserves, but these reserves account for less than 10 percent of the total oil in the world. Once unconventional methods become commercially competitive, the Middle East will be dwarfed by Canada, the United States and Venezuela. And the discussion about the world will reaching “peak oil,” really means the peaking of cheap Middle Eastern oil. And that means the Middle East’s comparative advantage is evaporating at lightning speed. As the price of oil rises, producers elsewhere in the world will be able to invest in larger operations and benefit from the economies of scale that Middle Eastern producers have always had. And as demand, production costs and prices rise, Middle Eastern producers will be competing with the rest of the world in a much tighter market. Result: Middle Eastern oil producers will lose the implicit discount on risk they gain from dominating the current world oil market. They will, in fact, be dispensable. Since after the WWII, the United States sought to prevent any major power from dominating the Middle East’s oil supplies. To that end, the United States supported anticommunist monarchies and autocracies in Saudi Arabia, Kuwait and Bahrain, among others. It has armed Saudi Arabia to the teeth, supported Iraq against Iran in the 1980s before fighting Iraq to defend Kuwait and Saudi Arabia in 1990–1991. And in 2000, added Kuwait, Bahrain and Morocco to its collection of major non-NATO allies, which includes Egypt, Israel and Jordan. Those policies were largely undertaken to maintain the security of world energy supplies. However, they make less sense in light of the present realities in the world oil market. Though it will take time to play out fully, the lacking advantage of the Middler East oil interests are eroding. The Middle East will remain an important player, but it will no longer be able to act as the “central bank of oil.” That is because oil itself will be less important, and the world oil market will be more diffuse and diverse. It might even be the slow-motion collapse of the Middle Eastern oil empire. Without the ability to use oil as a diplomatic weapon, there is very little that Gulf countries can do. The Russians and Chinese, on the other hand, wield far more economic and diplomatic influence over not only the United States but its European allies as well. For the time being, the primary belligerents in this conflict are of Middle Eastern origins and America would prefer to keep the conflagration localized. While longtime allies like the Saudis find it surprising that America remains so uncommitted to the pressing issues of the MENA region , America has every reason to abstain. The focus will shift towards more promising and threatening areas of the world, such as East Asia.
