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    Energy Security in the Age of Middle Eastern Revolutions

    An absolute monarch of the world’s most gas-rich country has given the West the best advice in the era of Middle East revolutions. The Emir of Qatar warned Europe not to stand with ‘hydrocarbon dictatorships’ for their economic interests.

    The sound of gunfire in the Middle East continues. We still don’t know how the chaos in Libya will be resolved, nor which, if any, other regimes will topple. But it is time to be thinking strategically about what the Year of Revolutions means for world energy security.

    The picture is not gloomy: Indeed, these events might be the best news for twenty years. But consumers have a key role to play in assuring their own supplies – and they have to learn new strategies beyond the bankrupt ploy of arming friendly dictators.
    First, we need to distinguish between short-term and long-term energy security. The short-term risks concern over the physical security of wells, facilities and pipelines; the evacuation of foreign operators from dangerous areas; and strikes and embargoes.

    Oil industries are surprisingly robust. Algerian production continued virtually uninterrupted through the 1990s, despite a vicious civil war that killed 100,000 people. Iraq managed broadly to sustain output thorough the worst years of violence. And despite the most thorough of scorched-earth campaigns in Kuwait after the 1990-1991 Iraqi invasion, production rebounded remarkably quickly. In the last full year before the war, Kuwait pumped 1.4 million barrels per day (bpd); by 1993, the country reached almost 2 million bpd.

    In Libya, there were earlier reports that the Zueitina refinery was on fire, and that pro-Gaddafi forces were attacking the inland Sarir, Nafoora and Mislah oil-fields. Still, major direct damage may be avoided since 80 percent of production comes from the opposition-held east. Recovery depends on how prolonged the struggle is, and whether there is any post-Gaddafi conflict. In a long civil war, oil revenues will be crucial to determining the victors. With Qatar’s help, the revolutionaries are now resuming oil exports, while denying funding to Gaddafi’s regime.

    Of course, executing significant new projects in a country is almost impossible in a situation of pervasive insecurity. And that is the crucial point: The key to recovery in the oil sector in Libya or similar situations is less any short-term damage, and more what happens afterwards, the speed and magnitude of repair and new investment. The dismal state of the industry in Iran and Iraq is due more to sanctions and their own mismanagement, than to the damage they inflicted on each other during their 1980-1988 war.

    Interruptions such as that in Libya will happen inevitably in an uncertain world, where energy supplies can be periodically hampered by a host of incidents from Gulf of Mexico hurricanes, unrest in Nigeria, Somali pirates or Yemeni saboteurs, to Venezuelan strikes and Russia-Ukrainian gas disputes.

    Fortunately, this time, oil inventories are high and Saudi Arabia has spare capacity, which it is making available to cover for lost Libyan output. The UAE and Kuwait have also signalled their readiness to assist. Otherwise, policies developed since the 1970s, including strategic stocks, improved efficiency and a greater diversity of fuels and suppliers, can ameliorate short-term disruptions. But the plans of thirty years ago, built around the International Energy Agency, still take too little account of the emerging giants, China and India. They need to be brought into the system, to avoid dangerous, zero-sum competition at times of crisis.

    A prolonged oil supply shock, caused by disruptions in Libya and another major exporter such as Algeria or even Saudi Arabia, is unlikely. If past history is any guide, such an event would strengthen the hands of ‘resource nationalists’ around the world. We could expect to see another wave of tax increases, nationalizations, and advances in the power of National Oil Companies (NOCs) – both those that hold resources themselves, and those, like the Chinese, who are empowered by their governments to ‘secure’ resources, futile though that strategy is.

    At the same time, pressure for new unconventional and frontier oil production, greater efficiency, and alternatives to oil such as gas substitution, biofuels and electric vehicles, would intensify. In the end, that will undercut the resource nationalists and oil oligopolists, but it might be a long and painful road for the world economy – a kind of rerun of the 1970s, with improved technology, and hopefully more tasteful fashion.

    In the longer term, global energy security depends on the type of governments that emerge in the Middle East and North Africa. There may be more revolutions and regime change in the region, or events may stop at Libya. But no state is going to be left unchanged by the 2011 upheavals, as all the anciens régimes are forced to choose from a muddled menu of political and economic liberalization, crude populism and handouts, and intensified repression.

    For the energy sector, this will influence the choices that are made on a wide range of issues. Will the country adhere to its OPEC quotas, cheat, or push for higher allocations? How much will be invested in oil and gas production, and will the role of foreign oil companies grow or shrink? Will domestic energy subsidies be increased, reformed or reduced? Most urgently for the less oil-rich states, how will they go about building sustainable, diversified economies? Will nuclear power be acceptable in an atmosphere of higher geopolitical risk, and given Japan’s Fukushima accident? And what about alternative energy, which requires security and a good investment climate even more than fossil fuels?

    There are two kinds of energy-rich autocratic regimes: Those which are primarily concerned with their own survival, the enrichment of an elite and perhaps some ideological goals, such as Burma, Turkmenistan, Equatorial Guinea, Iran, Saddam Hussein’s Iraq, and Gaddafi’s Libya; and those paternalistic states which genuinely try to spread at least some of the economic benefits amongst the population, such as the UAE, Kuwait, Qatar, Oman and Brunei. We need to recognise that engagement with these two types of regimes is very different, practically and morally. Even more problematic are states such as Saudi Arabia, Algeria and Kazakhstan, which fall in the grey zone between these two categories.

    Development-oriented autocracies can be good for energy security when they manage the industry decisively, and make judicious use of foreign investment. Qatar and Abu Dhabi are the best examples – Qatar has become the world’s largest exporter of liquefied natural gas with the help of ExxonMobil. Oman and Egypt have done well in sustaining oil and gas output despite limited resources.

    But ‘sovereign wealth funds’, intended to save excess earnings for future generations, are vulnerable to being raided by profligate governments, as in Iran and Venezuela, or used as vehicles of the ruling dynasty’s private enrichment and deal-making, as Seif Al Gaddafi did with the Libyan Investment Authority. And recent events seem to show that oil-funded autocracies are only stable when they have small populations and vast energy wealth.

    Weak regimes, especially the semi-democratic ones, pose several threats to long-term energy security. Politicised decision-making and paralysis have led to stagnation in the petroleum sectors of Kuwait, Iran and Iraq. The citizens of such countries may not benefit from the oil wealth, or, as in Russia, Egypt and Tunisia, the benefits of liberalization may go to a small coterie of oligarchs or crony capitalists. This is fertile ground for populist demagogues who starve the energy sector of funds and expel foreign companies, à la Hugo Chavez.

    In the worst cases, as in Nigeria, Iraq and perhaps post-revolutionary Libya, with numerous tribes, sects and factions and easy access to weapons, squabbles over oil revenues degenerate into political deadlock and even armed struggle.

    Conversely, weak governments with dilapidated energy sectors, heavy budget deficits and a need to raise funds to create jobs, have a big incentive to increase production quickly. Iraq may now be moving into this phase. Expansionary policies pose a threat to OPEC unity and a boost to consumers – albeit probably a short-term one, as Venezuela showed in the 1990s.

    Energy subsidies stoke rampant energy consumption in the Gulf, which leads to Saudi Arabia burning more than one million bpd of crude oil for power in the summer months, makes some of the world’s largest reserve holders net importers of gas, and gives the region the world’s worst carbon footprint. Though Iran surprisingly cut subsidies in December, this largesse, also covering food, will be retained or increased, even when, as in Jordan, Syria and Morocco, it is not really affordable. In the longer term, very careful subsidy cuts will have to involve targeted protection for vulnerable groups. Fully democratic, legitimate regimes have the best chance of managing this tricky balancing act.

    Packages of freebies, such as Kuwait’s gift of $3580 per family, Bahrain’s of $3000, and King Abdullah bin Abdul Aziz’s interest-free loans, debt forgiveness and pay rises, perpetuate the rentier state mentality. Conditioning local people to look to the state as provider, rather than equipping them with the attitudes and skills to succeed in the modern economy, only exacerbate joblessness.

    With Saudi youth unemployment running at 43 percent, it is obvious that neither piecemeal reforms, nor repeating the failed policy of the past with larger cheques, will succeed. Further investment in the oil sector and related industries such as gas and petrochemicals, is very profitable but does not generate many jobs.

    A radically different approach is needed. New regimes need to be assisted in finding free-market solutions to using their energy wealth productively. It means investing in basic infrastructure: Power, water, public transport, which has mostly been done well in the Gulf; less well in Egypt, Libya, Iraq and Yemen.

    But it also means radical improvements in government efficiency and real economic reform, taking on monopolies and corruption, and so often offending the powerful. It means renewing education for the modern world. And it means privatization, encouraging entrepreneurship and creating a diverse mix of small and medium enterprises. This is a difficult policy course to steer: Too often, as in Egypt, privatization has been associated with corruption, lay-offs and poor conditions for employees. This association has to be broken, perhaps by offering ordinary people shares in former state enterprises – though avoiding the chaotic ‘voucher privatisations’ of 1990s Russia.

    As one Saudi, Fahad Aldhafeeri, tweeted, “We want rights, not gifts.” Oxford University Economics Professor Paul Collier has proposed giving each citizen a ‘direct dividend’ of oil revenues, compelling governments to justify and account for their budgets. Financial support for private sector employment of the national population is another option for the Gulf economies, heavily reliant on foreign labor. Whatever the system, the key is to combine economic efficiency with social justice.

    Oil revenues must not be allowed to entrench a new generation of autocrats or corrupt elites. Through the Extractive Industries Transparency Initiative, Norway and others have worked intensively to improve oil sector governance in new oil states including Iraqi Kurdistan, Timor Leste, Ghana and Uganda. The same is needed in countries rising from the ashes of dictatorship, notably Libya.

    The emerging consumers, notably China and India, need to have their place, but this must not lead to a race to the bottom in standards of ethics and human rights. Instead, a broad range of actors needs to be involved in building a transparent, democratic oil order in the post-revolutionary Middle East, to defuse the inevitable accusations of neo-colonialism. Resource-rich, well-governed non-western countries such as South Africa, Malaysia and Chile could be useful interlocutors.

    In the longer term, the EU in particular needs to encourage economic growth and diversification, as it did in post-1989 Eastern Europe. For a now inward-looking continent laden with debt and unemployment, this may be challenging. But Europe needs to open up to trade with North Africa, in products other than hydrocarbons. Turkey, repeatedly shunned by the EU, could be a valuable bridge, and presents an Islamic version of Germany’s ‘Mittelstand’ of small and medium-sized, often family-run businesses.

    Though currently heresy in European policy circles, why should not EU membership be open to North African countries? Tunisia has per capita income levels not much lower than Romania and Bulgaria, and would be much more digestible than Turkey. Libya’s oil, if well-managed, would make it richer than several EU members. Within a couple of decades, Europeans might well be fleeing their ageing, indebted, stagnant economies for booming countries on the Mediterranean’s sunny southern shore.

    The best bet, then, for global energy security, is to promote democracy, the emergence of stable, pluralist, accountable political systems and dynamic, relatively free economies. This is not a call for interventionism – but neither are the energy-consuming countries obliged passively to watch new regimes emerge. Such multifaceted engagement avoids the charges of hypocrisy and self-interest levelled at past oil deals with regimes such as Gaddafi’s. It is also the only way to ensure real stability and energy security for Europe and the world, a stability not enforced by the secret policeman’s gun.

    Robin MILLS
    INEGMA
    11.04.2011

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