It’s 1973 Again: A Resurgent Middle East

To say that this has been a good year for the Middle East would be an understatement. If just 10 years ago, you had predicted that out of all regions in the world, the Gulf states would be resurgent in the midst of two unprecedented global crises, people would have thought you were joking. Saudi Arabia and other Gulf states were seen as petrostates struggling to diversify and become relevant in a world turning to green energy. But after a confluence of poor decisions in the West and the Russia-Ukraine War, rich US-aligned petrostates in the Middle East have proven that they are more powerful than ever and are set to become even more powerful in the future. 

Anyone who thought that oil would be declining because of lower oil demand from the green energy transition has been proven wrong. Mostly because Western countries have stalled any serious climate action (look at the vague agreements made at the COP27 summit), oil-producing Gulf countries continue to exert power over us. Partially because the meager energy transition programs put into place have been counterproductive, Gulf countries have only strengthened their leverage. Tom Friedman of the New York Times explains that counterproductive “green virtue signaling” took the form of investors “delaying or stopping investment in new oil and gas production [in the United States]” and instead extracting “as much profit as they could from existing wells.” This meant that while we kept polluting, we didn’t create the extra capacity needed to rely less on the Middle East. As a Goldman Sachs newsletter put it, without expanding production, we lost the daily equivalent of Saudi Arabia’s oil production and Qatar’s gas production domestically.

With more strength than ever in the global oil market, Saudi Arabia has been able to raise gas prices to reap rapidly proliferating profits post-2020. Since the war in Ukraine and the supply shock related to Russian oil sanctions, the price of a barrel of crude oil has jumped to over $100, peaking at $130 in March 2022. Yes, the price of a barrel of crude oil has subsequently declined by 30% and is at $80 currently, but Saudi Arabia has used an Organization of Petroleum Exporting Countries (OPEC+) production cut to try to restore the $100 price. That happened on October 5th, when the Saudi-led OPEC+ announced a cut of 2 million barrels or 2% of global production. 

These high oil prices will actually lead to a harder energy transition rather than an easier one. Yes, high oil prices force consumers to seek greener, cheaper alternatives. But high prices spur drilling for new sites, especially among nationally owned oil companies (like those of almost all Gulf states), which leads to a larger supply that eventually lowers the price of oil and further entrenches oil producers and the rest of the world on oil-based development. Additionally, volatile high oil prices make it hard for investors to plan green energy investment and can kill some investments. This means that Gulf states are indirectly perpetuating dependence on their oil supplies into the future with strong oil prices right now by stifling investment into green energy projects. 

This does not even take into account OPEC members’ strategies which deliberately seek to keep the world hooked on Middle Eastern oil and that have gained steam over the last few years. Saudi Arabia has donated $2.5 billion to American higher education and funded over 500 studies on keeping gas cars competitive or raising doubts about electric vehicles. The Saudis have also partnered with lobbying groups that have an interest in sustaining oil markets that use corn-based ethanol. In total, Saudi Arabia has spent $140 million on trying to influence American policy and public opinion. By weaponizing green energy projects to lower domestic consumption of oil in an attempt to export even more oil to the rest of the world, Saudi Arabia hopes to successfully increase its sale of oil overseas to a higher proportion than ever before. 

What does all of this mean? It means that Saudi Crown Prince Mohammed bin Salman is in more of a position than ever to have a Western leader like President Biden kiss his ring and then not make good on a promise. That’s exactly what he did when he led OPEC+ in curtailing oil production after Biden visited him in July with the goal of having Saudi Arabia increase its production in response to the Russia-Ukraine War. It means that Saudi GDP grew by 7.6% this year, one of the highest rates in the world. It also means that the power of Middle Eastern oil producers is bound to only increase in the coming years, so we can expect similar diplomatic snubs from emboldened Gulf states in the future. With renewed geopolitical clout from strength over the world oil market, Gulf countries, which have long been dominated by the US and other foreign influences, will be even less responsive to doing what foreign powers want them to do. The next time Saudi Arabia launches a brutal war, as it did in Yemen, or murders an American journalist on foreign soil, don’t expect that it will even attempt to apologize or cover it up to appease the US.