How energy markets in Arabia could impact the rest of the world

If the Suez Canal closes, oil supplies could be disrupted 
Abdul-Rahman discusses how global energy markets in the Arab world could impact other countries.

Workers in the oil industry are holding their breath for fear there will an interruption in oil supplies. The reason for this fear is the paramount importance of the countries in the Middle East and North Africa in supplying the world with energy. But is their concern justified?

There has been uncertainty in the region since the Arab Spring of 2011, which led to the destabilization and change in power of some established regimes. 

Many research centres have warned of the consequences of any possible interruption in oil supplies, especially since there are historical experiences of supply interruptions in the Arab region.

Each of these concerns will be dealt with in turn. 

1- The position of energy in the Middle East and North Africa compared to the rest of the world.

The latest available data, according to the annual statistical report by BP, indicates that proven oil reserves in the region in 2020 amounted to 816 billion barrels, of which Saudi Arabia accounts for about 20%. The region's production for the same year reached 29 million barrels per day, which is equivalent to more than a third of global production. An excess production capacity continues to be maintained mainly by three member states of the Gulf Cooperation Council (GCC), namely Saudi Arabia, Kuwait and the UAE, respectively. This has enabled these countries, and Saudi Arabia in particular, to be key players in the oil market in terms of Arabian heavy crude oil. The region can therefore fulfill any demands for oil in the event of any sudden interruption.

2-Security of oil supplies in the Middle East and North Africa

The dominant role of the region as a major player in the global oil market, due to  its oil and gas reserves, has made supply security a central issue for the energy policies of oil-importing countries. As well as their heavy dependence on this strategic resource, importing countries fear the occurrence of disturbances that may curb the safe flow of oil supplies. If oil supply is limited this could lead to a steady and significant rise in oil prices. We all remember the macroeconomic repercussions of the massive price shocks of the 1970s for the member countries of the Organization for Economic Cooperation and Development (OECD).  We do not want to have
that shock again.

Because of the fear of oil supply disruptions, whether unfounded or not, successive US administrations have aimed to prevent that. Many observers believe that one of the most important aspects of energy security is to limit the sudden interruption of supplies, especially for oil originating from the countries of the Middle East, which are historically known to be subject to unrest and turmoil.

US administrations, starting with President Nixon in the mid-70s, have pursued policies that reduce dependence on imported foreign oil, including Arab oil. They have encouraged a rationalization of consumption and a reliance on alternative energies such as renewables.

However, the security of oil supplies in the Middle East is not as bleak as the US makes out. This is in despite of the dramatic developments and events that the region has witnessed. For example, the Arab Gulf states, have always been keen to meet the market's supply requirements.

When talking about interruption and disruption in oil supplies, it is necessary to distinguish between the short-term and long-term effects of that interruption. One of the short-term effects is the direct loss of production and
its impact on prices. In the long-term, there could be loss of production capacity and a decline in exports.

If these disruptions are caused by terrorist acts there is likely to be a limited impact on the global oil supply - despite media coverage that suggests the contrary. However, disruption in supply due to international conflicts and civil wars will greatly affect oil supplies in the long run. 

As for unilateral economic sanctions, such as those imposed by the US on the Islamic Republic of Iran or the sanctions imposed by the EU on its oil imports from Syria, they will likely have a limited impact on oil supplies to the rest of the world. Countries subject to such sanctions can divert their crude oil to other geographical destinations.

3-The direct effects of the Arab uprisings on the oil markets

The global oil markets reacted fearfully to the "Arab Spring". The fall of the Mubarak regime in Egypt on February 11, 2011 created a state of uncertainty in the oil markets. There were fears that this would lead to the disruption of oil supplies that pass through the Suez-Mediterranean pipeline (SUMED) and the closure of the Suez Canal.

Although Egypt is a small oil producer, the presence of the Suez Canal, which connects the Red Sea and the Gulf of Suez to the Mediterranean Sea, means it has strategic importance. Therefore, it is an important link for the trade in crude oil and refined products.

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Tuesday, 06 June 2023