9- Energy and Resources Series: The GCC Diplomatic Crisis and its Effects on the International Energy Market



The ports for exporting oil in the Arabian Gulf (aka Persian Gulf)
(southfront.org)

This is a special edition in English of my article. All my articles are usually in Arabic as I believe in enhancing the Arabic content on the internet, but due to the importance of this topic discussed in this article I decided to write it in English as well to reach to larger audience.

for Arabic version please click here

In this article we will avoid discussing the political issue behind the crisis in the relationship among Gulf Cooperation Council (GCC) countries; we would rather focus on its effects on the energy market and its international stability.

Before we start analyzing the situation I would like to address one political concern, which is, would the issue escalate from diplomatic issue to military actions? The simple and direct answer is that this is very unlikely. The answer is based on many important points summarized in the following:

·       Any issue that is linked in the Arabian Gulf (aka Persian Gulf) could lead to direct sharp increase in the energy prices in the international market which will affect large countries that receive their secure energy supply from this region

·       There is around 17 m bbl/d of oil passing through the Arabian Gulf which is about 35% of the world export of oil through sea and 20% of the total world export

·       Qatar by it self is supplying the world LNG market with about 32% from this region

·       The Arabian Gulf is a very active route for international trade of many goods that are supplied by large countries depending on strong economies and high demand with healthy purchasing power of the countries in the region

·       Most of the ports are located west of Qatar borders which means any distraction in their sea borders could lead to chaos in these countries import and export including Saudi, Kuwait, Bahrain, Iraq; the only alternative routes will be through Iranian water (check the map)

·       Except for UAE their port for export is located East of Qatari borders which means they avoid passing by Qatari borders the need to pass through Iranian or Omani water (for oil they have another route that will be discussed later)

Taking into account all the above any military action in the region will make mega military powers to interfere in order to secure the energy supply continuity. Countries like Japan, South Korea, France, India, Germany, China, UK, and other EU and Asian countries are highly dependent on this region for the security of their energy and will not tolerate any threat for this strategic relationship.

Who can avoid Hormuz Strait incase of larger crisis that leads into closure?

·        Saudi Arabia can continue to export around 1.6 m bbl/day from its port that is located in the Red Sea; this account for about 20% of its total export in a normal day. This is too low to sustain a large economy. Although the pipeline is exporting around 5 m bbl/day from its East province to its West province, most of the oil is burned to be utilized for electricity production. Adding another pipeline will not be cost effective and will take long time.

·         UAE has built in 2012 a pipeline from Abu Dhabi to Al Fujairah in which they can export more than 2 m bbl/day of oil which accounts for about 80% of their total export on a normal day. So they can avoid going through Iran and Oman and can have direct contact with the world making any escalation in the region having limited effect on their export.

·         Iran control all the sea routes connecting its ports to the world; nevertheless, in case of instability it could be a great challenge to move in and out of the Arabian Gulf securely

On another hand, we find that UAE is importing about one third of its gas by Dolphin Energy project which is located in Qatar and the pipe is crossing through the Qatari waters. The company is 51% owned by Mubadala from UAE, 49% International oil companies with no Qatari shares in this company at all. Any disruption in the region could lead to the disruption of this supply; which will lead to a difficult situation for UAE that cannot be resolved promptly. With shortage of gas the prices worldwide will shoot up and supplier might be reluctant to increase their supply on the short run as uncertainty of the market will increase as well.

In regard to the closure of the Saudi borders with Qatar; we need to remember that Qatar is a peninsula with 95% of its borders being sea borders. Qatar also owns on of the world largest carrier Qatar Airways. If we compare Qatar with isolated countries in the mid of the ocean we will find that the chances of survival are much higher for Qatar that is located geographically in a circle that within 7 hours of flight time you can reach 70% of the world countries. Most of the goods arriving Qatar are coming through they sea as well. Therefore, the closure of the borders from Saudi side is just purely overrated. The only time closing the borders is effective; is when we have a landlocked poor country with limited alternative options.

In conclusion, any military distraction in the Arabian Gulf will lead to further escalation and probably to World War III. That’s why we found that all the world leading politicians were calling the situation to be de-escalated and resolved by diplomatic solution. We believe that all indications shows that the situation could be contained diplomatically to keep the world supply of energy in the secure side. We all hope that the issue will be resolved in a diplomatic way as any further escalation is not going to serve anyone in this region.

Witten by:

Yousef M. Al-Jaber

Specialized in Energy and Resources