US energy security and the Middle East

06 September 2002

As the hawkish calls in Washington for another Gulf war become louder, the question of energy security - always close to this administration's heart - is coming into sharp relief. Shifts in the balance of oil production from the pattern of the past decade, combined with the threat of major regional upheaval, have presented the US with a number of challenges and opportunities that will directly affect the Middle East. President Bush has long made his position clear: the US needs to diversify the kinds of energy it uses and increase the number and geographical locations of its suppliers.

In 2001, the Gulf accounted for crude oil imports of nearly 2.7 million barrels a day (b/d), representing some 30 per cent of all US crude oil imports and almost 20 per cent of total refinery throughput in the US. For some in the US, the figures imply a dangerous level of dependence on a small number of producers in a volatile and distant part of the world. Things do not improve in the future. Rather, the Energy Department forecasts an increase in oil exports to some two-thirds of what will be a far greater figure of total consumption by 2020.

The national energy plan, drawn up by the Bush administration within months of taking office, puts the issue in stark terms: 'On our present course, America 20 years from now will import nearly two of every three barrels of oil - a condition of dependency on foreign powers that do not always have America's interests at heart.'

The classic reference is the Arab oil embargo of 1973 that pushed oil prices through the roof and left an indelible impression on the US of the political might of oil. However, the oil market today is very different from that which was so sorely shaken three decades ago. The creation of the Paris-based International Energy Agency as a counterpoint to OPEC allowed oil consumers to stabilise the market by developing reliable figures on global supply and demand and creating strategic reserves of oil to cushion the blow of unforeseen shortages in supply.

OPEC would now be hard pushed to carry out an embargo with success, and would damage itself more than its intended targets in the process. Producers know this, and the more responsible ones are adamant that oil cannot be used in that way again, and that market stability must remain the shared goal of producers and consumers alike.

Moreover, the steady rise in non-OPEC and non-Middle East production has diminished the strong market position of the organisation. The rapid rise in Russian oil production over the past two years in particular has provided another stream of energy to world markets that is filling most of the new global demand, further compromising OPEC's market share. West African producers too, have raised their production in recent years, with the bulk of activity being conducted by US majors using new technology that allows exploitation of once inaccessible offshore fields.

While the Middle East remains - and will remain - the focus of world hydrocarbons production, the emergence of other producers means that consumers can bypass short-term cut-offs afflicting usual supply sources. For the US, this has been reflected in attempts to establish good relations with non-Middle East producers. The efforts have borne fruit through a programme undertaken with Canada and Mexico to increase energy trade between the countries, and the establishment of a new export terminal for the US at the north Russian port of Murmansk.

In political terms, the new oil import options have given hawks an opportunity to discount arguments that centre on energy stability. They say that the US can rely well enough on Western hemisphere and West African oil, giving Washington a freer hand to pursue a Middle East policy now constrained by oil concerns. They argue further that the successful overthrow of Iraqi President Saddam Hussein and his replacement with a friendlier regime would lead swiftly to the resurgence of Iraqi oil supply - with production capacity first pushed up to its historical high-point of 3.5 million b/d, and then up to levels closer to 6 million b/d, depending on the new Baghdad government's relations with OPEC and how quickly sanctions were lifted.

However, this outcome is unlikely: 'It will take a great deal more time and money than is now forecast for Iraq to get to be a world-class exporter on the scale of Saudi Arabia and Russia,' says Ed Morse, executive adviser at the US' Hess Energy Trading, and senior Energy Department official under the last administration. 'If and as it does expand significantly, it will do so far more through co-operation with other producers than through a sharply poised battle for market share.'

A corollary prize for the US if the hawks' plans came right would be in Baghdad's need for private sector help in increasing its exports - with large US majors best placed to step in along with long-term allies Russia and France. Such developments could allow the US to come closer to Iraq and distance itself from Saudi Arabia during a period when a lot of criticism has been levelled at the kingdom.

'To some extent, the way the Saudi Arabian government became more assertive over the past year, especially in the Middle East peace process, pushed the administration to deal with Israel in a way it would have been otherwise reluctant to do,' says Morse. 'I think the administration realises there is now an opportunity to deal with one long-term problem, which is its policy dependence on the preferences of Riyadh.'

While the argument has become part of the post-Saddam scenario envisaged by the hawks, they are equally clear on the dangers of inaction. Vice-president Dick Cheney, in a speech made on 26 August arguing for military action, warned that: 'Armed with an arsenal of weapons of terror and a seat atop 10 per cent of the world's oil reserves, Saddam Hussein could then be expected to seek domination of the entire Middle East, take control of a great portion of the world's energy supplies, directly threaten America's friends throughout the region, and subject the United States or any other nation to nuclear blackmail.'

What will happen to the oil price in the event of an attack on Iraq is not clear cut. OPEC members have repeatedly said they will cover any loss of Iraqi crude to the market, and have proved over the past two years that they can adequately manage to do so. Those who point to the dramatic increase in prices at the start of the 1990-91 Gulf war would do well to consider Iraq's lower position in the world of oil. Then, some 5 million b/d were lost due to the combined sanction of Iraqi and Kuwaiti exports; now, Iraqi exports are less than 1 million b/d.

While the US has many short-term options available to offset a fall in Gulf output, and the longer-term strategies to shift the focus of energy dependence from Saudi Arabia to other producers, Washington is well aware that Saudi Arabia remains its most natural energy ally.

Angus McDowall

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