OIL AND ENERGY: A CATALYST FOR DIPLOMACY
- Written by Vlad-Adrian Iancu
Remember the play dates we had as children? Funny, little games which we thought were about social skills or abilities, turned out to be maps of who we were going to be as adults. The quiet kid, the loud spoken one, the aggressive, and the assertive and so on; everyone got a seat at the table and played the game as best they could, according to their particularities. It was never about a game, it was about the stakes. As stakes got higher, alliances were made and compromise led to fruitful relationships. Or to total disasters when we couldn’t get what we wished for. But it was understandable because we were just kids, right? Ramp this scenario up to modern days and you’ll find the players to be world superpowers. The stakes have risen considerably: oil and energy are ultimately about survival. The difference here is that in this current scenario no one player can walk away with the pot as the sole winner. As no man is an island, no nation will be able to come on top if they don’t play well with others. Big or small, countries and companies will have to shake hands in order to maximize their chance of achieving economic success.
Speaking about joining forces, the EDA (Emirates Diplomatic Academy) and OIES (Oxford Institute for Energy Studies) have come together to share some insight in their ‘Global Trends in Oil and Energy: Implications for the GCC and Foreign Policy Responses’. The structural trends were presented and discussed by Doctor Bassam Fattouh and the workshop participants, with a few valuable conclusions coming up. Remember to take this with a grain of salt, as these statements are not the official standing of the United Arab Emirates (UAE) Government or the EDA.
Among the major talking points which are supposed to shape at least the next 20 years, we could list the shift of oil demand away from the OECD, the continuing role of US shale oil as a versatile resource, friction in the OPEC and relations to Russia and how the changes in policy regarding climate and technology could influence oil demand.
As explained in the research, there might be some implications for GCC (Gulf Cooperation Council) oil exporting companies. These may vary from expanding ties with Asia beyond the economic sphere and competition between OPEC allies, to changing views regarding global oil demand scenarios for oil exporters. The bottom line would be that the foreign policy of GCC countries will influence the management of changing consumer-producer relations and producer-producer relations all for the purpose of maximizing chances of economic success. Apart from regional cooperation, the propositions were centred on strengthening ties and links with Asia, US and Russia whether it would be economically, strategically or on the basis of fighting extremism.
It seems that the main route for GCC states will be diversification in order to no longer be dependent on oil exports. The three main factors, as proposed by the Insight, will be a shift of energy demand to Asia, a plenitude of exportable oil and the uncertainty linked to technological advancements. As far as demand is concerned, the non-OECD countries will take the lead, with China and India as flag bearers. This makes a lot of sense, seeing as the demand is fuelled by middle class expansion, a trait that Asia is presenting in spades. Furthermore, as explained by the report, Asia is experiencing the ‘golden period of motorization’.
Another point to consider would be the OBOR (One Belt One Road) policy which will link China to the rest of Asia and Europe and will surely have a major say in the energy flow. This will also be impacted by China’s trade policies, leading the relations between it and the GCC to be more geostrategic. India will most likely replicate the same producer-consumer dynamic.
Another important player is the US, emerging on the market as the new kid on the block since its ‘shale revolution’ which skyrocketed the production of crude oil and natural gas liquids. Profitability will be increased by efficiency gains and further developments in technology, not to mention the short investment cycle which helped dub it as ‘agile’. This of course will change the flow of oil trade. As the US decreases imports and starts exporting, countries from Africa and Latin America are left without a piece of their market; Russia expands its exports to Asia and so, the once controlling Gulf producers are faced with serious competition. But the shadow that the US is casting could reach much farther. It is envisioned that it will become a net exporter of oil and gas by 2020 or 2030, having reached that status already in regards to natural gas. This of course could shake things up dramatically in that the GCC countries may not present the same geostrategic importance for the US as they once did. The relations between the two will not only be influenced by possible future policy shifts but also by the increasing competition between oil suppliers in Asia. Also, let’s not forget that US involvement is also the main guarantee for security in the Gulf area.
The domino effect means that the frozen OPEC production levels could be a thing of the past. 2017 looks quite uncertain as increasing production capacity is at the forefront of plans for nations like UAE and Kuwait, not to mention Iran and Iraq. In a market balancing act, OPEC and Russia relations should continue to go forward, as both entities are forced to increase production. Seeing as the world’s view on resources has changed from insufficiency to abundance, the discussion shifts towards the most profitable choice. Low cost producers and nations that provide a stable environment for investments will certainly take the lead. This sounds like the Middle East. The only obstacles could be instability in state institutions. A peak for oil demand is envisioned to happen somewhere between the 2020s and 2040s but this may very well be dependent on the speed of implementing domestic policy responses and technological breakthroughs. Germany and China stand as examples of public acceptability of certain energy technologies with developments in nuclear energy and coal powered electricity respectively.
Foreign policy and diplomacy will be quintessential in and out of the OPEC. The options would be attracting more Asian investors in the upstream sector and as stake holders in GCC energy industry and conversely acquiring downstream assets in Asian countries. An example of shifting the relation from economic to strategic would be the UAE-Indian agreement on oil storage or the UAE-South Korean nuclear energy deal. As the US moves from ally to competitor, the relationship should be mostly based on fighting terrorism, leaving the energy factor out of the discussion.
In what pertains to economy, the way to victory seems to be mapped out by the Insight as follows: International producers and multi stakeholder partnerships should be struck in order to support alternative, non-energy uses of oil such as plastics, petrochemicals and pharmaceuticals. Speaking of non-energy uses, further research and development into CSS (carbon capture and storage) and beyond should be supported by oil producers as well as the assorted policies and market mechanisms. Regional cooperation will also be vital in energy markets and renewables. Last but certainly not the least should be the focus on streamlining industrial diversification strategies based on cheap hydrocarbon energy.
If you’ve been following thus far you more than likely noticed that the main condition for this plan to come to fruition will be cooperation. As every nation tends to follow its own agenda, external relations may fall to the background. This may prove to be a dire mistake. Recent events have proven that people have trouble being united in their own countries, let alone across borders. Still, a need to grow and survive may yet have the power to bring us together. We have a lot of things in common that we may forget about but I believe the need for energy can’t be overlooked. Will this be enough?