The geopolitics of oil in the Middle East


Global oil prices have fallen sharply over the past seven months, leading to significant revenue shortfalls in many exporting countries.

Low oil prices have always affected political developments, but its geopolitical consequences are always unpredictable, especially in those countries who economically rely on it.  Many past oil shocks were driven by supply disruptions, such as the OPEC oil embargo in 1973 and the Iranian revolution in 1979. Oil prices collapsed in the mid-1980s, falling from their previous height of around $30 per barrel at the beginning of the decade to a low of below $10 per barrel for a few months in 1986. In Algeria, the revenue drop caused a political crisis that culminated in elections won by Islamists, after a military coup and a brutal civil war. Saddam Hussein’s 1990 invasion of oil-rich Kuwait can also be attributable to the desire to increase Iraq’s revenues in times of domestic financial stringency and political instability.

The current unexpected fall in world market prices for oil started in the second half of 2014 is comparable to other recent episodes, but what is its effect on geopolitics?

Obviously, the recent fall in world oil prices cannot but have an impact on the politics of the Middle East. Many of its states, including two of the major players in the current struggle for regional influence, namely Iran and Saudi Arabia, rely heavily on oil to fund their governments and to float their economies more generally. For Saudi Arabia, which has always used oil prices for its regional ends, orchestrating the price drop is a key factor that might weaken its regional rival Iran that returns to the oil export market after the lifting of sanctions.

Nevertheless, oil prices could be a challenges even for the Gulf monarchies. As matter of fact, losses in export revenues will translate into shrinking fiscal revenues, because oil export earnings are captured almost entirely by governments, resulting in large budget deficits. From this point of view, oil exporters could lead to a reduction in tensions in the region, as they explore ways to cooperate in order to prop up the price of oil.

But there is another key player on this chessboard: Russia. The falling of oil price had also a heavy impact on Moscow which is also highly reliant on oil and is trying to re-establish its regional influence in the Middle East after a two decade gap following the collapse of the Soviet Union. Vladimir Putin determined to re-establish his nation as a major power through military interventions on the European continent and in the Middle East. The oil price dynamics affected also Moscow, whose government has recently announced the 10% cut of public spending, a signal of  stressed economy that depends on crude and that has been touched by European sanctions.

In this context, lower oil prices could likely lead Iran, Saudi Arabia and Russia to the negotiation table on oil issues, and any agreements they make could reduce the level of geopolitical tension in the Middle East more generally. From this point of view, the decline of oil prices could have an impact on Syrian conflict with the possibility to de-escalate the tension of this regional game, opening the door to diplomacy.

At the end of the day, it is always difficult to argue on who are the winners and who are not; the reality often leads far from the obvious conclusion. What is certain is that revenue drop, even if it has a little to do with geopolitical implications, it could affect them too much.

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