RIP: Arab Oil Age (1973–2023)
The years 1973 and 2023 will likely come to be seen as strangely analogous beginning and end points of a 50-year “Arab Oil Age.”
Then…
Five-decades ago, Saudi Arabia and other Arab members of Opec raised their “official” oil prices, cut oil production, and declared an embargo on oil exports to the US and others they saw as supporting Israel in a war started by Egypt and Syria but won, militarily, by Israel. Near-term, the war caused huge losses to Arab life, property, and pride. The oil embargo upended both the Arab and Western power structures, for better or worse.
The embargo put Opec in charge of crude oil pricing, in place of Western oil majors, then known as the “Seven Sisters,” that had fine-tuned prices up to that point. Crude oil prices soon quadrupled. Saudi Arabia and other previously impoverished, low-population Gulf Arab oil states, most notably the United Arab Emirates and Qatar, got rich quick — but not yet powerful. Desperate for security, these cash-rich countries signed petrodollar recycling accords that brought much of their wealth back into the international system through US banks and Treasury bonds.
Oil money gave the Gulf monarchies power over traditional Arab leaders in Egypt, Syria, Iraq, and Algeria, which were beset by post-colonial wars and internal strife that in some cases traced back to the humiliation of their losses in 1973 and other wars with Israel. With the overthrow of the Shah in 1979, Iran flipped from strong defender to resolute foe of Israel, and oil prices again shot up — shifting still more money and power to Saudi Arabia and its smaller neighbors.
Petrodollar recycling also helped ensure the international supremacy of the dollar for another five decades. In return, the absolute monarchies of the Middle East Gulf got what long appeared to be iron-clad security guarantees. America became increasingly reliant on financial supremacy to enable deindustrialization that boosted the profits of US corporations but weakened their clout at home relative to banks and other financial institutions — the victory of Wall Street over Main Street, in US political parlance — and cleared the way for East Asia to become the world’s factory.
… And Now
This month, Opec and its Russian and other allies in “Opec-Plus” acted once again amid a war in Israel that was started by Arabs — this time Palestinians in Hamas — and looks like it’s being won, militarily, by Israel. The Palestinians are suffering huge loses of life and property. However, Arab pride has been bolstered, and the brutality of a deeply shaken Israel’s response to Hamas’s attack is undermining Western support and prospects for “normalization” of the Jewish state’s place in an overwhelmingly Muslim region.
Also, instead of holding the world’s attention, Opec’s talks on who should cut crude oil production by how much to prop up oil prices for a while longer were held on a Zoom call that was overshadowed by the same-day opening of COP28 debates on whether oil even has a long-term future. Oil prices fell despite the Opec-Plus efforts, while COP2, held in the rich UAE city of Dubai with an Arab oil state oil company official in the chair, attracted 70,000 delegates, lobbyists, and demonstrators.
Despite all those who wish them ill, Western and Opec-Plus oil companies alike are currently healthy and brimming with cash after their near-death experience during the pandemic. The global status of Saudi Arabia, the UAE, and Qatar — and the Wall Street status of Western oil companies — have soared since pandemic times, which saw Saudi Crown Prince and defacto ruler Mohammed bin Salman shunned by then-new US President Joe Biden for his involvement in the murder of dissident Saudi journalist Jamal Khashoggi.
But how long is the oil party likely to last amid worsening climate chaos? Probably not long. Opec-Plus is arguably doing just what the climate activists are asking for: These countries are shutting in more oil production than the total oil output of any two Western oil majors. They are doing so in a struggle to keep oil prices from sinking, but the effect is to discourage demand and make low- or no-carbon alternatives more competitive.
Holding oil off the market to push up prices is something Opec has done more than once over the decades. But this time, growing oil demand won’t come to the producers’ rescue, as it has in the past. On the contrary, the International Energy Agency says China’s oil, natural gas, and coal demand will all be declining by 2030. Others think China could see peak oil use as soon as 2024, thanks to economic turmoil and the rapid spread of solar power and EVs. If China passes peak oil, can the world be far behind? Once peak is past, how long and how far will Opec-Plus members be willing to reduce their own output and leave more of the shrinking sales pie for others?
Oil Impacts
The debates in Dubai started with the question of how much already developed countries — and oil states such as the UAE — will pay to help the Global South develop on a low-carbon path and pay for damage resulting from carbon emissions beyond their borders. One result will be to narrow the field of candidates to replace China as a global engine of oil demand growth.
Another proposal, to triple renewable generating capacity and double energy efficiency gains by 2030, would be bad for natural gas and coal that are generating fuels, and efficiency certainly won’t aid oil longevity. An ongoing “global stock-take” may see key oil-consumers up their emission-reduction pledges to slash oil and gas use. And oil companies and countries are pushing methane reduction as their contribution to decarbonization — which to give credit where it’s due, will be helpful for the climate if it really happens.
Despite the clear danger all this poses to the future of fossil fuels, the oil-state representatives and Western oil lobbyists in Dubai have mainly focused on a turn of phrase. What, if anything, should the conference say about whether coal, oil and gas should be “phased out”; “phased down,” implying more wriggle room; or eventually avoided in “non-abated form,” implying the costly and questionable carbon capture and storage that even the oil companies themselves aren’t investing in — whatever they say.
It seems Big Oil is willing to expend a lot of hot air delaying a Death of Oil declaration by COP. Western oil companies doubtless fear such a statement would weaken stock market sentiment towards their shares. Whatever.
Petrostate Problem
The rags-to-riches Gulf oil states are a weightier matter. Millions of people now live in these once low-population countries, and many more millions elsewhere in the Arab world live to a considerable degree on their largesse. They can’t just be written off as an investment loss, like the Western corporations. The same goes for non-Arab petrostates, from Russia to Africa.
Increasingly, Saudi Arabia and its neighbors acknowledge the existential problem they face. They need time to build not only their sovereign wealth funds, but also their national power and status which, they hope, will attract more outside investment. Whether vetoing COP references to ending oil use will actually buy that time, and whether having more time will actually aid efforts to diversify their economies are open questions. Petrostates have been trying to reduce dependence on oil and gas earnings for decades, to little effect.
But pretending the issue doesn’t exist is no more defensible than pretending oil use can be made compatible with zero carbon emissions. What, however, can the rest of the world do? With all the wars and exploitation embedded in US Middle East strategy since the Petrodollar Accords were signed in 1974 — and before that in the perverse policies of the European colonial powers — it may be that the West’s most helpful approach would be to try and avoid making things worse.
How much the Israel-Palestine war matters to this shifting configuration of oil and energy is open to debate. Before the Oct. 7 Hamas attack, Saudi Arabia looked set to recognize Israel diplomatically and economically in return for civilian nuclear aid and tighter security guarantees from the US. That deal might have led the Saudis to weaken or drop their campaign to prop up oil prices. It currently seems implausible, given widespread Arab anger at Israel and at the US for its strong support for Israel, even as it destroys Gaza.
That may mean less oil production, a plus for the climate; and higher US gasoline prices, a negative for Biden’s re-election chances. It may also mean that Saudi, Abu Dhabi, and other Gulf States’ interest grows in China’s request to shift oil trade off dollars and onto yuan/renminbi, further undermining the petrodollar order that has prevailed since the 1973 Arab oil embargo. The situation is highly fluid, though, and the more so with Russian President Vladimir Putin now in Saudi Arabia. The only certainty is that the old order is dead.
