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The new Gulf oil boom poses dilemmas for the west

8 months ago
in Market
The new Gulf oil boom poses dilemmas for the west
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In his State of the Union address days after Vladimir Putin’s forces invaded Ukraine, President Joe Biden listed measures the US was taking to punish Russia in a “battle between democracy and autocracy”. Yet as the west has sought to isolate one autocrat, it has been forced to seek help from others: Saudi Arabia and its fellow absolute monarchies in the oil-rich Gulf.

Since Biden’s February speech, oil and gas prices have hit their highest in more than a decade as the west tries to strangle Russian energy exports. This month, the EU approved a plan to ban Russian seaborne oil imports. The bloc also agreed to co-ordinate with the UK on plans to ban insuring ships carrying Russian crude, which would further stymie Moscow’s ability to export.

Before the war, Russia produced more than 10 per cent of global oil supplies and was a vital source of energy for Europe. The International Energy Agency has forecast its output could now decline by up to 3mn barrels a day. There will be shippers willing to transport Russian crude to China or India. But the level of Moscow’s exports is only heading in one direction, threatening a significant undersupply in the market.

To damp sky-high petrol prices ahead of US midterm elections, Biden is having to turn to a state he pledged to treat as a pariah. Washington has urged Saudi Arabia, Opec’s de facto leader, to raise production. This month, the kingdom and its allies in Opec+, which includes Russia, finally announced a modest acceleration of output.

The White House credited Saudi Arabia for “achieving this consensus among the group members”. Biden is considering visiting the kingdom. That would mean sitting with Crown Prince Mohammed bin Salman — whom US intelligence concluded had authorised the operation to “capture or kill” journalist Jamal Khashoggi, who was murdered four years ago.

The energy crisis is increasing the leverage of MBS and other Gulf leaders. Only Saudi Arabia and the United Arab Emirates, another autocratic state, have the spare capacity to significantly boost oil production. Neighbouring Qatar, the world’s biggest exporter of liquefied natural gas, is meanwhile being courted by European governments and energy companies. While the world frets about energy supplies and inflation, the Gulf is enjoying a boom as the west’s reliance on its hydrocarbons only deepens.

Yet the US has long worried about over-dependence on such a volatile region. Its relations with Gulf states can be fractious. Tensions with Iran amid fears over its nuclear ambitions mean the threat of a conflagration is never far away. US imports from the Gulf have fallen sharply since the shale boom, but its pump prices are still affected by global market dynamics. Even as leaders gathered in Glasgow for November’s COP26 meeting to commit to phasing out fossil fuel use, Biden was berating Russia and Saudi Arabia for not pumping more oil as petrol prices rose.

The reality is that western policymakers were wilfully slow in transitioning to alternative energy sources. Now they are left with few simple solutions to diversify. It typically takes at least three years and billions of dollars to bring a new oil or gas project online, and energy companies will invest only if assured of a long-term market. So the world either locks itself into more fossil fuel projects that undermine net zero targets, or ends up with stranded assets as nations transition to green energy.

Western democracies’ reliance on oil-rich autocrats was always something of a Faustian pact as they turned a blind eye to rights abuses. In the rush to secure alternative supplies to Russian oil and gas they should avoid replicating the mistakes of the past — and not give the likes of MBS a free ride.



www.ft.com

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