Whether history is the product of turning points or incremental change, 1 January 2015 feels like it’s a new start for the Middle East and the GCC in particular.
On the horizon are generational leadership transition in the GCC and a radical reordering of the global energy order. The two are connected and will have lasting impact on the region and the world.
Saudi Arabia’s King Abdullah was admitted to hospital for tests on 31 December. Crown Prince Salman, Abdullah’s half-brother, is undisputed heir. But his advanced years suggest Saudi Arabia is approaching the point when power will pass to the Al-Saud family’s next age cohort.
Sultan Qaboos, absent from Oman’s annual national celebrations in November, is also unwell. UAE president and Abu Dhabi ruler Shaikh Khalifa Bin Zayed al-Nahyan’s health problems have been officially acknowledged.
Speculation that potentially-destabilising struggles for power have broken out in all three countries are misleading. Arabia’s unique political morphology, unfathomable to the modern mind, has withstood the test of time. The desire for continuity supersedes all others in a region where stability has delivered almost 15 years of prosperity to the GCC.
Governance in Arabia is exceptional. Yet new leadership inevitably brings change. And it will take place at a historic moment for global energy markets.
The many ways power can be produced and the global network that allows gas from Qatar to be used in the US and Saudi oil to be refined in China are having irresistible consequences.
Once, geographical and technical constraints forced consumers to commit to a particular energy feedstock and source long-term. These inflexibilities persist, but most advanced economies have a growing choice of energy options.
Founded in 1960, OPEC’s role has been to secure a higher return on its member states’ oil and gas assets. Its breakthrough moment was in 1973/74 when OPEC secured a 300 per cent rise in prices. It was a global turning point. If it hadn’t happened, the rise of the GCC as the engine-room of the economy of the Middle East and a global player in oil and finance would have been impossible.
The full implications are now obvious. By keeping prices substantially above average production costs, OPEC created an irresistible incentive for investment in non-OPEC oil and gas reserves and validated a shift towards alternatives to hydrocarbons.
GCC OPEC states command the spigot for 40 per cent of world oil and 20 per cent of world gas but this is no longer sufficient to maintain their energy market supremacy.
Saudi Arabian Oil Minister Ali al-Naimi’s declaration that the kingdom will not cut production to offset the price crash since June constitutes a radical revision in OPEC’s core mission. His argument is that the most efficient oil and gas producers should get the biggest market share. By implication, reserves and population will no longer be relevant in calculating how much OPEC states should produce and sell.
But it’s not just about oil and gas. Unless OPEC states can compete globally with all forms of energy, it must lose market share and income.
This is an existential issue, not just a technical one.
The three other GCC OPEC states appear to assent to this approach, though probably with less conviction than the kingdom. High-cost and high-population OPEC states in contrast are outraged. But there’s nothing they can do about it. Saudi Arabia and GCC OPEC states have accumulated more than $2 trillion in current account surpluses and more than $1 trillion in budget surpluses since 2002. They are secure, stable and enjoy the largely-uncritical support of the US, now purged of its temporary enthusiasm for radical Middle East political change.
Some argue that OPEC is self-destructing and the year to come will mark its final passing.
Like forecasts made of the coming fall of Saudi Arabia and other GCC states, this is based on a misunderstanding of the resilience of their systems of governance and the pragmatic calculations that precede every step they take.
OPEC will continue but, inspired by its GCC member states, it will perform a different role. The organisation has been a mechanism for transferring income from oil consumers to producers; from oil corporations to oil exporting nations and from the private sector to the state. But that era’s over.
In the new energy era, it will be an association of the world’s most efficient producers of hydrocarbons, forecast to continue for the indefinite future to be the largest global source of energy. OPEC’s targets will no longer be essentially quantitative: production, exports and prices. Qualitative goals will become increasingly important.
OPEC’s future will be secured through collaboration with consumers and partnerships with what were once seen rivals, but on OPEC’s terms.
This will require skills at least as demanding as those that enabled the GCC to defy the first world sceptics and rivals in developing nations to create and manage the biggest oil and gas industry on earth. But history suggests it’s a challenge they can master.
It would be wrong to treat other Middle East nations as being of secondary significance. They too have a part to play.
But as 2015 starts, the road to power in the region and influence in the world beyond leads first to Arabia and invariably to Riyadh too.