Understanding the Dangers of Oil

“We do have to do something about the energy problem. I can tell you that nothing has really taken me aback more, as Secretary of State, than the way that the politics of energy is […] ‘warping’ diplomacy around the world. It has given extraordinary power to some states that are using that power in not very good ways for the international system—states that would otherwise have very little power.” Secretary of State Condoleezza Rice, testimony before the U.S. Senate Foreign Relations Committee, April 5, 2006.

Throughout the 19th Century nearly half of the world’s crude oil supply came from the gushing oilfields surrounding the Azeri city of Baku. At that time, petroleum supplied only four percent of the world’s energy, giving the Caspian region little strategic advantage on the international stage. But as the world economy embarked on a steep growth trajectory, dependence on petroleum grew significantly.

Today, oil supplies about 40 percent of the world’s energy and 95 percent of its transportation energy. As a result, those who own the lion’s share of the reserves of this precious energy source are in the driver’s seat of the world economy and their influence is steadily growing.

Since the 1930s the Middle East has emerged as the world’s most important source of energy and the key to the stability of global economy. Today, this tumultuous region produces 37 percent of the world’s oil and 18 percent of its gas. When it comes to reserves, the Persian Gulf is king. It is home to 65 percent of global oil proven reserves and 45 percent of its natural gas. The Middle East also controls a significant portion of the hydrocarbons that are yet to be discovered. According to the U.S. Geological Survey, over 50 percent of the undiscovered reserves of oil and 30 percent of gas are concentrated in a region primarily in Saudi Arabia, Iran, Iraq, Kuwait, UAE, and Libya. 

The concentration of so much of the world’s hydrocarbons in this geographical location means that as long as the modern economy depends on the supply of oil and natural gas, the Middle East will play a key role in global politics and economy. As it is, most of the world’s countries are heavily dependent on Persian Gulf oil. In 2006, the Middle East supplied 22 percent of U.S. imports, 36 percent of OECD Europe’s, 40 percent of China’s, 60 percent of India’s, and 80 percent of Japan’s and South Korea’s. Even oil-rich Canada is dependent on the Middle East. Forty five percent of Canada’s oil imports originate in the region.

Barring a major technological transformation, global dependency on the Middle East is only going to grow. According to the International Energy Agency, from now to 2030, world oil consumption will rise by about 60 percent. Transportation will be the fastest growing oil-consuming sector. By 2030, the number of cars will increase to well over 1.25 billion, from approximately 700 million today. Consequently, global consumption of gasoline could double. The two countries with the highest rate of growth in oil use are China and India, whose combined populations account for a third of humanity. In the next two decades, China’s oil consumption is expected to grow at a rate of 7.5 percent per year and India’s at a rate of 5.5 percent, compared to 1 to 3 percent growth for the industrialized countries.

As a result, by 2030 Asia will import 80 percent of its total oil needs and 80 percent of this total will come from the Persian Gulf. The reason why Persian Gulf countries’ share of the world’s energy pie is likely to increase has to do not only with geology but also with resource management. While non-Middle East countries pump at full speed, Middle East producers, many of them members of the Organization of Petroleum Exporting Countries (OPEC), stick to a quota and produce well under their capacity. This means that non-OPEC oil is running out almost twice as fast as OPEC’s. Exxon Mobil Corporation has estimated that non-OPEC production—this includes Russia and West Africa—will peak within a decade, making recoverable oil left outside the Middle Eastern world scarcer and scarcer. On the other hand, the reserve-to-production ratio among Persian Gulf producers ranges between 80 and 100 years, allowing those countries to stay in the race decades after their competitors have depleted their reserves. This is likely to lead to global dependence on the region of unprecedented scale, with considerable implications for global security and economy. The Chief Economist of the International Energy Agency stated, “We are ending up with 95 percent of the world relying for its economic wellbeing on decisions made by five or six countries in the Middle East.”

Conventional wisdom, concerned only with smooth functioning of the market, says that ownership of oil is meaningless, that it does not matter if most of the world’s oil is owned by one regime or the other. But in the case of the Middle East, resource ownership does matter. The region is riddled with deepening ethnic and political tensions, terrorism, corruption, and authoritarianism. In addition, there are problems that have no solution in sight and that will no doubt directly affect the supply of energy from the Middle East, among them a growing rift between Sunnis and Shiites, tension between the West and an increasingly radicalized Muslim world, increasing terrorist activity against oil facilities, protectionism, lack of investment, unresolved border disputes, and the growing uncertainty about the political stability of key energy producers like Saudi Arabia, Iran, and Iraq. The energy security and national security problems resulting from reliance on a single energy resource primarily located in such a volatile area are likely to be intensified as demand for oil grows. The region’s problems will no doubt impact not only the world’s economy and security but also consuming nations’ attitudes and policies toward the region’s producers, as well as toward each other. 

Impact on the war on radical Islam
Despite promises by the Middle Eastern governments to stop terrorist financing, six years after September 11, wealth generated by the region’s oil rich countries continues to flow to terrorist organizations and organizations promoting radical Islam. It is impossible to precisely know the extent of the phenomenon, but there is no doubt that portion of the petrodollars sent to the Middle East finds its way through official and unofficial government handouts, charities, and well-connected businesses, to the jihadist movement. In this, the most problematic country is the region’s lead oil producer, Saudi Arabia.

Prior to September 11, Saudi nationals were the largest contributors to al Qaeda and its affiliates. To forestall open condemnation by its fundamentalist Wahhabi religious establishment, the Saudi regime has for many years placated the clergy by bankrolling its growth while striking an unspoken deal with the radicals: go wreak havoc anywhere you want as long as you keep us out of your harm’s way. This deal entailed a constant infusion of money into thousands of mosques and madrassahs that preached hatred and intolerance throughout the world. With a little over one percent of the world’s Muslim population the Saudi Wahhabis support 90 percent of the expenses of the entire faith, overshadowing other, more moderate traditions within Islam.

In July 2005, U.S. Undersecretary of the Treasury in charge of fighting terrorist financing, Stuart Levey, noted, “Wealthy Saudi financiers and charities have funded terrorist organizations and causes that support terrorism and the ideology that fuels the terrorists’ agenda. Even today, we believe that Saudi donors may still be a significant source of terrorist financing, including for the insurgency in Iraq.” More recently, Levey said in an interview, “If I could snap my fingers and cut off the [terrorist] funding from one country, it would be Saudi Arabia.” Another Middle Eastern country that thrives on the current oil bonanza is Iran. The Islamic Republic’s theocratic regime is known to support and provide training to terrorist groups like the Shiite Hizballah as well as to Sunni radical groups like such as the Palestinian Hamas and the Taliban in Afghanistan. It also supplies weapons to Shiite insurgents who fight the U.S. and its allies in Iraq.

Growing dependence on the Middle East means further enrichment of the corrupt and dictatorial regimes in the Persian Gulf and continued access of terrorist groups to a viable financial network which allows them to remain a lethal threat to the West. It would also necessitate increased Western military presence in the region to ensure access to oil. But such presence would only strengthen the xenophobic and anti-Western sentiment among the jihadists and increase their motivation to fight the infidels. Furthermore, continuous infusion of money to radical Islamic educational institutions creates a new generation of radicalized youth, making reconciliation between the West and the Muslim world more difficult to achieve. This vicious cycle can only be broken through massive political reforms that the oil regimes currently seem to resist.

Impact on human rights and democracy promotion
Studies show that countries rich in easily extracted and highly lucrative natural resources that do not have well-developed democratic traditions, do not sufficiently invest in education, productivity, or economic diversification. In addition, such resource-rich governments do not feel obligated to be accountable or transparent to their people and they deny them representation. They also have no imperative to educate women and grant them equal rights. While their oil wealth allows them to be the strategic pivot of world politics and economy, the record of these “trust fund states” on human rights, political stability, and compliance with international law, is abysmal.

Some Persian Gulf countries have made an effort not to repeat the reckless spending policies that accompanied previous spikes in oil prices by diversifying their investment portfolios and strengthening their non-oil sector. But they still continue to use oil revenues as a means to maintain their power. Thus freedom and democracy advance at an extremely slow pace, if at all.

In some places the petrodollars influx only causes a reversal in the progress toward freedom. As New York Times columnist Thomas Friedman noted in what he calls “the first law of  petropolitics,” the price of oil and the pace of freedom always move in opposite directions in authoritarian countries highly dependent on oil and gas for their GDP. If democratization makes any significant progress in the Middle East it only happens in countries that do not rely on energy exports like Jordan, Bahrain, or Morocco.

Impact on regional stability
Despite the high visibility of the Arab-Israeli conflict, historically, wars among Muslim countries in the Middle East have caused far bigger losses in terms of both blood and treasure. Such conflicts have been a destabilizing factor for the global energy market. Both the Iran-Iraq War and the 1990 Iraqi invasion of Kuwait caused energy crises which were followed by recessions. In such a combustible environment feeble and insecure regimes, flush with petrodollars, feel the need to arm themselves to the teeth, fueling a regional arms race which only contributes to the general sense of insecurity. This problem is now being exacerbated by the deepening rift between Sunnis and Shiites as it expresses itself in Iraq. While Sunnis constitute the lion’s share of the Muslim world as a whole, in the Persian Gulf Shiites comprise a 70 percent majority. This means that the divide between Sunnis and Shiites will inescapably affect the oil market. Increasing sectarian violence and inability to reach an acceptable wealth-sharing compromise is taking a heavy toll on the Iraqi oil industry with profound implications for the global oil market. Four years after the U.S.-led invasion, Iraq has not been able to match its pre-war crude production level of 2.5 million barrels per day. Due to nonstop sabotage taking place in the north, Iraq was barely able to produce 2.1 million barrels per day in 2006.

Perhaps the biggest casualty of a spillover of Muslim sectarianism would be Saudi Arabia. The eastern province of Saudi Arabia is home to most of the Kingdom’s giant oil fields and export terminals. It is also the home of the bitter Saudi Shiite minority. Shiites make up roughly 15 percent of Saudi Arabia’s population of 25 million. They are treated as second-class citizens and they harbor strong antagonism against the Kingdom’s Wahhabi establishment which considers them heretics. Should an Iranian-inspired Shiite revolt break out, the damage to the Saudi oil industry and the world economy at large could be incalculable.

A second destabilizing factor with certain impact on the oil market is the looming crisis with Iran. While the U.S. and the European Union are trying to forge a diplomatic strategy to halt Iran’s nuclear program, Iran seems determined to pursue its nuclear ambitions. In an effort to foil Western attempts to isolate it diplomatically, Iran strengthened its relations with Russia and other energy-producing Central Asian countries, and it has also utilized its energy resources to purchase diplomatic protection from China and India, a third of the human race. Tehran’s diplomatic dance with China, the number one oil and gas importer from Iran, is the one Iran counts on most. The two countries are bound by energy deals reaching a total value of roughly $100 billion, guaranteeing that China will use its veto power to block any American effort to impose strong economic sanctions against Iran in the UN Security Council. Iran’s continuous defiance could produce two undesirable outcomes. In the near term it could escalate to a military confrontation between Iran and the U.S., an eventuality that will no doubt disrupt the free flow of oil through the Strait of Hormuz and send oil prices to unprecedented level. If Iran does succeed in becoming a nuclear power, the long run consequences could be far more severe. A nuclear Iran will not only be a threat to the region—Iran’s President Mahmoud Ahmadinejad is a strong advocate of the destruction of Israel—but it also guarantees that other Middle Eastern countries follow suit. Many regional actors including the Gulf Cooperation Council (GCC), Yemen, Egypt, Jordan, and Morocco have already declared their intention to develop nuclear capabilities albeit “for peaceful purposes.” But such peaceful projects are often harbingers of nuclear military programs. Some predict that the nuclearization of the Middle East could result in a more restrained behavior by its countries as was the case of the balance of power between the U.S. and the Soviet Union during the Cold War years. But considering the history of miscalculations and erratic behavior by some of the Middle East’s regimes, it may be a leap of faith to expect the same composure and restraint that was exhibited by the great powers. Hence, a nuclear Iran enabled by the new energy reality, and in particular the Chinese and Indian dependence on its energy, should be perceived as one of the most destabilizing developments of our time.

Gal Luft is executive director of the Institute for the Analysis of Global Security (IAGS).