Low Oil Prices: A New Opportunity for Gulf Cooperation

The United Arab Emirates said on Monday it would back a global freeze in oil output to bolster prices, while some OPEC delegates predicted a meeting of producing countries in Algeria this week could still yield a deal to restrain supply.

BY Omar Al Ubaydli

When the founders of the Organization of the Petroleum Exporting Countries (OPEC), convened in Baghdad in 1960, they made life difficult for themselves by violating virtually all of the ideal conditions for operating a cartel. That is why, 55 years later, Saudi Arabia has made the right decision by maintaining its production, and why the six Gulf Cooperation Council (GCC) countries—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE—should consider making renewable energy a key driver of future, shared GCC economy.

OPEC has 13 members geographically dispersed across the globe. The members have wildly differing cost structures, overlain by divergent fiscal demands. Moreover, global demand for oil is anything but stable; in addition to attracting the attention of financial speculators who make their living from commodity price volatility, oil has strategic value, and the underlying structural demand for it is highly sensitive to the health of the global economy. Getting Venezuela, Nigeria, and Iran to agree on quotas and then ensuring compliance with those quotas is a herculean task. Therefore, making OPEC an operationally successful cartel for one year—let alone 60—would be an achievement for the ages.
If the theory of cartels paints a picture of an uphill struggle for OPEC members, then the data on their production confirms the cartel’s ineffectiveness. In an in-depth study of the group’s activities since 1980, Brown University’s Jeff Colgan showed that OPEC members violate their quotas over 95 percent of the time.

OPEC members do not just seek to maximize profits—they are also locked in a geo-strategic struggle over the Middle East and beyond, making the prospects of successful coordination highly remote. Even if Iran and Saudi Arabia were somehow able to coordinate their oil production in spite of their differences, how are they to deal with an Iraq so racked by instability that it cannot even control Iraqi production, because Iraqi Kurds ignore the requests of the central government in Baghdad? Moreover, non-oil-related tension between OPEC members is rising rather than diminishing.

However, the organization’s inability to operate as an effective cartel should not be confused with its individual members lacking market power. In fact, Saudi Arabia has—and continues to have—significant influence. In the last 20 years, it has often deployed that influence to the benefit of the global economy as part of its strategic relationship with the U.S. The kingdom maintains significant spare capacity which it taps into when one of the other major producers is temporarily unable to furnish the market, such as during the Iraqi invasion of Kuwait in 1991, or the Libyan revolution of 2011. This helps maintain stable prices, to the benefit of all parties.

In the current geo-political climate, the prospects of OPEC members resolving their internal differences are dim. That is why Saudi Arabia is definitely making the right decision by defending its market share—it simply cannot trust that Iran and Iraq will hold up their end of any bargain. Moreover, competition from shale oil ensures that prices are less responsive to output cuts by OPEC than they once were, which in turn guarantees that an output cut by Saudi Arabia is tantamount to a reduction in revenues. In the zero-sum environment of Middle East conflict, it is fair to interpret many of Saudi Arabia’s adversaries ridiculing the kingdom’s decision as being efforts at pressuring it into a mistake. The OPEC meeting in December 2015 confirmed that Saudi Arabia is capable of withstanding that pressure.

The more important question for Saudi Arabia and GCC countries concerns their future trajectories. Looking two years—let alone 30 years—down the road in oil markets has made a fool of countless analysts, due to the inherent unpredictability of global demand and supply for fossil fuels. Nevertheless, it is evident that a host of environmental, technological, and geo-strategic factors are pushing some of the world’s largest consumers of oil—including GCC countries themselves—toward renewable energy alternatives. What should GCC states be looking to do?

In fact, the renewable energy sector offers the Arab Gulf region an opportunity to kill two birds with one stone. The key is designing an investment plan intelligently.

A primary goal relates to conservation. The coincidence of high per capita incomes, generous energy subsidies, and an arid, desert climate, means that GCC countries have high levels of energy consumption. On a particular note, there is the loss of significant potential oil and gas revenues, due to the high domestic hydrocarbon consumption levels. GCC governments have shown ample appreciation of these concerns, and they play a key role in the significant renewable energy investments that have already been made, as well as the ones that have been earmarked for the future.

Beyond conservation goals, GCC governments have been pursuing economic diversification strategies since the 1990s, and renewable energy is an oft-cited component of that strategy. The industry is especially attractive because it is consistent with the desire to transform the economy into a knowledge-based one—renewable technologies are considered cutting-edge, and they also do a decent job of creating desirable jobs.

Finally—and most importantly—renewable energy offers an opportunity for GCC countries to significantly ramp up their economic cooperation, and to develop strategically valuable, international-class technology. This point relates to two particular features of renewable energy research in the GCC.

While benefiting from the abundant light, modern solar energy techniques are significantly impaired by the region’s heat, and they require considerable amounts of water, which is regionally very scarce. Danish and German solar engineers are understandably not prioritizing research on modifications that suit the Arab Gulf climate, opening the door for GCC countries themselves to make the necessary refinements. Saudi Arabia in particular graduates hundreds of world class engineers annually, and it makes sense to direct some of their talents to renewable energy technologies tailored for the GCC climate.

Meanwhile, Arab Gulf nations should look into pooling their budgets into cooperative and synchronized research bodies that will surely reach the necessary minimum scale, rather than having each GCC country embark upon its own renewable energy research program. Efforts are underway to improve research collaboration, but much more needs to be done for GCC countries to realize their potential.

Omar Al-Ubaydli is the program director for International and Geo-Political Studies at the Bahrain Center for Strategic, International and Energy Studies (Derasat).

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