The gas era will revolutionize the Middle East

Author: Gaston Saidman

Oil was always the most used mineral because of its use in the development of multiple products that are necessary for our daily lives without us even realizing it, such as the construction of asphalt, plastic to create a simple pen and even the ink for the pen.

Although the mineral was discovered much earlier, it was only in the year 1908 that large reserves were found in the area of Iran (at the time part of the Ottoman Empire).  That sparked an interest to create companies such as British Petroleum. These companies reached an agreement with various governments and that put an end to the cartels of the oil market in the 1920’s.

If we take a brief tour through history, we will see that the oil market went through many important events. Its price was affected by the different situations that marked great changes in the economic sector such as  the crisis of 1929, the reforms of former US President Franklin D. Roosevelt called “The New Deal” “, the second world war, the cold war and finally the creation of OPEC that in some way tried to balance the price.

Today we can see that in the last two years the price of crude underwent important changes. Saudi Arabia is the largest oil exports and production country, and over time, they had to take control of many crises and changes that this mineral caused.

Nowadays the oil market is again facing a major change where the Saudi country faces several situations such as the internal economic crisis, the rivalry with Iran that will remain unstable till the end of November, and of course the future dilemma they will have to face when the oil will become second to the natural gas and other new energy technologies.

According to the different analysts, from now until the year 2050, significant changes are expected and that is because according to the meteorological observes the following winters will be very hard and that implies an increasing demand for gas that is estimated to begin in 2019. Faced with this, what will happen to oil? In this case, LNG (Liquid Natural Gas) is not the only obstacle for large oil producers. If we look at how new technologies for the production of energy have progressed, we will notice that oil is lagging behind because its use within the field is losing prestige as a result of the new electric-battery cars that have already hit the market in certain parts of the world (for example the United States and Israel).  This means that the demand for crude would be decreasing in the energy sector, but not because we are running out of the mineral itself as many people think.

To understand this we must know that the oil market is divided into two groups; the first is formed by the countries that have a high demand for oil along with a great possibility of technological investment, and the second are those that have a large capacity of production but its demand is relatively low and of little technological level without much amplitude of investment. Now, although in a normal market interaction between the seller and the client is usually understood in a reasonable way, this is not the case in the black gold market when the fair exchange of technology investment for oil was never achieved. Today, thanks to new technologies for fuel, we need less and less oil to produce energy.

Saudi Arabia and the change in its economy

The expectation of a growing demand for gas puts at risk the status of Saudi Arabia in the energy market at a time when the kingdom is going through one of its worst economic crises.  Apart from the corruption case that was exposed recently, they also don’t have a mineral that can replace oil in an era where the demand for it will decrease.

Although Saudi Arabia always based its economy on the export of crude because it is one of the countries with the highest production, we must say that they did not know how to manage their income. They don’t only spend a lot on personal expenditures of the monarchy, but also on their eternal ambition to be the leading country in the Islam world. This led them to spend a fortune on constructing mosques around the world, and even as we know, fund terrorist organizations in addition to their intervention in the Yemen war.

Unfortunately, it wasn’t a good year due to the impact of lower oil prices along with OPEC’s decision to change their production. Even though Saudi Arabia had already sold future contracts, they were not enough to cover the loss of its annual income that was reduced to 360 billion dollars. Added to this the corruption network exposed before the reporter Jamal Khashoggi was killed in a Mysterious way on October 2 at the Saudi consulate located in Turkey.

This economic crisis leaves Saudi Arabia with 40% unemployment and a population that consists of 70% citizens around 30 years old. This requires the government to create new sources of employment.

To face this reality, the Saudi prince started a new economic plan that aims to solve the crisis through new reforms. These reforms require the modernization of the tourism industry, even though Saudi Arabia is not a country with a developed tourism services and even less so for the Western countries. As a country that still bases its law on religious foundations that are not attractive to the Western culture, making changes would mean a cultural reform that would have to be authorized by the country’s religious elite. This will make it very difficult and we won’t see a significant change in the short term.

In a country where there are social differences according to the religious group that you belong to and especially where there are whole areas that entry is forbidden for non-Muslims, it will take time to create a plan that will get the attention of the west. There is also the delay of the industry development that will take time; no country ever became an industrial power in a matter of one day.

Unfortunately for the Crown Prince, his plan to reach an agreement with companies such as ARAMCO in which he tried to have part of the earnings given to the government for the development of new projects failed, on the contrary, ARAMCO announced that it will decrease the crude drilling in some areas which already implies less production.

Iran facing sanctions

Iran will have its worst nightmares come true because of Trump’s threat to tighten the sanctions. It seems that this is influencing other countries such as China, India and Iraq’s decision to join the United States. A few weeks ago, the Iraqi government announced that it would cut the export of oil to Iran by 30,000 barrels. This will cancel the agreement between the two countries based on their geographical areas and involves moving small volumes of oil from its oil field northern of Kirkuk to Iran in exchange for Tehran delivering the same amount of oil to southern Iraqi ports, and it is now speculated that the same amount will be transferred to Turkey instead.

So far, this means that there will be a massive reduction in the oil production and that will give an advantage to the natural gas proponents, which means less dependence on oil producing countries. It is possible that this scenario is what caused the decrease in oil prices in the last few weeks. We have to pay attention because this could be an investment tactic to boost their sales influenced by the future shortage of this mineral – sell massively today and buy at the price of $ 63 then resell when the sanctions will be implemented and the price will reach $ 100 per barrel. It is not such a bad idea.

Middle East prepares for a change

It is very possible that the Middle East is changing, if there is something we can learn from its history is that this kind of change will affect future policies and I will even dare say that we will have new leading countries that will influence the global economy. This means that if Saudi Arabia was the main player in the energy market, they will not enjoy that status for much longer, and this is where we should be vigilant and prepared for the new bosses!

The huge amounts of natural gas found 90 kilometers west offshore from Haifa (Israel) is attracting the interest of new investors in the energy field, but even more the commercial relationship that is already beginning between Israel and Arab countries such as Egypt and Jordan. These new relationships could change the political interests. Why?

These days, Israel finished signing an agreement that consists of creating pipelines that will provide gas to Egypt in significant quantities to the point that it will place Egypt as a player of great influence in the energy market within the Middle East. The flow of natural gas into the country will greatly benefit their local economy. Now, the most important thing is that this agreement will create a solid platform that encompasses the interests not only of these two governments but also of the public. We could say that the strengthening of these relations provides Israel with a more positive image of being open to future peace processes in the area and that gives the whole region an aura of stability.

The creation of these pipes allows liquid gas to be transferred more easily than crude and this ease could satisfy the needs of other countries in the area. The objective is not only the edges of the Middle East; it is quite possible that thanks to the large amounts of gas combined with the growing demand, Israel will become the new supplier for the European countries. That being the case, Egypt will not need Russian gas and perhaps neither will other countries, something that will undoubtedly change the policy we know today.