It’s Time to Diversify: Arab Nations’ Over-reliance on the Oil Industry

This article is the first of a two-part series, and seeks to demonstrate how regional instability in Arab nations can harm their oil production and, consequently, the global oil market.

It is no secret that the economic treasure of the Middle East is its oil. The Organization of the Petroleum Exporting Committee reported that for 2018, the Middle East was home to 64.5% of the world’s oil reserves, with Saudi Arabia, Iran, and Iraq acting as the top three suppliers. However, given how these three nations are particularly prone to political instability, any oil markets connected to them tend to be volatile. 

For Saudi Arabia and Iraq especially, recent regional turmoil has caused shocks in oil prices. On September 14, two of Saudi Arabia’s major oil facilities, owned by Saudi Aramco, were attacked, which wiped out over half of the nation’s exports. The Houthi rebels from Yemen took credit for the attacks. Due to this sudden disruption to the world’s oil supply, prices initially rose by 10% and brent crude oil futures increased by 20%. Only two weeks later, Saudi Arabia was able to rebound. By churning up mass oil production with the usage of offshore fields, Aramco was able to return to the same oil prices that were present before the attacks. However, in the future, Saudi Arabia might not be so lucky. The nation is well known for its decades-long rivalry with Iran, which makes similar military attacks in the future all the more likely. If Saudi Arabia doesn’t demonstrate the ability to protect its oil facilities or oil output soon, international investors could lose faith in Saudi Aramco’s IPO offering. 

While petroleum investors’ concerned eyes were fixated on Saudi Arabia and Iran, Iraq exploded in a crisis of its own. Although oil acts as the center of many Arab nations’ economies, oil itself often serves as a source of instability. Since October of this year, Iraq has erupted in mass protests, with thousands of Iraqi civilians demonstrating against corruption, unemployment, and unsupported basic life necessities. Unlike previous instances of unrest in Iraq, Time Magazine has labelled this uprising as “the largest in Iraq since dictator Saddam Hussein fell in 2003,” since ordinary civilians, not political groups, are behind the protests. Theoretically, oil should have acted as the solution for Iraq’s struggles with poverty, as Iraq is projected to earn $79 billion in revenue this year from oil sales alone. However, corrupt political officials ensure that this income goes into their pockets, and not into programs that can aid Iraqi civilians with poverty relief and job availability. 

Although Iraq uses offshore sites to export oil, many of its oil fields are still within the country itself. Protestors have been blocking major trade ports or roads leading to oil fields, which prevents trade goods from entering or exiting the region as easily. Furthermore, the protests, which have grown violent on both sides, have spread to southern key petroleum cities like Basra. Oil produced in Basra supplies 90% of Iraq’s total oil exports, so any unrest there could completely derail oil production for the entire nation. As a greater concern for investors, unlike Saudi Arabia, Iraq does not have the same “workarounds or spare capacities” in its system to bounce back as quickly from depletions.

If Iraq’s oil market is harmed as a byproduct of the civilian demonstrations, the entire global supply of oil could face consequences. India, China, the U.S., South Korea, and Greece all imported $45.5 billion of oil from Iraq in 2017, so these five biggest customers will be the most vulnerable to spikes in their own domestic oil prices. China may also be taking the hardest hit in the near future. Just last month, Beijing and Baghdad announced a joint “oil for reconstruction” partnership. In exchange for a two-thirds increase in crude oil sales, China will invest heavily into Iraq’s infrastructure. However, due to the recent protests in Iraq, these plans for China to secure Iraq as part of its Belt and Road Initiative in the Middle East may be temporarily halted. 

Clearly, change is needed. But, oil has been so central to the economy, income, and livelihood of the Middle East for the last several decades. Is it possible for these countries to look past oil as a source of revenue? What other options for markets exist for Iraq, Saudi Arabia, and similar oil-producing Arab nations?