The US energy resurgence since 2005 has dramatically changed the geopolitics of global energy, particularly with respect to the Middle East and North Africa (MENA). The political risks in the MENA region are as high as they have ever been, just as oil supplies are abundant and inflation-adjusted prices are lower than they have been for decades.
The effects of lower oil prices (trading under USD 30.00 per barrel in mid-January 2016) on the MENA region are serious and complex. Three of the five countries labeled by RBC Capital Markets Ltd. as the “Fragile Five”—countries whose economies are undiversified and deeply dependent on oil revenues—are located in the MENA region: Algeria, Libya and Iraq (Nigeria and Venezuela round out the constituents of the group). For nations like these that produce and export large volumes of oil and depend on oil export sales for most of their revenue, sustained low oil prices present serious economic stability issues and the prospect of continuing budget deficits and diminished investment. Compounded by the volatile regional political and military situation, sustained low oil prices will increase the political security risks in the MENA countries.
Almost all oil exporters in the region, particularly the Gulf Cooperation Council (GCC) members, are facing steep declines in fiscal revenues as oil prices are now less than one-third of those needed to balance their budgets. Saudi Arabia’s 2015 fiscal revenues were about half of those in 2014. Iraq’s revenues are estimated to decline by USD 40 billion in 2015 and 2016, while government spending remains high as large parts of the population work for the government or are dependent on public sector spending. Iran is hampered by the combination of previous and current sanctions and low oil and gas prices. The wealthy oil exporters in the region—Saudi Arabia, Qatar, Kuwait and UAE—have large financial reserves that will enable them to run deficits over the coming years, but Iraq, Libya and Algeria have very limited foreign asset reserves.
It is becoming more and more difficult for the oil rich countries to mediate conflicts or maintain regional financial stability. As noted by Jon Alterman, after the “Arab Spring,” tens of billions of dollars have flowed into Egypt from the Gulf states, first as Qatari support for Mohammed Morsi’s Muslim Brotherhood-led government, and then as UAE, Saudi, and Kuwaiti support for the secular nationalist government of Abdel Fattah al-Sisi. The Gulf states’ approach to the Arab Spring was to treat the dislocations as an economic phenomenon. They spent huge amounts of money in the region in an attempt to stifle any contagion of regional instability, but with declining oil prices the implementation of their aid projects in neighboring states has slowed. Many MENA governments subsidize domestic energy prices and, in that respect, lower global oil prices have benefitted countries such as Egypt, Lebanon, Jordan, and Morocco. On the other hand, many (like Egypt and Morocco) are also labor-exporting countries, heavily dependent on worker remittances from wealthier neighboring countries. Moreover, regional oil importers are suffering the effects of regional conflicts and terrorism. Jordan, Lebanon and Turkey are burdened by the influx of Syrian refugees or migrants and the accompanying fiscal consequences. Jordan hosts more than 630,000 registered Syrian refugees. In Lebanon, refugees account for one-quarter of the population. Unemployment rates in Jordan increased to 12.5 percent in the first half of 2015. The World Bank has attributed increased insecurity and uncertainty to lowered foreign and domestic investment in both countries.
It has been evident for a decade that growing population pressure (the so-called “Youth Bulge”), failed economic development, a lack of employment for the younger generation, and failed and corrupt governance increased the potential for political upheaval in the MENA region. Even before the “Arab Spring,” many oil-rich countries had been trying to address people’s dissatisfactions by distributing oil revenues rather than by introducing political and economic reforms. Many of other countries in the region have similarly avoided reforms by depending on outside aid from neighboring petroleum-rich states. Alterman points out that as their wealthier neighbors become less able or willing to provide such support, countries like Yemen, Iraq, Syria and Libya have greater difficulty combatting domestic political instability. This in turn renders them more vulnerable to insurgent or terrorist groups such as the Islamic State, Ansar al Shari‘a, al-Qaeda in the Arabian Peninsula (AQAP), and al-Qaeda in the Islamic Maghreb (AQIM). Five years of civil war in Syria and the escalating conflict with ISIS in Iraq after 2014 have gravely damaged these countries’ stock of physical capital. Absent a (unlikely) prompt resolution of these conflicts, the economies of these countries have little prospect for recovery, and they continue to run high current account fiscal deficits.
The recent Saudi-Iran confrontation in Yemen adds to ongoing political uncertainty in the region. Iran’s potential to add oil supplies to the market now that P5+1 sanctions are eased could put further downward pressure on oil prices in 2016 and 2017. The confrontation, if escalated, could require both countries and their allies to assume still greater military spending burdens, worsening their fiscal difficulties. Moreover, the confrontation adds to regional geopolitical risks, affecting investment, tourism, and trade.
Libya as a Microcosm
Since the civil war began in 2011 in Libya, attacks on key facilities have resulted in significantly diminished oil production and the shutdown of some oilfields. Libya had produced around 1.6 million barrels/day (B/D) before the civil war; current oil production stands at 360,000-370,000 B/D. Furthermore, oil sales are yielding almost US $160 per barrel (/B) less than what Libya needs to meet its annual budget requirements. In their Financial Times article in January 2016, Anjli Raval and Heba Saleh highlight that with the 10th largest oil reserves in the world, Libya is estimated to have forgone more than US $68 billion in potential oil revenues since 2013.
The head of the Libyan National Oil Company (NOC) estimates that if recent UN-backed peace plans succeeded, oil production could rise to 1.2 million B/D. But the actions of ISIS in Libya (believed to have 2,000-3,000 fighters as of December 2015) aim to destroy or damage infrastructure and to reduce state revenues and to undermine peace efforts.
ISIS activity in Libya poses a huge threat to the country’s political stability and energy sector, already burdened by a multitude of political and economic factors including a dysfunctional and fragmented state-owned oil company and the activities of local militias. The defeat of ISIS alone will not provide a solution. Without stable and profitable oil revenues, Libya will remain vulnerable politically and economically, and will be a growing threat to regional security.
The World Bank forecasts oil prices to average US $37/B this year and to increase to US $48/B in 2017. Even if the price increases to around US $50/B, it is still much lower than the price before 2010, when the MENA countries were relatively stable. Sustained low oil prices discourage economic development and investments in security and diversity of supply. In his report on the implications of sustained low oil prices, Frank Verrastro emphasizes that global oil market security hinges heavily on having a diverse and robust global market, strategic stocks to draw on quickly in times of significant shortfalls, and policies that balance prudent and timely development of indigenous energy resources with environmental stewardship, economic improvement, strong trade ties, and a future-oriented outlook as the energy landscape continues to change.
The World Bank expects average growth in MENA to be 4.1 and 4.4 percent in 2016 and 2017, about one-percentage point higher than in the past three years. Much of this additional growth is contingent on Iran’s re-entry into global markets and sufficient security for Libya and Iraq to increase oil exports. Meanwhile, regional expert Anthony Cordesman notes that the same problems that drove the upheavals in 2011 remain in place even in the stable MENA states, and are far worse in others, particularly the fragile states such as Libya, Iraq, Syria, and Yemen. As most projections indicate continued oil supply abundance in 2016 and 2017, political and economic risks in the MENA region will continue to be vulnerable to volatility in the global oil market. It is necessary to continue paying close attention to the future trends of oil prices and their implications for the MENA countries.
Guy F. Caruso is a senior advisor in the Center for Strategic and International Studies Energy and National Security Program. He served as Administrator, Energy Information Administration, from July 2002 to September 2008. Mr. Caruso has over 40 years of energy experience, with particular emphasis on topics relating to energy markets, policy, and security.
Amane Kobayashi is a research intern of Energy and National Security Program at Center for Strategic and International Studies His research focuses on the politics and security in Libya and its impact to the Sahara-Sahel countries.