October 15, 2018
How oil turns antagonists to allies
Oil market dynamics can make for strange bedfellows, as overlapping economic interests can often trump entrenched regional rivalries or bilateral strife. That is not to say that oil markets are not vulnerable to geopolitical events—they are. Probably the most well-known and often cited example of a geopolitical issue to effect oil markets was the 1973 Arab-Israeli War, in which Arab oil producers claimed to have embargoed oil supplies to the United States in retribution for US military assistance to the Israelis during the conflict.
However, while the link between oil and geopolitics has certainly been demonstrated on several occasions, not every geopolitical issue bleeds over into the oil market. In fact, when it comes to energy production, many countries have demonstrated that they are likely to get along when it comes to oil policy even if they are antagonists in the geopolitical sphere.
Although geopolitics can, in some cases, dictate economic terms, business and economics often take precedence over antipathy, particularly when two powers are presented with financially beneficial opportunities. This has been proven time and again, as nation-states engage in commercial alliances that run contrary to their geopolitical interests, but in accordance with their economic ones.
Saudi Arabia–Iran/Qatar
One key example is the ongoing political rivalry amid cartel cooperation between oil giant Saudi Arabia and some of its neighbors with whom political relations are tense to nonexistent. Saudi Arabia has developed intense regional rivalries with both Iran and Qatar, to the point where it no longer maintains diplomatic ties with either nation. However, this rivalry recedes when the Organization of Petroleum Exporting Countries (OPEC) meets.
At the November 2016 OPEC meeting, Saudi Arabia led OPEC nations, including Iran, to a landmark production cut agreement that included granting special accommodations to Iran as its industry recovers from years of United Nations (UN) sanctions. Saudi Arabia and Iran reached this momentous agreement even though, earlier in 2016, Iranians sacked and burned the Saudi embassy and Saudi Arabia banned Iranians from participating in the Hajj. Although it would have supported Saudi Arabia’s geopolitical aims to further punish Iran’s oil industry, the economic and financial benefits of this OPEC oil agreement for Saudi Arabia superseded the geopolitical antagonism.
Saudi Arabia–Russia
Historically, Russia and Saudi Arabia have not enjoyed a harmonious relationship, and today the two powers stand on opposite sides of almost every significant regional issue. Russia supports the Assad regime in Syria and has military forces stationed in Syria to protect the regime, while Saudi Arabia opposes the Assad regime and supports the movement to remove Assad from power. Russia also maintains business and political ties to Iran, which Saudi Arabia seeks to isolate from the global community.
However, when it comes to the oil market, Saudi Arabia and Russia couldn’t be closer. Not only did Saudi Arabia convince Russia to join OPEC’s production agreement, but the two mega-oil producers are preparing to solidify their cooperation in a new oil producers agreement. Russia and Saudi Arabia are also on the way to establishing a joint investment fund to pursue new energy technologies. Russian oil minister Alexander Novak and Saudi oil minister Khalid al Falih have each visited premier oil installations in each other’s countries and may even collaborate on nuclear power and natural gas initiatives. Thus, while Saudi Arabia and Russia remain at odds geopolitically, they are allies in energy.
UAE–Iran/Qatar
Geopolitically, the UAE is allied with Saudi Arabia and opposes Iranian expansion in the Middle East. The UAE also supports the Trump administration’s renewed sanctions on Iran and the Iranian oil industry. Despite these differences, the UAE has continued to purchase significant volumes of oil from Iran. According to TankerTrackers.com, in the month of September the UAE was the third largest importer of oil from Iran, purchasing over 4.5 million barrels. Even as the UAE claims it plans to end its purchases of Iranian oil, Dubai continues to buy large amounts of condensate from Iran to refine into domestically used jet fuel.
In June 2017, the UAE broke off all diplomatic relations with Qatar, citing Qatar’s support of terrorist groups. These actions included banning Qatari ships from docking at UAE ports, ordering all UAE citizens to leave Qatar, and expelling Qatari citizens from the UAE. Despite the harsh conditions the UAE has imposed on Qatar (along with other GCC countries) the UAE and Qatar have maintained their energy business deals. Qatar continues to supply the UAE with natural gas via the Dolphin pipeline, and despite the diplomatic dispute, neither country ever considered shutting down the flow of natural gas.
Turkey–Kurds
Turkey has long had an antagonistic relationship with the Kurds, particularly with its own domestic Kurdish population, and has long considered the formation of an independent Kurdish state as a geopolitical—and indeed existential—threat. Turkey has strongly opposed the Kurdish independence movement, both in Turkey and in neighboring Iraq. However, that has not stopped Turkey from benefitting from Kurdish oil resources in Iraq.
In 2013, The Kurdistan Regional Government (KRG) signed a deal with Turkey to export Kurdish oil while bypassing the Iraqi national oil company. This oil travels via pipeline from northern Iraq through Turkey to the Turkish port of Ceyhan. Turkey benefits economically from this relationship, but so does the KRG, which sees the revenue from its oil trade as essential to its independence objective. Turkey strongly opposed the KRG’s independence referendum in 2017 and even threatened to cut off the KRG’s access to global markets. However, Turkey failed to follow through on this threat and KRG exports continued to flow through Turkey with only minor interruptions.
These examples demonstrate that when it comes to energy, lucrative deals prove important than acrimonious relations, and that when money is to be made, hostile neighbors can find their way to common ground. For these countries, the energy industry and energy trade or transit make up a significant component of their economies, and some of these countries rely entirely on revenue from energy production and sales. Thus, when given the choice between geopolitical stances and economic well-being, these countries are rarely willing to sacrifice or even endanger this business for diplomatic or geopolitical maneuverings.
Ellen R. Wald, Ph.D. is a senior fellow with the Atlantic Council Global Energy Center. You can follow her on twitter @EnergzdEconomy
Image: Oil drums (photo by Sergio Russo/Flickr).