Petrodollars at work: Rivalries in the Persian Gulf

Executive Summary

Over the past several years, the states of Eastern Arabia – notably Bahrain, Kuwait, Oman, Qatar, and the United Arab Emirates (U.A.E.) – have had to increasingly deal with a number of crises.The most important of these crises involves the very resource with which these nations’ livelihood depends: oil. Another troubling crisis for these states has been the withdrawal of the United States from the region and the ascendancy of Iran. Squeezed between the two regional hegemons of Iran and Saudi Arabia, these tiny states have sought to protect their independence as well as self-interests by building themselves into important centers of power through their immense wealth and influence. Controlling these states would be highly beneficial for each regional hegemon, since it would give the controller access to not only those reserves of wealth and influence, but also extensive maritime access to the Persian Gulf.
The future of these states will largely depend upon what the outcome of the Iranian-Saudi rivalry will be as well as their ability to maintain various collective institutions that will monitor aspects related to their economics, military, and politics.

Introduction

The discovery and exploitation of oil in the Middle East has been critical for the development of several states in the region. None more so than the formerly impoverished Sheikhdoms of the Persian Gulf. As a result of possessing some of the world’s largest natural energy reserves, these Sheikhdoms are now highly influential and extremely wealthy states. An example of their increased importance has been the level of activity with which these states partake in worldwide. Despite having made substantial progress over the years, there has been a growing concern within these states over the price of oil, as well as the ongoing Iranian-Saudi rivalry that is threatening to bring these states into a regional conflict. These states have sought to manage these crises through a multitude of collective institutions that will ultimately have to work together in order determine their fate.

Historical review of the region and its energy exploitation

Since the nineteenth century, Great Britain had dominated the Persian Gulf and the territories of Eastern Arabia. In 1971, the British decided to withdrawal from the region, and granted independence to the territories of the Persian Gulf that had been under some form of treaty with Great Britain. After acquiring independence, the states of Bahrain, Oman, Qatar, and the United Arab Emirates (or U.A.E.) began to rapidly develop their economic infrastructure – with a concentration on the energy and financial sectors. These newly independent states did not have to undertake this blindly. Since the Second World War, two of the largest energy producers in the region had been Kuwait and Saudi Arabia. Both of these states were able to amass huge reserves of wealth by selling their oil on the European market; and as a result they were able to develop their own infrastructure relatively quickly (Mansfield, 2000, p. 282). With both Kuwait and Saudi Arabia as prime examples for development, the states of Eastern Arabia followed the same method of the selling of oil in exchange for large sums of wealth, and were just as successful in the process as their neighbours. So successful in fact, that a sort of financial rivalry exists to this day between Qatar and Saudi Arabia – two of the richest states on the planet.

The sheer amount of wealth that has been generated by these states from their natural energy reserves has been nothing short of astronomical. In order to protect their interests in energy production and finances, those states of the Middle East that had a stake in such matters decided to create two international organizations. The first of these was created on 14 September 1960, and was called the Organization for Petroleum Exporting Countries (better known by its acronym OPEC). Created to guarantee the price of oil for those nations that are a part of the organization, OPEC has acquired a notorious reputation in the West as the chief price fixer of oil (Brew, 2016). While dominated primarily by Middle Eastern states in its formative years, OPEC has grown to include a number of African as well as Asian nations. This has given OPEC an appearance of being a much more internationally inclined organization. The second organization was established on 25 May 1981, and is known as the Gulf Cooperation Council (or GCC). All of the Persian Gulf states are members of the GCC, which is an economic and political union of those states. As with other economic unions, the goal of the GCC is to increase trade between its member states. While the issue of a single currency remains elusive for the organization, there has nonetheless been significant progress made through economic cooperation. In recent years, Saudi Arabia, who is the leader of the GCC, has been pushing for greater political union between GCC members (Khalaf, 2013). Calls for unification have largely been ignored and seen by the smaller GCC members as an attempt by Saudi Arabia to increase its own influence and power in the region.

Starting in 2014, the price of oil began to drop. This price reduction initiated an economic crisis within the states of Eastern Arabia, forcing them to begin looking for ways to bolster their export-based economies. One way how these states have begun to tackle the issue of reduced state revenue has involved the raising of fees and taxes. They have also begun to buy international bonds and sell debt in order to balance their budgets (Parasie and Whittall, 2016). Another area that the rulers of these states have begun to consider is fiscal reform. Whether or not the populations of these states can become attuned with the ideals of fiscal conservatism after so many years of double digit – and in some cases triple digit annual growth from the selling of their energy reserves is questionable. In early 2016, the Kuwaiti government tried to pass fiscal reforms that would have altered the way which and ultimately how much oil workers were paid (Stratfor, 2016). The workers, who were unionized, went on strike and the reforms were never passed. Since then, the Kuwaiti government has looked elsewhere for fiscal reforms – again, notably in the area of fees and taxes. It remains to be seen whether or not similar measures will try to be taken in the other Persian Gulf states. Another major area that needs to be considered if these states want to embark on fiscal reforms is budgetary cuts – in particular the spending on various social programs with which the ruling monarchs undertake for their national citizenry. According to OPEC’s own 2015 Annual Statistic Bulletin, oil production by OPEC member states had fallen in 2014 by 1.5%; and ironically, demand for oil products had risen to 2.9% within those very Middle Eastern states who also happen to be primarily oil producers (Omar S. Abdul-Hamid, et al., 2015).

“The fluctuations in the price of oil taught the Persian Gulf states who were OPEC members a valuable lesson: to restructure their economies”

The drop in the price of oil could not have been reasonably controlled by OPEC. It was caused by the simple fact that energy production had been and continues to be on the rise in the U.S. (Wendt, 2014). In the U.S., the oil industry has been using the highly controversial extraction method called fracking in order to access hard to reach sources of shale oil. The 2015 Annual Statistic Bulletin published by OPEC supports this claim, by stating that “In 2014, world crude oil production averaged at 73.4 million barrels / day, increasing by 0.7 per cent, over 2013. Noticeable increases originated in North America, particularly in the U.S.” (Omar S. Abdul-Hamid, et al., 2015). For approximately two years OPEC members have been in panic mode as they watched the price of oil fall and their main source of state revenue slowly dwindled. Another issue that has been causing uncertainty in the price of oil has been the potential for Iranian oil to make a return to the market. While an OPEC member, the presence of sanctions had limited Iran’s ability to sell its oil; thus severely impacting its overall economy. Before sanctions had been put in place, Iran was a major exporter of oil. As with the increase in U.S. energy production, many in OPEC fear that the mere presence of more oil from Iran would cause another drop in the price of oil (BBC, 2015). The fluctuations in the price of oil taught the Persian Gulf states who were OPEC members a valuable lesson: to restructure their economies in order to avoid having trouble with their energy-dependent economies in the future. It has been two years since that drop in the price of oil had occurred, and since then oil has struggled to return to its former position of strength at +$100 a barrel.

Regional security issues and rivalries

Another area that is of growing concern for the states of Eastern Arabia is security. This has been largely due to the Obama administration’s diplomatic rapprochement with Iran and that state’s continued policy of supporting Shiite groups throughout the region. Almost all of the states of Eastern Arabia have a composition of Shiite and / or Sunni populations (with the exception of Oman – which is of the Ibadi sect) and as such, the possibility for sectarian violence is very real. These states cannot afford any period of political instability. Furthermore, internal instability would only embolden Iran as well as terrorist groups such as al-Qaeda and the Islamic State to meddle within these state’s internal affairs. This explains in part the attitude that the monarchs of these states have towards the development of social programs for their native citizenry (Roberts, 2016).
For security, the states of Eastern Arabia had to, at first, rely on Great Britain for protection, and then the United States in more recent years. Four years after the Gulf Cooperation Council had been established in 1981, the member states decided to create a modest military force that could provide some means of defence. That military force is known as the Peninsula Shield Force. Throughout its 35 years of existence, the Peninsula Shield Force has been deployed widely throughout the GCC and has provided the ruling monarchs with the capability to maintain both order and stability within their respective states (Stratfor, 2014). Due to the growing security concerns of these states, there has been talk of rebuilding the Peninsula Shield Force into a proper military that is up to modern standards. A major part of that rebuilding phase will concentrate on the refurbishing of arms and equipment; another widely discussed issue for the force has been recruitment and its overall size. Early reports suggest that the Peninsula Shield Force will drastically increase in size – from its modest numbers to over 100,000 strong (Stratfor, 2014). As these possible changes to the Peninsula Shield Force are being discussed by its respective member states; the Arab League has unanimously created a new military force. Known generically as the “Arab League Response Force,” this new military force is around 40,000 strong and is headquartered in Cairo, Egypt (Stavridis, 2015). A multinational force recruited from many Arab nations, this Arab League Response Force gives us a possible idea of what a revamped Peninsula Shield Force might look like in the future.
In recent years, the Peninsula Shield Force has seen a flurry of activity due to the series of crises that are currently gripping the region. As a result of being deployed more actively, many within the GCC and those involved in Arab affairs have been interested in seeing whether or not there is the possibility of an “Arab NATO” being established in the near future. Unlike NATO which was designed to be a defensive alliance, this Arab NATO is being created as a reaction towards the rise of Iran. As with previous Arab coalitions that had taken place in Yemen in recent years, the main goal of this Arab NATO would be intervention (Editorial Board, 2015). The establishment of a permanent military alliance between Arab states would be highly beneficial for the states of Eastern Arabia. Not only would it act as deterrence towards Iran, but it would also give certain military benefits. These military benefits include: a joint command structure and better coordination (Stratfor, 2014). Other larger states such as Egypt and Saudi Arabia will almost certainly have to join the alliance since they could provide it with the necessary manpower; while states like Kuwait and Qatar can help finance it (Stavridis, 2015). With this, it can be seen that each state will be able to supply the Arab NATO in its own unique way; making it a collective / collaborative effort.

“An example of the stark differences that exist between GCC member states is how they perceive and act upon Islamic terrorism”

One issue that could potentially diminish or end the progress that had been achieved by the GCC thus far is the lingering rivalries that have come to characterize the relationships that exist between almost every member state. An example of the stark differences that exist between GCC member states is how they perceive and act upon Islamic terrorism. In recent years, several of these Arab states have been under pressure from Washington to combat Islamic terrorism in any way they can – and yet, it is common knowledge that Qatar openly supports organizations that are considered by many to be radical Islamists. This has angered Saudi Arabia, and Qatar’s other Persian Gulf neighbours. Another area of contention between Qatar and its Persian Gulf neighbours has been Qatar’s criticism of their handling of both domestic and foreign affairs through its own media: al-Jazeera. Particular attention has been directed at Saudi Arabia, which in response decided to close down al-Jazeera in their country (Cockburn, 2014). From this, it can be seen that the Qatar-Saudi rivalry has clearly exacerbated since the early days of their financial rivalry.

While the Qatar-Saudi rivalry certainly garners a majority of the attention, it is not the only rivalry that exists between GCC members. Most if not all of the remaining rivalries do however, involve the peninsular state of Qatar in some way. Dating back to the nineteenth century, when Bahrain attempted to dominate Qatar militarily, the Qatar-Bahraini rivalry has a strong historical precedence that has managed to exist to this day. The two nations have primarily squabbled over territorial disputes as well as natural energy reserves that lie within their contested borders. The Qatar-Emirati rivalry has far more dire consequences for the GCC since it reaches beyond the immediate Persian Gulf area to include failed states across the Middle East and North Africa region. Both Qatar and the U.A.E. have been supporting opposing factions in the ongoing conflicts in both Libya and Syria (Wagner and Cafiero, 2015). Tensions have steadily risen between all GCC members over this issue of supporting either Islamist or anti-Islamist factions. In 2014, there was a diplomatic effort attempted in order to force Qatar to change its position on supporting Islamist groups or regimes across the region. The effort was led by Saudi Arabia and included other GCC member states (Kholaif, 2014). Those states that had sided with Saudi Arabia pulled their ambassadors from Qatar, temporarily isolating the peninsular state for a brief time. While its other Persian Gulf neighbours are still displeased with Qatar over its past actions, tensions have gradually began to ease, and relations are back to being cordial. These rivalries that have existed for some time between the member states of the GCC are a major obstacle in its attempt at forming an Arab “NATO”.

Conclusion

From this, it can be seen that a series of crises has threatened the small states of the Persian Gulf to the point where the rulers of these states have begun to collectively collaborate on a series of economic, military, and political issues. It will be interesting to see whether or not the mere threat of Iran can force these states to end the lingering intrastate rivalries (such as the ones between Bahrain and Qatar; and the one between Saudi Arabia and Qatar) that have characterized the geopolitics of the region since the 1970s. With the U.S. attempting to become more and more disengaged from the region, it is a certainty that the Arabs will have to do more in regards to providing their own security in both economics and foreign affairs. They certainly have the resources to do so. While fiercely independent, the Sheikhdoms of the Persian Gulf will find that unity on a wide range of issues will enable them to use their immense reserves of influence and wealth more effectively then as independent entities. This will of course put these states at the centre of attention as they begin to become more and more active throughout the wider Middle East and North Africa region.

Recommendations for Policy

Economic diversification. As mentioned in this paper and elsewhere, the states of the Persian Gulf have been largely dependent on the selling of their natural energy reserves (oil and natural gas) on the world market in order to increase state revenue. With the price of oil always fluctuating, it would be best if these states could somehow diversify their economies in order to prevent them from being crippled by another collapse in the price of oil. This will be especially hard for the smaller Persian Gulf states. However, this is already being done within Saudi Arabia with several large scale industrial projects. Whether or not these states can be truly weaned off of energy dependence remains to be seen. The selling of their natural energy reserves on the world market has been the mainstay of all of these states’ economies.

Diplomatic rapprochement with all neighbours. A diplomatic rapprochement between all of the Persian Gulf states is highly advisable; especially if these states want to collaborate against the growing threat of Iran. As such, it will be interesting to see if leaders such as Tamim bin Hamad al-Thani and Salman bin Abdulaziz al-Saud can set aside their differences and end the rivalries that exist between their states in order to begin to cooperate on a wide range of issues. Ending years of rivalry will be of great benefit to the Persian Gulf states, since it will enable them to concentrate all of their resources on the threat that is posed by Iran, rather than on themselves.

Establishment of an Arab “NATO,” or greater alliance. For some 35 years the states of the Persian Gulf have been cooperating on economic issues through the GCC. This organization has provided the framework that is needed for both economic and political collaboration. The threat posed by Iran and the persistence of conflict in Libya, Syria, and Yemen have forced the states of the Persian Gulf to consider establishing a permanent military alliance as well as a much larger military force. Having worked together on a variety of economic and political issues through the GCC, the establishment of an Arab “NATO,” or greater alliance should come relatively easy. The inclusion of other states outside of the immediate Persian Gulf area would greatly increase the overall strength of the alliance by enabling the alliance to draw on a wider range of resources. The establishment of both a regional military organization and a military force for that organization will enable member states to have greater options for maintaining internal security, as well as a more dynamic foreign policy within the MENA region.

Shane Vrable is a Junior fellow at the CGSRS | Centre for Geopolitics & Security in Realism Studies. He may be contacted at Shane.vrabel@cgsrs.org

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