Fractures in Arab Gulf alliance a greater threat to oil security than Islamic State
Break up of the Gulf Co-operation Council could threaten world’s largest oil fields as Saudi Arabia and Qatar lock horns over alleged support for Islamists
By Andrew Critchlow
The Telegraph
In 1981 six Arab monarchies, which today control about a fifth of the world’s oil supply, formed the Gulf Co-operation Council (GCC).
As the war between Iraq and Iran intensified, the Sunni Arab sheikhdoms of the Gulf peninsula – Saudi Arabia, Oman, United Arab Emirates (UAE), Kuwait, Bahrain and Qatar – originally came together in theory to form a Middle Eastern version of the European Union. Although the group has no formal political charter like the EU, it still provides the only official forum where all six leaders of these oil-rich countries can sit down together to debate and agree on mutually beneficial policies in the region.
But the rise of Islamic extremism across the Middle East, America’s growing willingness to deal with Iran and lingering leadership succession issues amongst member states are now unpicking the ties that have bound the GCC together in a tectonic shift that could have profound implications for the security of the world’s largest oil fields.
Formed in the shadow of war, its initial purpose was to help guarantee security mainly from larger Pan-Arab nationalist despots such as Saddam Hussein and the threat posed by the Shiite Mullah’s in Tehran. But after the US invasion of Iraq in 2003 its focus became increasingly economic. Initiatives such as interconnecting electricity networks across the GCC, regional transportation projects including a railway and the possibility of a formal currency union took hold.
Often criticised as being just a powerless club of oil-rich benign dictators, the GCC has arguably done more than any other institution to guarantee political and economic stability over the last 35 years in the region once dominated by warring bedouin tribes. However, the populist forces unleashed by the Arab Spring uprisings of 2010 and the rise of extremists under the banner of either the Muslim Brotherhood in Egypt, or the Islamic State of Iraq and the Levant (Isil) now threaten to tear it apart.
Tensions between Saudi Arabia, the UAE and Qatar were understood to have again come to head this weekend with an emergency meeting of foreign ministers in the Red Sea city of Jeddah described by the Saudi newspaper Asharq Al-Awsat as being “critical”. Riyadh and Abu Dhabi have accused authorities in Doha of supporting terror related groups such as the Muslim Brotherhood and meddling in the internal affairs of other GCC states.
The meetings could eventually lead to Qatar – the world’s biggest shipper of liquified natural gas – being ejected from the GCC. They also come at an awkward moment in the group’s history when a number of its leading ruling dynasties are in transition.
“People in the region say the GCC is effectively over as an organisation,” said Christopher Davidson, a reader in Middle East politics at Durham University. “Cracks are now appearing in the half-century old client state system in the region.”
In Oman – where rumours over the health of the country’s childless leader Sultan Qaboos have brought decision making to a halt in recent months and caused growing speculation over the succession – the country has slowly moved closer to Iran. Bilateral talks between Muscat and Tehran over a number of energy deals have deviated from the GCC’s naturally hawkish line on Iran. Meanwhile in Iraq, Isil is reported to be earning $2m (£1.2m) per day from oil fields it has already captured.
However, a bigger danger than Isil to the security of the world’s largest oilfields in the Gulf is arguably a wider breakdown of political co-operation across the region. Despite these dangerous risks, oil prices are under downward pressure with Brent crude suffering its biggest falls in more than a year to trade close to $100 per barrel.
“We’ve got the barbarians at the gates of the world’s largest oil fields and the price of crude has hardly moved, which tells me this instability has been factored in,” said Davidson.
Kuwait agrees China crude deal as Gulf producers turn to Asia
Kuwait has become the latest Arab Gulf state to deepen its oil trading relationship with China as the US gears up its own exports of ultra-light crude.
Kuwait Petroleum Corporation said over the weekend that it will increase its shipments to China by 500,000 barrels per day (bpd) of oil over the next three years, accounting for about 15pc of the Gulf state’s exports. Eventually, exports to China could hit 800,000 bpd.
“With new and mutual co-operation between the two parties, there is a good sign of increasing the volume of our crude oil exports to China up to 500,000 bpd in the next three years,” Nasser Al-Mudhaf, KPC’s Managing Director of International Marketing told the Kuwait News Agency.
Oil-rich Gulf states are increasingly turning to China for new energy deals as the West led by the US seeks to reduce its dependence on Middle East oil and instead focuses on developing domestic energy sources such as shale.
Earlier this year, state-owned China National Petroleum Corporation agreed a landmark deal with the Abu Dhabi’s government to help exploit energy resources in the emirate.
Traditionally, Gulf states have held close relationships with Western oil companies but experts say these deals will challenge the historic status quo further.
Supply risks are high despite falling oil price
Bears have hold of the oil market with crude falling to its lowest level since June 2013 but according to Commerzbank the current weakness in prices will be short lived.
The price of Brent has fallen 15pc since hitting $115 per barrel in June largely due to the perception of new supply coming on stream such as ulta-light oil condensate exports from the US.
But Commerzbank believes investors are ignoring the fundamental risks that could shut off supplies from the Middle East and Russia in a heartbeat. “The market is underestimating supply risks in our view and the price of oil could rise significantly at any time. Long-term oil prices have already increased markedly,” said the broker.