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Geopolitical Developments in theMiddle East 10 Years in the Future
Dr. Steven Wright
Associate Professor
Associate Dean
Qatar University

A Sustained Period of Low Oil Prices?
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Back to the 1980s?
Oil Price Collapse in 1986

 It was preceded by a period ofhigh oil prices.
 Resulted in global non-OPEC
supply growing (in the North Sea,Alaska, Mexico and the Soviet
Union, among others).

OPEC Action

Market ShareLower Global Demand Oil Demand was 5.4 million
barrels per day (mb/d) lower in1983 than 1978.
 It is noticeable that the recent
dispute between Iran and Saudi
Arabia, had a limited
risk/speculation impact on theprice of oil.

A New Cycle ofLow Oil?

 OPEC cut production toraise prices.
 Little Impact due toOver Production

 Saudi Arabia Changes
Policy to Defend MarketShare Policy Results in 15
Years of Low Crude Oil
Prices From 1986-2000
 From 2000-2014
 2014 - ??

Crude Oil Prices 1861-2014
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The Lifting of Iran’s Containment
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Infrastructure

Energy MarketFactor
Oil Potentialth(4 Largest GlobalReserves)
Natural Gasnd(2 Largest GlobalReserves)

Significant investment
needed in Iran’s oil sector
Can Iran Raise International
Finance to Fund The
Modernization of its Energy
Sector?

Distinctive features• Iran peak-oil at 4.2 million b/din 2011
• Current domestic consumptionof 1.7 million b/d• Production and domestic
consumption of natural gas isvirtually equal.

Iran has exceptional
potential, but domestic
demand is increasing.

• Ageing infrastructure meansthat significant infrastructure
investment is needed.

• Iran’s re-entry to the oil sector
leads to a further downward
outlook on oil price.
• Mainly due to geopolitics andadditional supply, but potential
would have longer term impact.

Iran’s oil and gas
sector are require
modernization:access to financing will
be important indictor

What is the Global Context?
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1. Oil is expected to be the slowest-growing fuel over the next 20 years.
2. Trends in the Global Natural Gas Market suggest the future possibility of an
oversupplied global market. New sources of gas such as those in the Eastern
Mediterranean, East Africa and Australia, and unconventional gas production inthe United States.
3. The EIA expects the United States to become a net exporter of LNG by 2016
and an overall net exporter of gas by 2018. IEA expects US natural gas
production to continue rising until at least 2035.
4. The market effects of further LNG exporters coming on stream in Africa, theLevant, Russia, North America and especially Australia (expected to emerge as
the world’s second-largest LNG exporter after 2015) could eventually produce agas glut.
5. OECD consumption of oil has peaked and is expected to decline post-2015.
majority of future global demand to come from China and India (assuming theircurrent growth trends continue).

A Future of Low Oil on the Middle East
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Negative Outlook

1. Even wealthy countries inthe Middle East will
inevitably face rising
economic problems andliquidity problems.
2. Diversification has failed.
The focus is on what
reforms can be
implemented, and will
they result in instability?
3. Less Foreign Aid andRegional Investment.

Adding to Existing Economic Problems?
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Negative EmploymentOutlook
1. Unemployment is a risingproblem in the Middle
East and is expected torise in the context of
weak economic growth.
2. Unemployment can leadto people being
disillusioned or turn toreligious extremism.
3. Countries such as Egypt
face an acute problem,and for the GCC
countries, the problem isa bloated public sector.

Adding to Existing Economic Problems?
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A Rising Population in a
Weak Economic Outlook

1. Saudi Arabia:31.5 Million (2015)36.8 Million (2025) (16.8%)
2. Yemen:26.8 Million (2015)33.1 Million (2025) (23.5%)
3. Egypt:91.5 Million (2015)108.9 Million (2025) (19%)
4. Iraq:36.4 Million (2015)
47.7. Million (2025) (31%)
5. Iran:79.1 Million (2015)86.5 Million (2025) (9.4%)

The Food and Water Problem
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1. A key explanation for the timing of the Arab Spring in 2011, was the rise in food prices
caused by climate change.
2. In Egypt, food prices rose by 20%, and 40 million persons were on food rations.
3. Rising population trends place further pressure on food prices, which are made worse bya weak economic situation.
4. This raises the risk of spontaneous popular uprisings by the population: It is more aboutsocial-economic factors than the political system.

The Food and Water Problem
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The Food and Water Problem
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1. Extremely high water stress exists: this makes agriculture more problematic; it inhibits
development; and is an increasing problem due to population growth and climate change.
2. Migration is likely to be a key theme for the future. Those who are more educated, arelikely to be the ones who will migrate, which inhibits development.

Key Observations:
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Currently Three Broad Groupings
1

Fiscal Breakeven Brent Oil Prices

The GCC: (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, andthe UAE)
Majority are Dominant Players in the Energy Market; Greater
Political Cooperation as a Bloc; Less Affected by the ArabSpring; More Acute Economic Imbalance with New Global
Economic Climate.

2
Non-GCC Oil Exporters: (Algeria, Iran, Iraq, and Libya)
All affected by the political environment; Very High Public
Debt; Fragile and insecure states in the case of Libya and Iraq;
Algeria weak economic outlook; Iran has potential but isdependent on sanctions remaining lifted post-Obama.
3Post-Arab Spring Countries: (Egypt, Jordan, Lebanon,Morocco, and Tunisia)
Uncertain and fragile politics; risk of insurgency.

1. The Middle East is aninsecure and highly complex
geopolitical arena.
2. All states will be affected by
the foreseeable forces.
3. The distinction between
these grouping may slowly
erode as all face similar
problems in the next 10years

Key Observations:
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1.

2.

3.

4.

In the context of the Arab Spring,increased subsidies wereundertaken by GCC governments
which raised their breakeven prices.
Example: Saudi Arabia’s February
2011 subsidy of $37bn which
included a 16% increase of publicsector salaries. This is equivalent toan additional $14/b on the price ofSaudi exports for 2010.
Qatar has its own debt refinancing
risks which limit liquidity based on
GRE Borrowing. IMF estimatesshow that total external debt
(excluding banks) has more thandoubled since 2008 to $89.2bn (52%of GDP) in 2011.
Based on the above, Qatar’s
breakeven is estimated to be over
$80/b by 2017.

Key Observations:IEEJ：January 2016 © IEEJ2016

What Does This Indicate for the Next 10 Years?
1
The economic context created by a long-term low oil
scenario has serious regional implications.
2
A low oil price impacts region-wide on financial liquidity.
3

4

5

General Observations

The Middle East Region has aHighly Complex Social, Politicaland Security Order. The trends
indicate less stability over thenext decade.

A weak economic outlook adds to the existing region-wide
structural problems of unemployment, food and water
security, in the context of a rising population base
Diversification has been a failure in the GCC states inparticular; therefore for the next 10 years the focus will be
on managing the decline.
Middle Eastern oil states, will have less liquidity at theirdisposal to ease what are expected to be rising social
tensions.

The Key Question is:
How will states ensure liquidityand balance their budget, whilst
balancing this against the risk ofa social breakdown.

How will the Economic Decline be Managed?
Policy 1 – Cut Spending (Austerity)
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What Is the Trend?
Subsidy Reform and Restructuring

 Government Spending will Decline Reduction of Subsidies.
 Government Organizations to be
Restructured and Cost Cut.
 Budget Linked to Planning.
 Risk of social response in a
reduction in benefits context.

Subsidies

Government
Budgets

Restructure

 Fuel Water Electricity
 Food Current Budgets haveexperienced significantcuts.
 This is problematic incontext of a risingpopulations.
 Opportunity for Budget
Based Planning Focus on CoreBusiness Will Add toUnemployment

How will the Economic Decline be Managed?
Policy 2 – Taxation
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What Is the Trend?
Developing a Stronger Tax System

 All Middle Eastern Governments willseek to strengthen revenue generation
mechanisms.
 The oil economies of the GCC will see
the most activity and changes.
 The Six GCC Countries, decided in Q42015 to implement a Consumption Tax
This will take around of 18-24 months ifplanned correctly.
 Corporate Taxes can be expected torise.
 Greater indirect taxation will beimplemented, which will be sociallyresented.

Consumption
Tax

Income andCorporateTaxes

IndirectTaxation

 GCC States haveagreed to adopt it.
 Exemption of essential
goods as perinternational standard.
 Saudi Arabia had
income tax from 19501975.
 Policy on Nationals
changed in 6 months,expatriates stopped
paying tax in 1975.
 Government services
 Property taxation
 Many examples tochoose from….

Current Revenue Structure in the GCC
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How will the Economic Decline be Managed?
Policy 3 – Print Money (QE)IEEJ：January 2016 © IEEJ2016

 For the GCC States who have a peg to the dollar, they are unable to engage in monetaryeasing.
 The challenge will be to maintain the peg given deficits and speculative trading.
 There is a risk the peg cannot be maintained (Oman, Bahrain and Saudi Arabia), a marginal
benefit is that the governments can engage in monetary easing, but a major disadvantage isthat will lead to inflation on food and other imports which all GCC states rely on.
 Middle Eastern states without the peg, are expected to engage in quantitative easing. This
will impact on food imports.

How will the Economic Decline be Managed?
Policy 4 – The Bond Market
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What Is the Trend?
Borrowing to Provide Liquidity

The Rise of Regional Debt

 Promoting Economic Growth means
regional liquidity must be promoted.
 For the non-oil Middle East
countries (especially Egypt), bondissuances is a key public policy tool.

 Saudi Arabia is facing an acuteproblem, and is raising liquidity bothinternally and externally.
 A distinction needs to be madebetween countries in the GCC –Qatar, Bahrain and Oman had alreadyhad a trend of borrowing.
 Qatar’s rate ishigher (over 80%)
if all inclusive oftypes of debt external debt,
public debt andbanks’ net
external position.

Trends in Saudi Arabia: A Cause for Concern?
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1

Saudi Arabia’s energy consumption is unsustainable: it should be a serious
international cause for concern. Far-reaching reforms in energy subsidies
towards reducing consumption and its level of dependence on oil revenues
are needed beyond what has been announced by December 2015.

2At current oil prices (2016), Saudi Arabia will run through its reserves by early2020s. This will place greater pressure on its peg to the dollar.
3Instability in Saudi Arabia poses the greatest single challenge to the Middle
Eastern system. Instability in the Kingdom would have a domino effect. As of2016, it is facing serious internal economic challenges, in addition to security
threats.

IEEJ：January 2016 © IEEJ2016

The Risk of Rising Sectarianism
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What Does This Indicate for the Next 10 Years?
1
Saudi Arabia sees Iran as a threat and incompatible with its conception of a Islamic Ummayiah (Pan IslamicCommunity).
2

There is an inherent incompatibility with an Islamic Ummayiah and the Nation State. The Nation state has
actually proved to be a destabilizing force as it has narrowed the definition of citizenship to encompass
religious identity. This narrowing of identity has proved detrimental in the Middle East.

3

The next decade is expected to see, in the context of growing socio-economic challenges, an intensificationof identity along religious lines. This leads to proxy warfare as is happening in: Yemen; Lebanon, Syria, Iraq,Bahrain. This is in addition to creating fault lines within Saudi Arabia itself given 25% Shia population.

The Context of Religious Extremism
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Currently Three Broad Groupings
1

2

The Emergence of Daesh (Islamic State) stems from:
1. (2000) - Jam’at al-Tawhid wa al-Jihad – Al Zarqawi
2. (2004) - Al-Qaeda in Iraq (Al Zarqawi pledge to Bin Laden)
3. (2007) - Islamic State of Iraq
4. (2013) - The Islamic State of Iraq & Levant (Daesh)
5. (2014) - The Islamic State (Daesh)
Takfirism:• Argues its followers should not cooperate with Shias andapostates.
• Justifying killing Muslims (Shias & Sunnis).
• Goal is to reestablish the caliphate.
• All Middle Eastern States are under threat.

3
Key Point:• Even with the military defeat of the Islamic State, theideology which it grew from, will remain and a newoffshoot group will emerge.

1.

2.

The risk caused by government instability
is that (in the absence of a democraticculture or separation of religion from thestate) it is an ideal breeding ground for
extremist groups.
The risk of terrorism will likely riseprogressively.

IEEJ：January 2016 © IEEJ2016

Concluding Observations
1

The 10-Year Outlook for Middle Eastern region is negative. A complex
arrangement of problems exist which have been progressively growing.
2

3Tensions within states; and amongst states; and also against radical Islamic
Ideology is expected to grow. This will likely lead to increased migration flows
from the region.
The three broad regional categories of states that exists in 2016 will start togradually erode, even the GCC states will see an economic decline and a needto reconstruct the social and economic system. The greatest challenge remains
an unstable Saudi Arabia given the regional implications it would have.

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