By Sourajit Aiyer
It is often said that money makes the world go round. Nowhere is this more ingrained than in the battles for oil, power and arms. The news of Saudi Arabia and its key allies severing connections with Qatar following the ongoing rift between the Gulf Cooperation Council (GCC) members shocked the world. Here are three theories about this issue.
Regaining control over the output (and prices) of oil and gas may be a good enough reason to instigate a rift in foreign relations. Baseless as it may seem, what if it were true? After all, oil and gas is a multi-billion dollar industry globally, and a critical one for Gulf nations.
Following the drop in global oil prices, the OPEC members decided to cut their production output by between 1.2 million and 1.8 million barrels per day (bpd) to raise the price. While this revived the price from its lows of around $40 to about $50, it was not sufficient.
At the same time, USA ramped up its shale oil production, with output expected at 10 million bpd soon. Libya and Nigeria, not part of the OPEC cutback, also ramped up production. Since the global inventory were still being fed, the uptick in oil price was not sufficient to compensate the OPEC for the loss in its output.
At approximately 600,000 bpd, Qatar is one of the smaller producers. However, fears of possible disruption to supplies due to a conflict may weaken OPEC’s deal on production cuts, eventually resulting in it chucking the cutback deal and ramping up production.
That could help raise its output and its eventual returns, even if one assumes prices remain stable in the near term. A more short-term reaction may be on prices, since only the fear would suffice for market reactions, even if there is no armed conflict.
Oil prices will be watched, and there will be focus on natural gas too. Qatar is the largest gas exporter. Iran, central in the Saudi-Qatar spat, has around 16% of global gas reserves. Russia, with around 25% of global gas reserves, is fast exploring its East. The recent Rosneft-Aramco meeting suggests a possible Saudi-Russian deal, maybe in gas too.
With the blockade on Qatar expected to overburden its sea freight (due to closure of its land border), any disruption in gas supplies may see prices spike up. While fears of conflicts have not impacted oil policy in the past, it may have a short-term ripple! Once up north, the prices may remain sticky.
This theory may not seem tenable, but it will be interesting to note the prices and fiscal revenues of oil countries this year, more so of the Gulf states.
Challenging the boss
For decades, Saudi Arabia had been the undisputed leader in the Gulf. The world’s largest oil exporter, the House of Saud enjoyed the US patronage since early 20th century, when the seeds of Aramco (Arab-American Company) were sown.
Larger neighbours like Turkey and Egypt aligned with this camp, given their close ties with the US and NATO.
But times have changed. Qatar’s real GDP grew at a CAGR of 5.4% between 2010 and 2016, the highest in the GCC. Saudi and UAE followed, with 4.6% and 4.4%. Estimated real GDP CAGR from 2016 to 2020 is 2.6% for Qatar, second only to UAE’s 3.2%. Saudi and UAE may be the larger-sized economies, but Qatar has one of the smallest populations.
Hence, not only is the pressure of Qatarization lower than that of Emiratization or Saudization, its average citizen is far richer. Qatar’s per capita nominal GDP in 2016 was $68,000 vs. the UAE’s $39,000 and Saudi Arabia’s $21,000. The 2020 estimations are $85,000 vs. $46,000 and $23,000.
Qatar is the world’s largest natural gas exporter today. Global financial markets gave Qatar (and UAE) emerging market status in 2013. In a region where Western liberals often question the freedom of media, Qatar has established an English-news network that is attracting media professionals from the US and Europe.
Qatar has high ambitions! Its growing clout gives it the confidence to challenge Saudi Arabia as the leader of the Gulf. Egypt and Turkey have troubles of their own, leaving the field open for Qatar.
The economic challenges that may hit Qatar following this connectivity blockade include spiking food inflation, construction materials inflation, delayed shipments, lesser transit travellers, exodus of critical expats and a general hit to prosperity. The estimated real GDP growth may seem far off then. The current crisis may just help slow down the challenger!
Possible military channel
The Sunni-Shia conflict was already raging between Saudi Arabia and its Sunni allies, and Iran and its Shia allies. This rift extended to Qatar when its Emir allegedly questioned Saudi’s anti-Iran rhetoric (later denied by Qatar saying their news agency was hacked).
Saudi Arabia ranks amongst the top five military spenders globally. It spent around 10% of its 2016 GDP on defence; that’s a around $64 billion. Conversely, Iran spent only about 3%, i.e. approximately $12 billion.
Qatar has money, but lacks the military might to stand up to Saudi Arabia. Iran has the weapons but needs money for more. Is this the link in the current Qatar-Iran bonhomie, resulting in extending the Shia-Sunni rift?
Qatar engaging in interactions with Iran post-elections and its alleged support to Muslim Brotherhood anyway did not go down well with the Saudis. When they formed a Muslim military alliance to fight ISIS and Al-Qaeda, many globally opined its real motive may be to intimidate Iran.
This opinion extended to the $110 billion arms deal struck between US and Saudi Arabia during Trump’s visit, where risks from Iran were discussed.
Since the 2011 Arab spring, the Sunni-Shia divide has been burning. While Qatar’s royal family hails from Saudi’s Najd, the home of Wahabbism, there have been recent friction between the Wahhabis and Qatar. Has this turned Qatar towards Iran as an extension of the Shia-Sunni rift, or is Iran playing its card to get military funds from Qatar?
Calling this crisis a possible conspiracy theory around these battles for money may sound far-fetched, as it may just be a regular diplomatic spat.
As of now, Qatar seems to have bitten off more than it can chew, as the implications of the blockade can be profound. Qatar has proved its point by standing up to the incumbent leader. Now, both would do well to temper down!
Originally published in Foreign Policy News, USA