A Year in Review – 2 – Oil and the Middle East and North Africa

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Continuing unrest in the Middle East and North Africa (MENA) this year has taken a significant toll on the region.

The Arab Spring – a revolutionary wave of demonstrations, protests and wars – has caused disruption to important sectors such as tourism and has impacted badly upon inward investment to the region. It’s no surprise MENA’s much-coveted oil sector has also been affected.

More recently, the conflict between Israel and Gaza has contributed to a sharp increase in prices in Brent North Sea crude. Brent’s volatility has shown all the signs of uncertainty during the year – which has not been good news for oil prices in Europe.

However despite a poor overview from 2012, many commentators – including the World Bank – say there is a possibility that the Arab Spring could actually contribute to economic development in the region next year and beyond. This could mean an increase in OPEC crude production.

And the reasoning behind this:

According to a team of academics from the Vale Columbia Center on Sustainable International Investment at Columbia University, once democratic institutions are created and stability in the region is restored, investors will be more than willing to return to this lucrative region.

But it’s difficult to speculate in a region as volatile as MENA at the moment. For example Goldman Sachs suggests that escalating tensions between Israel and Iran could drive oil prices above $130 a barrel next year.

Increasing Food Prices and Continuing Unrest as Disruptive Forces

Anyone trying to forecast future events for the region should also watch out for a spike in world food prices, when it is expected they could hit an all-time high in the first quarter of next year.

This is due in part to one of the worst droughts this summer in the US since the dust bowl of 1936. MENA is one of the largest importers of grain and foodstuffs in the world, so it is likely this could serve to cause some further disorder.

Dr Gawdat Bahgat of the National Defense University’s Near East South Asia Center, believes a combination of factors in 2012 will contribute to some further shake ups in the region. Increasing global oil production from Iraq; as well as from other Arab countries including Saudi Arabia (who are making up for the shortfalls in oil supplies due to international sanctions imposed on Iran); could help to increase oil production in the future.

A leveling out of oil usage in OECD countries in 2012 may also change the dynamics of world demand. Recession-hit countries in the West have become more and more energy efficient and as I discussed in a previous blog, technological advances such as fracking and horizontal drilling in North America could enable the US to become self-sufficient in less than a decade.

All of this could have wide-reaching implications on the US presence in the Middle East, where they are traditionally one of the biggest importers of crude oil. It’s no surprise therefore that MENA is increasingly looking to Asian markets to secure major buyers for their oil exports.

Enter Major Buyer – China

2012 was an interesting year in China – particularly when the new seven-man Party leadership took over at the helm last month. However, when asked to recall what was memorable about the emerging superpower in 2012, many may refer to its controversial role in the Middle East, when it opposed sanctions on Iran over its nuclear energy program and decided to veto a UN resolution against Bashar Al-Assad’s regime in Syria.

China is now one of the significant movers and shakers in the Middle East and as 2012 draws to a close, it will be all eyes on new leader Mr Xi Jinping to see how he plans to extend his country’s influence in the region. It will certainly be interesting to see how the role of this emerging superpower will evolve as it becomes more and more commercially involved and, perhaps despairingly for China, more and more entwined in foreign and diplomatic relations.

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