Executive Summary

Oil, economic growth, and politics have long been intertwined in the Middle East, transforming the region over the past 50 years into a dynamic player on the global stage. After decades of almost uninterrupted expansion, the sudden collapse in oil prices in mid-2014 has had a dramatic impact on the political economy of the region, creating formidable challenges that will ultimately set a new trajectory for the region’s future development. Initial expectations among oil producing countries that the fall in prices would prove temporary gave way in 2015 to a more somber acceptance that a paradigm shift in the international oil industry has taken place. The industry’s long-held narrative of steadily rising oil prices against a declining resource base increasingly more expensive to develop has been rewritten by technology-driven development of shale oil that will expand global supplies further into the future in a more competitive, lower oil price environment.

To explore the paradigm shift in the international oil market and the geopolitical and economic implications for the Gulf region, the Arab Gulf States Institute in Washington hosted its second annual energy conference, “Petro Diplomacy: Challenges in the New Energy World” on September 19, 2016. The conference brought together oil industry executives, economists, foreign policy experts, scholars, and government officials to discuss key drivers of the oil price outlook, upstream oil investment strategies, economic and energy policy reforms in the Gulf Cooperation Council states, and the impact of lower prices on foreign policy agendas, regionally and globally.

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Key Findings

• The alarming drawdown in reserves and rising fiscal deficits have been the focus of much public discourse, however, the Gulf Cooperation Council states are in a much better financial position now to weather the storm than in previous downturns. Imposing reforms will be politically and socially challenging but an array of financial shock absorbers are available to help lessen the impact. Nonetheless, the pace of change will be tempered by the need to maintain a delicate balance in a multiyear, low growth, economically challenging environment.
• The political momentum for economic reforms is also driven by recognition that oil prices will remain lower for longer and that a high level of uncertainty surrounds the timing of a sustained market recovery. This low oil price environment will eventually lead to tighter oil supplies and stronger prices in the future, but when and to what level is still under debate.
• The advent of nonconventional shale oil is injecting yet another level of complexity in forecasting higher oil prices, and hence revenue for government planners. Mainstream economic forecasts are coalescing around a $50-60 per barrel (bbl) band to 2020. At the same time, diverging views are rampant among industry professionals, with a much wider price range of $40-75/bbl projected through the end of the decade.
• Two years of persistently low oil prices has also triggered a crisis for OPEC, with ministers searching for a new policy framework that will lead to stronger markets. A policy shift aimed at maximizing oil revenue is expected to replace the market share strategy in place since late 2014. OPEC experts at the conference reasoned that the catastrophic collapse in oil revenue will lead to a much higher degree of cooperation and compromise among members at the November 30 meeting in Vienna than shown over the last several years. Nonetheless, there was also skepticism that OPEC would be able to overcome the myriad demands of individual members to reach a credible agreement as well as concerns about compliance if an accord is reached. Failure by OPEC to successfully implement an agreement could see oil prices falling back below $40/bbl and, once again, raise the question of whether the group remains relevant.
• The high levels of geopolitical turmoil in the region are straining relations among the Gulf states and compounding financial woes. Civil wars in Syria and Yemen have created a cauldron of competing interests among countries, with Saudi Arabia’s already tense relations with Iran further inflamed by Tehran’s interference in the Yemen, Syria, and Iraq conflicts. Low oil prices are having the biggest impact on the political agendas of the Gulf region’s three largest countries, Saudi Arabia, Iran, and Iraq, which could have far-reaching impacts on international oil markets.