The Iranian nuclear deal has struck an optimistic tone in the Middle East, Ayyub writes, and officials in the United Arab Emirates are taking the opportunity to increase energy cooperation with Iran. That collaboration threatens to further erode Saudi Arabia's influence over the region's oil.As the Iranian nuclear deal begins to take effect and international pressure on the regime continues to diminish, Gulf nations have begun re-establishing diplomatic and economic relations with their once-distant neighbor. The deal has struck an optimistic tone in theMiddle East, and officials in theUnited Arab Emiratesare taking the opportunity to settle old disputes and increase energy cooperation with their neighbor across the Gulf.
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Iranand the UAE are close to reaching anagreementon three long-disputed islands near theStrait of Hormuz, perhaps the worlds most important oil chokepoint. The strait carried roughly35percent of all seaborne traded oil in 2011. According to a high level UAE source, Iran will retain sea bed rights around the three islands while the UAE will hold sovereignty over the land. Omani officials mediated the talks.
While the deal could prove positive for the UAEs economy, it effectively isolatedSaudi Arabiafrom the negotiating table on a key issue affecting both theGulf Cooperation Council (GCC)and global oil trade. Saudi Arabia ships three times more crude oil through the Strait of Hormuz than any other Gulf nation (see graphic above). And yet, as Saudi Arabian influence over the GCC continues to erode, countries in the Gulf have distanced themselves from the Kingdoms confrontational position on Iran.
The deal with the UAE is just the latest sting to Saudi Arabia from its fellow GCC members andOrganisation of Petroleum Exporting Countries(OPEC) nations. Oman is planning to build apipelineconnecting it with Irans natural gas fields as part of a $60 billion deal to increase cooperation and trade between the two countries. Iraq recentlyannouncedits plans to collaborate with Iran to increase its oil production capacity to 9 million barrels per day (bpd), challenging Saudi Arabias domination of OPEC. The Kingdom produced 9.8 million bpd in December 2013.
Saudi Arabia changes its strategy
Saudi Arabia continues to find itself pitted against Iran, both on the battlefield in Syria and at economic conferences inDavos. And while the Kingdom enjoys relative economic prosperity, it has taken steps to lessen its reliance on its massive oil resources, perhaps to the benefit of investors.
Emaar Economic City, a massive Saudi real estate firm, recentlystartedoperations on the countrys first privately owned port up Saudi ArabiasRed Seacoast. The project will include the construction of a special economic zone, namedKing Abdullah Economic City(KAEC). The city will host as many as 2 million people and will help diversify Saudis economy beyond oil, into shipping, pharmaceuticals and packaging.
Twenty five percent of global trade goes through the Red Sea but weve never leveraged it in the region, Emaar CEO Fahd Al Rasheed said at theWorld Economic Forumin Davos. The Red Sea sees shipping and oil traffic mostly bound for Europe and the western hemisphere via the Suez Canal. The project is expected to be completed by 2020 and has the potential of becoming a global logistics hub, handling trade for the entire region.
The project is also a positive sign for investors. Although the special economic zone has Saudi government backing, it is operated by a private company with a local stock market listing, which could help to spread the wealth generated by the project to both investors and the local population.
Saudi Arabia has made attempts to lessen its dependence on oil domestically, as well. In January, the country signeddealswith French and Japanese companies that aim to support Saudi Arabias nuclear energy program. Despite its large oil production and position as the Middle Easts biggest oil consumer, Saudi does not generate enough electricity to meet its domestic consumption.
The World Economic Forum recentlyrankedcountries based on domestic energy security, and Saudi Arabia came in at 91 out of 124 countries. The energy shortfalls are mostly derived from Saudis growing population and subsequent increased energy demand. The U.S. Energy Information Administrationreportsthat rising domestic energy consumption could result in the loss of 3 million barrels of crude oil exports per day. With a growing population and energy demand increasing 8 percent annually, Saudi hopes a push toward nuclear energy will fulfill its domestic energy needs while freeing up more oil for exports.
As Saudi Arabias influence over the Gulf further erodes, the Kingdom must continue to invest in projects that diversify its revenues and resources, and sustain its competitive advantage. Iran may be the talk of the town, but Saudis strategy may prove just as pivotal to the future of the Gulf.
By The Christian Science Monitor
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