Shifting Global Energy Demands and its Impact on Arabian Gulf Energy Security

By Riad Kahwaji, Director General, INEGMA, 5/12/2019

The Paper was presented at the Open Study Day on Energy Security in Middle East and North Africa, by NATO Strategic Direction – South Hub and Allied Command Transformation

The Arabian (Persian) Gulf region sits on half of the world’s oil reserves, which makes it of vital strategic interest to global energy security and economic stability. So long as the world continues to largely depend on oil and gas for energy, this region will remain a major focal point of interest to global powers and developing countries. This has been the case since the end of World War II, and will continue to be so for many more decades. The nature of the threats has changed over the years. However, one factor remained constant throughout the past period and that is the West led the way in establishing and enforcing the security framework for the Arabian Gulf security. Although the means have changed with time, however the objective remained the same: To ensure dominance of the United States and its Western allies on the region.

Oil to the East

The rise of Asian powers with a notable increase in energy demands to cope with level and speed of growth has been having its impact on oil exports from the Arabian Gulf region. Moreover, the shale oil discoveries in northern America have largely reduced the United States oil imports. A simple review of Arabian Gulf oil exports to the United States shows that it has been cut by nearly half of what it used to be less than two decades ago. According to the U.S. Energy Information Administration the United States imports of oil and petroleum products from the Arabian Gulf were 1,008,545,000 barrels in 2001, and dropped to 867,559,000 barrels in 2008 and to 575,807,000 barrels in 2018.[1] In the second quarter of 2019, Bloomberg reported that U.S. imports of crude oil and condensate from Arabian Gulf reached 800,000 barrels per day, which accounts for only 6% of total shipments from the region.[2]  

Meanwhile China’s import of oil from the Arabian Gulf has increased substantially over the past two decades. In the summer of 2019, Saudi Arabia ranked as number one supplier of oil to China with an average daily import of 1.83 million barrels per day.[3] Currently four of the top eight suppliers of oil to China are in the Arabian Gulf – Saudi Arabia, Iraq, Oman and Iran.[4] Japan, in turn, heavily relies on Arabian Gulf oil. According to 2018 figures, eight of the top ten of Japan’s oil suppliers are in the region, in the following order: Saudi Arabia, United Arab Emirates (UAE), Qatar, Kuwait, Iran, Bahrain, Oman and Iraq.[5] Iraq and Saudi Arabia are the top two exporters of oil to India followed by the UAE, Iran and Kuwait.[6] After Iran was hit by the U.S. sanctions it lost its spot as the top supplier of oil to South Korea, and that spot went to Saudi Arabia, while Kuwait and the UAE remain on the list of top five suppliers.[7] All in all, Asian powers import 80% of their oil from the Arabian Gulf region.  While India and China import half of their oil requirements from the Arabian Gulf, Japan, South Korea, Singapore and Taiwan import three quarters of their oil from the region.[8]

Asian powers also house the main depots and refineries that process the crude oil that is shipped back to Arabian Gulf countries. Millions of barrels of Iranian oil are stored in depots at Chinese ports serving as vital reserves to Tehran. These reserves enable both Iran and China to manipulate oil prices despite efforts by OPEC to stabilize the market.[9] Although this practice has been linked to the imposition of U.S. sanctions on Iranian oil, however it has the potential to become a permanent situation even after sanctions are lifted due to the influence it could give China on oil rates. These depots bolster the current Chinese petroleum reserves that are estimated to be 325 million barrels of oil, which is equal to a little over a month of imports.[10]   

Bolstering Relations with Asia

The two major players in the Arab world that are regarded as regional power houses, Saudi Arabia and the United Arab Emirates (UAE), have embarked on a series of steps marking a strategic shift in their foreign relations policies. In the past few years, leaders of the two countries have improved and expanded their relations with China and India as well as other rising Asian powers such as Pakistan, Japan and South Korea. The scope of relations was no longer restricted to trade, but has widened to include foreign direct investments – moving both ways – and the defense sector. Many Arab countries will likely follow – if they haven’t already – the footsteps of Riyadh and Abu Dhabi in the coming years.

Comparing the commercial relations these two countries have with the U.S. with relations with Asian powers it will not be hard to conclude that the winds are blowing towards the East. For example, value of bilateral trade between UAE and China stands at around $55-billion per year, while with India is about $50-billion annually with an agreement between the two sides to double it by 2020. China has about 300,000 expats living in UAE, while India has the largest expat population that stands at 3.3-million strong. These figures are impressive compared to UAE-U.S. trade relations that stand at around $25-billion per year,[11] while value of UAE-EU trade relations are about $47-billion annually. If UAE annual trade relations with other Asian powers like Japan ($24-billion), South Korea ($15-billion) and Pakistan ($9-billion) were added to China and India the total will come up to $153-billion compared to $72-billion with the U.S. and EU.

About 60 percent of the UAE’s non-oil foreign trade is with Asian countries, and China’s foreign direct investments (FDI) in the UAE totaled $9.1 billion in 2017, while India’s FDI in UAE totaled $1 billion in 2018.[12] According to UAE minister of economy, China is currently the country’s number one trade partner, accounting for nearly 10 percent of non-oil products in 2018.[13] China is also Saudi Arabia’s number one trade partner, and has recently won $28-billion worth of economic agreements with the Kingdom.[14] In 2019, Saudi Arabia signed trade agreements worth billions of dollars with Asian powers like India and Pakistan.[15]

The United States’ strength in trade relations with Arab Gulf States is largely due to its big exports of defense and aviation products. Even U.S. FDI in UAE and Saudi Arabia are still larger than most Asian states; however China and some of its Asian partners are clearly making a strong push and starting to gain more ground. Arab Gulf countries are clearly taking notice of the political changes in Washington and what it could mean to their defense procurement programs as well as plans for industrial cooperation. While President Donald Trump has made it clear on more than one occasion that the U.S. military was deployed in the Arabian Gulf region to provide security in return for money from the Arab states there, the leading Democratic Party presidential candidate Joe Biden has vowed to halt defense programs with Saudi Arabia if he is elected. So, the prospects of maintaining the current Arabian Gulf security framework do not look promising when U.S. foreign policy seems to be ever more dictated by domestic politics.

Changing Policies

After the United Kingdom colonial power came to an end in the Arabian Gulf, the United States relied on two regional powers, Saudi Arabia and Iran, to prevent the Soviet Block from exerting any influence in the region. However, the Islamic Revolution in Iran brought an end to this arrangement. The so-called tankers war in the later part of the Iran-Iraq 8-year war underlined the importance of the region to global energy security and demonstrated the readiness of the United States to use military force to assert its dominance and ensure the flow of oil through the Strait of Hormuz. Shortly after the Iraqi invasion of Kuwait that sparked the Gulf War, led to the establishment of major military presence for the United States and its Western allies in the region. The regional security framework for the Arabian Gulf became very much U.S.-centric where Washington became the main guarantor of security.         

The attacks on oil tankers and oil facilities in the Arabian (Persian) Gulf region in 2019 have undermined the regional security regime the United States and other Western powers has enforced since the development of the Carter doctrine in 1979.[16] The asymmetrical threats that dominated the regional scene for the last two decades have escalated in the last years. However, actions by groups affiliated with the Iranian Revolutionary Guards have proven to be most serious threat to energy security with the employment of advanced weapons such as drones and cruise missiles.[17] The U.S. failure to protect assets of its allies and retaliate against hostilities has all but contributed to the already dwindling confidence the Arab Gulf States have in Washington.

Most experts have agreed that Asian powers, especially China, would suffer the most in case hostilities broke out in the Arabian Gulf region between the United States and Iran. Iran has proved capable of disrupting flow of oil from the region even if the countries tried to surpass the Strait of Hormuz and use outlets on the Arabian Sea or the Red Sea.[18] But while focus has been on Iran and non-state actors, the near-peer power struggle has reemerged and occupied the global theatre where China and Russia are pushing ahead to assert influence worldwide.

Asian Technology and Blue Water Navies

While the Trump Administration sends out confusing messages about its commitment to the Arabian Gulf security and adopts more isolationist rhetoric, China and Russia move in ready to fill the vacuum. Asian powers import 80% of their oil from the Arabian Gulf region, which means they will be more willing to play a bigger political and military role in securing energy resources there. Although these powers do not yet possess the needed military power to provide the region with the adequate security, however China, India and Japan are all building their blue water navies and are poised to have formidable power projection capabilities by 2035. China is expected to have in service six aircraft carriers, of which four will be nuclear-powered, while India will have about three carriers.[19]

China has already established a foothold in the vicinity of the Arabian Peninsula by opening its first overseas naval base in Djibouti on the Red Sea. China is working hard on carrying out its “one-belt one-road” plan linking its territories by land and sea with Europe and the rest of the world, especially vital routes to its energy resources in the Arabian Gulf. The Chinese naval presence will eventually contribute to improving military-to-military relations between China and its Arab Gulf neighbors. The Saudi military recently held naval exercise with the Chinese off the Port of Jeddah, in a step towards enhancing relations and joint operations.[20]   

China is making quick strong advances in its military technology and air power capabilities and is now able to protect what it regards as vital areas in the Indian Ocean, such as the case in the South China Sea where Chinese Navy is adopting area access area denial (A2/AD) approaches, making zones inaccessible by foreign powers. The Chinese will ultimately expand the A2/Ad zones as its military grows more capable and as the Arab Gulf neighbors become more receptive to its role. China already has strong strategic relations with Iran on all levels, and will not face any problems from Tehran if it ever decides to establish a bigger military foothold in the region.

The size of military relations that already exist between the United States and the Arab Gulf States makes it unlikely that a full breakup between the two sides would take place – at least not any time soon. These countries have joint industrial projects and their military hardware is mostly from the U.S. and Europe. However, the Arab Gulf countries have been taking more steps recently setting themselves up to become closer to the Eastern powers in terms of technological development. The UAE has hinted last October that it was ready to receive the new generation 5G technology offered by the Chinese giant telecommunication company Huawei, despite U.S. opposition.[21] When the U.S. is declining requests by its Arab allies to acquire certain military technologies, the latter are now seeking solutions in China. The best example on this was the Chinese selling of attack drones to both the UAE and Saudi Arabia, which is now opening a local factory to these Chinese Wing Loong 1 unmanned combat aerial vehicles (UCAV).[22] Even long term strategic programs such as alternative energy resources like nuclear power plants the Arab Gulf States seem to prefer non-Western providers. While Saudi Arabia is working with Argentina on developing its nuclear facilities, the UAE awarded the contract for its first nuclear power plant to South Korea.[23]

Therefore, not only is China trying to improve relation with Arab Gulf countries in all fields and elevate them to a more strategic level, regional players appear ready and willing to work with China and other Asian powers moving further away from their Western allies. Arabian Gulf states are clearly embracing a strategy of a multi-polar world where the United States is no longer the sole dominant power. Hence, threat to the current security regime in the Arabian Gulf, where the U.S. has been the dominant player, might evolve from asymmetrical to conventional and subsequently Asian powers, especially China, will likely challenge this dominance. This will sure have an impact on energy security from the Western perspectives in particular.         

Conclusion

Alliances and strategic relations between nations are based on size of common interests and the level of the need one has to the other, and as such the majority of Arab Gulf States are bound to pivot to the East away from the long-time partnerships and alliances with the West, especially the U.S. The growing inter-regional trade relations and the increased dependence of rising Asian powers on crude oil of the Arabian Gulf and the rise of isolationism and populism in the West are driving most of the current Western allies in the Arab world to the East gradually ending an era of dominant influence for Europe and the United States on large parts of the Arab World. Therefore, shifting global energy demands are driving a big rapprochement between the oil-rich Arabian Gulf region and Asian powers, which could increase military competition between the U.S. and China in the region, and possibly undermine energy security regionally as well as globally. 


[1] U.S. Energy Information Administration: U.S. Imports of Persian Gulf Countries of Crude Oil and Petroleum Products, (31/10/2019), https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MTTIMUSPG1&f=M

[2] Julian Lee: ‘A Run Through Who has What at Stake in Persian Gulf if Oil Flows Get Disrupted’, Bloomberg, (June 27, 2019), https://www.bloomberg.com/news/articles/2019-06-26/which-oil-buyers-have-most-at-stake-as-mideast-tensions-rise  

[3] Reuters: Saudi Retains Top Spot for China Crude Imports in August, Iran Sales Plunge, (September 25, 2019), https://www.reuters.com/article/china-economy-trade-crude/saudi-retains-top-spot-for-china-crude-imports-in-aug-iran-sales-plunge-idUSL3N26G1KE

[4] Ibid

[5] Statista: Import Volume of Crude Oil to Japan in Fiscal Year 2018, by Country, (September 24, 2019), https://www.statista.com/statistics/761568/japan-crude-oil-import-by-country/

[6] The Economic Times: ‘Iraq Continues to be India’s Top Oil Supplier, Imports from U.S. Rises 4-Folds,’ (May 1, 2019), https://economictimes.indiatimes.com/industry/energy/oil-gas/iraq-continues-to-be-indias-top-oil-supplier-imports-from-us-rises-4-folds/articleshow/69129071.cms?from=mdr

[7] Jeff Sung: ‘Saudi Arabia Remains South Korea’s Top Oil Supplier after Iran Sanctions,’ Arab News, (10/10/2019), https://www.arabnews.com/node/1566581/business-economy

[8] Anand Toprani: ‘Oil and the Future of U.S. Strategy in the Persian Gulf’, War on the Rocks, (15/5/2019), https://warontherocks.com/2019/05/oil-and-the-future-of-u-s-strategy-in-the-persian-gulf/

[9] Bloomberg News: Millions of Barrels of Iranian Oil are Piled up in China’s Ports, (22/7/2019), https://www.bloomberg.com/news/articles/2019-07-22/millions-of-barrels-of-iranian-oil-are-piled-up-in-china-s-ports

[10] Jessica Jaganathan and Jessica Resnick-Ault: ‘Buyers of Saudi Oil Scramble for Alternatives, U.S. Exports Ramp Up’, Reuters, (16/9/2019),  https://www.reuters.com/article/us-saudi-aramco-refineries/buyers-of-saudi-oil-scramble-for-alternatives-u-s-exports-ramp-up-idUSKBN1W10V2

[11] UAE Embassy in U.S.A.: ‘UAE-S Trade’, (2018), https://www.uae-embassy.org/uae-us-relations/uae-us-trade

[12] Walid Abbas: ‘UAE Looks to Asia to Expand Trade’, Khaleej Times, (25/3/2019), https://www.khaleejtimes.com/business/economy/uae-looks-to-asia-to-expand-trade

[13] Gulf News: ‘China Lead Trade Partner of the UAE: Al Mansouri’, (22/7/2019), https://gulfnews.com/uae/china-leading-trade-partner-of-uae-al-mansouri-1.65370898

[14] Natasha Turak: ‘China Won’t Judge You: Why Saudi Arabia’s Crown Prince is Betting Billions on Asia’, CNBC, (15/3/2019), https://www.cnbc.com/2019/03/05/saudi-arabia-crown-prince-to-invest-billions-in-china-india-pakistan.html

[15] Ibid

[16] The Carter Doctrine refers to the strategy set forth by former U.S. President Jimmy Carter which calls for U.S. using whatever means possible to prevent the domination of the Arabian Gulf region and its oil by any foreign power. See more in Anand Toprani: ‘Oil and the Future of U.S. Strategy in the Persian Gulf’, War on the Rocks, (15/5/2019), https://warontherocks.com/2019/05/oil-and-the-future-of-u-s-strategy-in-the-persian-gulf/

[17] Hasan Al Hasan: ‘Iran Seeks to Prove it Can Disrupt Oil and Gas Exports from Arab Gulf States’, Euractiv.com, (16/5/2019), https://www.euractiv.com/section/energy/opinion/iran-seeks-to-prove-it-can-disrupt-oil-and-gas-exports-from-arab-gulf-states/

[18] Ibid

[19] For more information on Chinese and Indian plans to build aircraft carriers see, Minnie Chan and Guo Rui: ‘China will Build 4 Nuclear Aircraft Carriers in Drive to Catch U.S. Navy, Experts Say’, South China Morning Post, (6/2/2019), https://www.scmp.com/news/china/military/article/2185081/china-will-build-4-nuclear-aircraft-carriers-drive-catch-us-navy , Robert Farley: ‘India’s Path to Global Superpower in Through Building More Aircraft Carriers’, The National Interest, (16/9/2019), https://nationalinterest.org/blog/buzz/indias-path-global-superpower-through-building-more-aircraft-carriers-80971

[20] Arab News: ‘Saudi Arabia, China Conduct Drill to Improve Combat Readiness’, (17/11/2019), https://www.arabnews.com/node/1585431/saudi-arabia

[21] Arab News: ‘Huawei is our Partner in Rolling out 5G Network, Says UAE Du’, (26/10/2019), https://www.arabnews.com/node/1565031/business-economy

[22] Natasha Turak: ‘Pentagon is Scrambling as China ‘sells the hell out of’ Armed Drones to UAE’, CNBC, (21/2/2019), https://www.cnbc.com/2019/02/21/pentagon-is-scrambling-as-china-sells-the-hell-out-of-armed-drones-to-americas-allies.html  

[23] Ali Oguz Dirioz and Benjamin A. Reimold: ‘The Strategic Context of the UAE’s Nuclear Project: A Model for the Region?’ Middle East Policy Council, (2017), https://mepc.org/strategic-context-uaes-nuclear-project-model-region

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