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Analysis
Gulf states get ready for change

Gulf states get ready for change

Repercussions of Iran-US rapprochement

by David Marsh in Doha

Mon 2 Dec 2013

There’s a common theme running through three sets of disparate events: rapprochement between the US and Iran, sabre-rattling between Japan and China over disputed islands in the East China Sea and the still-unresolved euro crisis.

The message doing the rounds of the Gulf Cooperation Council (GCC) – oil-rich but population-light Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates – is to prepare for far-reaching transitions and shifting alliances in the next decade.

There is distinct queasiness in the region over the interim nuclear pact between Tehran and Washington and the prospect of a more comprehensive deal within the next six months, which could pave the way for Iran to become a regional hegemon. Worries over the agreement will have been increased by the weekend statement by Hassan Rouhani, Iran’s new president, that Tehran will not dismantle its nuclear facilities, as advocated by hardliners in Israel and the US Senate.

Coinciding with possible reduced US political and economic interest in the Gulf as it advances towards energy independence, the next ten years could see an increase in sparring between the pivotal but vulnerable Gulf oil producers and their muscle-flexing Iranian neighbour.

Recognising these anxieties, US politicians have played down any question of diminished ties with the Gulf. However, the outlook for the Gulf states might include an opening of security and defence cooperation with China, including possible purchases of military hardware, as the oil states seek a new equilibrium between east and west.

In an interview published on Saturday, President Rouhani told the Financial Times that Tehran was determined to maintain a uranium enrichment programme for peaceful purposes. This has added to concern throughout the predominantly Sunni states in the Gulf region that Shiite Iran will use lifting of sanctions and resumption of trade with the west as a means of extending its power base.

Symptomatic of fears of change was an article in the Saudi-owned pan-Arab Asharq Al-Awsat newspaper last week claiming that Washington was 'abandoning the US’s historic alliance with the Gulf.'

China, with its own highly visible regional aspirations in east Asia, stands out both as a possible source of cooperation for the Gulf states as well as a reminder of the destabilisation potential of powerful players in unsteady regional constellations.

The spat between Japan and China over the islands known as Senkaku by Japan and Diaoyu by China is uneasily reminiscent of regional rivalries in the Gulf region.

Europe is important for the Gulf states, for negative reasons. Beset by the continuing problems of balancing euro area creditor and debtor interests, and hamstrung by a Germany that is economically robust yet uninterested in leadership, Europe will not be a significant factor in Gulf power-play.

The negative example of the euro provides a convenient excuse for Gulf states to go still more slowly on their long-term monetary union plan – a project apparently destined to remain permanently on the agenda of regional summits but never reach fruition. The UAE and Oman have already pulled out and there is little enthusiasm elsewhere. Meanwhile the prospect of many years of sub-optimal economic growth in Europe’s heartlands will drive the Gulf producers to look still more intensively towards China and other faster-growing Asian economies as long-term purchasers of oil and gas and also as partners in regional development.

The six states of the Gulf Cooperation Council remain a highly important influence on world energy markets, accounting for 30% of oil reserves, 22% of gas reserves and 24% of oil production. Furthermore, sovereign funds in the regions, with assets estimated at up to $1.5tn, represent a growing hub of financial and investment power. During a bleak period in the world economy, the GCC area is still chalking up economic growth in the 4 to 5% range.

The Gulf states are producing record volumes of oil. Saudi Arabia, Kuwait, the UAE and Qatar set aggregate production records in each of the last three months, according to the Paris-based International Energy Agency (IEA). Rising oil exports from the de facto leader of the Organisation of Petroleum Exporting Countries (OPEC), Saudi Arabia, have made up for shortfalls in other oil producers including Iran, Libya and Nigeria.

Any increase in Iranian exports from the sanctions-induced fall to just 1.1m barrels a day this year (from more than 2m barrels a day at the start of 2012) will probably be offset by a corresponding fall in output from the Gulf region’s 'swing' producers.

Surging production in North America, based on increasing shale oil and gas output, will diminish the Gulf states’ energy importance in coming years. The IEA forecasts that the US will displace Saudi Arabia as the world’s biggest oil producer in 2015.

But the IEA expects US shale oil production to peak in 2020 and decline thereafter, even as global demand continues to grow to 101m barrels a day by 2035, from about 90m today. Meanwhile, Gulf states are capturing more Asian markets. India imported 44% of its crude from Saudi Arabia, Kuwait, Qatar and the UAE in July, up from 36% in 2011, while China gets 25% of its imports from the foursome, compared to 21% in 2007. All this points to Asia looming ever larger on Gulf geopolitical radar screens in coming years.

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