top of page
synergy logo.png

Oil and Authoritarianism - Alpcan Efe Gencer


The oil and gas riches of the Middle East have, for long, making it a hotspot in international energy dialogues. The implications of its vast have been different regarding each state in the region. The domination of fossil fuel production in the export structure of these nations has created significant results over the decades, which are becoming more and more visible by the day for the general public. These negative consequences have also led to the creation of the term ‘resource curse,’ which implies the overreliance on the hydrocarbons for fueling the national budgets and the harmful effects it brings upon. Before explaining the geopolitical dynamics of the host nations, the focus should be placed initially on how the additional revenue gathered from the sale of hydrocarbons has created different governing structures and the domestic balancing effects these nations have utilized as a result.


A prime reason for why these authoritarian regimes within these states have managed to survive for decades is because they have not required their citizens tax-money to provide them with services. Instead, the oil and gas revenues have been used to substitute for the taxes, and also to win the approval of the general population, numerous subsidies have been granted. The form of subsidies differs from state to state. Still, the general perception that the Middle East North African (MENA) oil is so cheap to extract has led to states lowering the price of gasoline and natural to gas to levels even below that of the cost of extraction. Other forms have been reduced the cost of food imports, an industry which these nations lack progression in due to their geographical location, or even the free usage of simple utilities such as water and electricity. The granting of these aids to the citizens in the region have been going on for decades. Housing some of the easiest to extract reserves in the world; these states, for most of the time, did not experience many problems keeping up with their programs.


However, the state intervention to the free market supply and demand balances has given rise to a problem that has crept up over the years to resurface as a catalyst for budget balance and political instability problems. Owing to the heavily subsidized price of fossil fuels, the domestic consumption of these materials has risen incrementally over the years. To make up for the amount lost in funding the commodity, the host nations and indirectly the NOC’s have increased their production rates for export markets. But overgoing the simple fact of the oil field that wells and other equipment need frequent maintenance and significant upgrades from time to time, the production zones of these states have become significantly inefficient compared to their previous conditions’ decades ago.


The case for North African states is open to more possibilities and solutions when compared to those situated in the Arabian Peninsula. Diversifying the gas suppliers of Europe, the African countries serve as valuable partners for ensuring the energy security of Europe. The Trans-Mediterranean pipeline connecting Algerian gas through Tunisia to Italy and the Greenstream pipeline connecting West Libyan gas directly to Italy act as points of contact and exchange between Europe and North Africa. The increasing global gas trade and the decreasing oil volume in tankers that are observed at the regional chokepoints such as the Suez Canal indicate a possible point of growth for these nations. Taking advantage of their relatively underdeveloped gas fields, many of these states possess the capacity to be an integral part of the new global energy mix.


The fragile political and economic balances these MENA petro-states hold could have negative implications for the global arena when it comes to maintaining geopolitical stability. The low-employment and low per-capita GDP growth economic models that they retain, in the short-run, cannot be changed. Suiting to the needs of the new global energy order, these states have the option to integrate into the new distributed production model in a more planned manner. The increasing worldwide gas and LNG demand could aid the revenue creation struggle many of these states are facing. Besides, the inclusion of human rights and freedom inducing points into the loan covenants/terms of sale contracts signed between Europe and MENA could help alleviate the domestic political pressure these states are facing, making changing the subsidization programs much more viable and likely without causing retribution from the citizens.


While the United States is out to grab as much market share as possible for its unconventional oil and gas producers, the MENA states should not worry about losing their shares or of an upcoming prolonged supply glut in the markets causing a sharp drop in prices. The reason is simple. While the U.S. is aiming to be energy independent, its shale wildcatters are fueled by debt and not equity. Already utilizing high-cost technology, the U.S. producers are highly sensitive to the price of oil and gas, and 52% of the shale debt and interest is calculated to be paid within the next seven years. The breakeven point is estimated to be around $50 bbl. Given this market pressure on the U.S. producers, they cannot be indeed energy independent by following a supply-side push trying to squeeze other cheaper conventional producers out of the market.


Another significant development for these MENA players is the growing new trends within the financial markets. Having financially strained their NOC’s, the international public financial markets are out of feasible reach for most of these states for healthy fundraising. But the new growth in the private equity markets has opened new venues to raise funds for these players. Only between 2014-2016 the private equity firms in North America raised $132 billion for energy investments. The direct and efficiency-focused nature of this financial market can very well be utilized for the greater growth of the fields in MENA.


Given the high-quality low-sulfur sweet crude being prominent in the MENA region, the refinery potential of the area is quite high. According to S&P Global Platts estimates, the global petrochemical demand is expected to grow above the global GDP growth rate by a few percentile points and multiples of the global demand for transportation fuels. The development of emerging economies will primarily be driving this push, especially for plastics, and it presents a significant opportunity for these petrostates to make up for the lost demand for oil and balance their national budgets.


The same case also applies to the developed nations when it comes to phasing oil out from greater circulation driven by greater employment of renewables and natural gas. The United Kingdom is seeking to revamp its offshore oil and gas service companies by establishing the world’s largest offshore wind farms, which share a portion of its supply chain with the offshore oil and gas sector. The lost production volume from North Sea fields is a prime reason behind this push. On the U.S. side, the announced chemical industry investment value is around $204 billion as of May 2019 according to the American Chemistry Council and the recent campaign for wind turbines in the northern hemisphere, which sources a lot of its large components and materials from petrochemicals products, is not without its reasons. The case can again be connected to the new developing energy mix that focuses more on downstream, variety, and efficiency.


Just as how this new transformation is creating new realities for MENA states, it is also doing so for the developed nations as well. Perhaps for an updated and more niche version of the articles, the developments in wind turbines and the global petrochemical demand can also be taken into consideration as the energy industry is moving faster than ever due to pressing and concerning environmental reasons and the inner dynamics/economics of the energy sector.



bottom of page