“The Middle East shapes energy politics, energy crises, and it has a huge impact on geopolitics” – Helen El Mallakh

Ahead of the upcoming 174th OPEC meeting in Vienna, Austria, (scheduled for Friday, June 22, and immediately followed by the fourth OPEC/non-OPEC ministerial meeting Saturday), Helen El Mallakh, director of the International Research Center for Energy and Economic Development (ICEED) was invited to speak about OPEC and global oil at the Energy Finance Discussion Group. Her talk was held in Denver last week.

Ms. El Mallakh is considered an expert on the Middle East and geopolitics. She holds double undergraduate degrees in economics and international studies – Middle East – from UCLA, a master’s degree from Harvard (Middle Eastern Studies with emphasis on economics), and an M.B.A from Rice University. Ms. El Mallakh has been manager of Political Risk for ConocoPhillips, involved in research at both Harvard and MIT, and undertaken projects with Saudi Aramco and Technip.

The Players

To set the stage, El Mallakh outlined her list of the major involved parties in Middle Eastern geopolitics:

Gulf Monarchs

  • Saudi Arabia and UAE vs Qatar
  • Kuwait

The Empires

  • Iran, Egypt, & Turkey

War-Torn States

  • Iraq, Syria, & Yemen

The Fortress

  • Israel

Vested Interests

  • US and Russia
  • EU and Asia (China)

El Mallakh made it apparent that in the Middle East, the numbers matter. This can be understood by looking at the table provided that shows how the U.S. and Russia are jockeying for position in military rank, petroleum production, and natural gas production and why they would be vying for political influence in the Middle East.

El Mallakh discussed the undermining of the gulf monarchs and their traditional alliances. This is due to Qatar rising to become a powerhouse through its production of natural gas, and it having to cooperate with Iran in shared gas fields. Qatar supplies 30% of UAE’s natural gas which translates to 50% of UAE’s total electricity. Making UAE dependent on Qatar.

“So even though UAE does have natural gas itself, it just uses so much that it’s highly reliant on Qatar. And this is now starting to have political, in addition to economic, ramifications,” El Mallakh said.

Pressure Cooker

One thing everyone can agree upon, Ms. Mallakh pointed out, is that the Middle East is a virtual pressure cooker.

“All of these countries are under intense internal pressure because of the demographics and the economic challenges they face. And the concern is that these pressures will morph into political instability,” El Mallakh said.

One of the major causes of this pressure is the social unrest that is a product of between 60% and 70% of the populations in these countries being below 30 years old and youth unemployment rates of 20% to 30%. “This allows for young people to be susceptible to religious radicalization such as we saw with ISIS,” El Mallakh said.

In addition to high unemployment rates, the youth in these countries look at themselves and see their own lack of economic and social progress, compared to their Western peers, El Mallakh said. Countries in the Gulf region have been able to manage this pressure by not implementing taxes on citizens, by doling out perks and by providing government subsidies. But Mallakh outlined how this is not an economically sustainable solution.

Who pays the bill?

Since the downturn of the oil market in 2014 it has been difficult for these countries to meet their annual budgets.

Looking specifically at Saudi Arabia and the price that they need to balance their budget, they would like the basket to be between $70 and $80 a barrel, according to El Mallakh. She explained the reasons for this.

First, they believe that if oil prices rise too high it will flood the market with competitors, which will create a future oil glut. Secondly, OPEC believes that support for its Iran agenda from the Trump administration is contingent upon keeping oil prices in this range.

Saudi Arabia now looks to expand its market share again. The only way it can do this is by removing someone else’s production from the market.

“And who would that be? Well, how about Iran? So it makes a lot of sense from an economic, political, and geopolitical standpoint why Saudi Arabia is taking this position against Iran,” El Mallakh commented.

In the beginning

The kingdom of Saudi Arabia was established in 1932 by King Abdulaziz Ibn Saud. When the King died in 1953 he had 45 sons and the kingdom is passed on only through this lineage. Now there are only three remaining sons, all of whom are progressing into elder age.

El Mallakh said that it has always been a concern that during this time a dangerous struggle of power would erupt over who would assume power in Saudi Arabia, due to the fact that there are roughly 15,000 grandsons and great grandsons of King Abdulaziz.

El Mallakh said current Saudi leader King Salman is 82 years old and is suffering from Alzheimer’s, which is progressing quickly, and whomever holds the title of ‘crown prince’ is automatically on deck to become next ruler of Saudia Arabia.

When King Salman first came into power he named his half-brother, Muqrin, as crown prince, but he was then quickly deposed by Muhammed bin Nayef (MBN).

Muhammed bin Nayef was crown prince from April 2015 until last summer, where he made a television announcement that he would be stepping down due to an addiction to painkillers that were affecting his decision-making abilities. What had actually happened was that his replacement, the current crown prince Mohammed bin Salman (MBS), had forced MBN to resign, El Mallakh said.

MBS is a 32-year-old reformer who, according to El Mallakh, “has been very ruthless in consolidating his power.” He has appeared on the front of TIME Magazine as an aggressive reformer, but still operates in the traditional Saudi way, she said.

MBS’ ambitious reforms

Muhammed bin Salman’s aims to diversify his country’s economy through his three GIGA projects:

  • Qiddiya entertainment city
  • Red Sea global tourist destination
  • NEOM
Present Day Middle Eastern Game of Thrones – Part One

NEOM Rendering: Source: Helen El Mallakh

  • Qiddiya is expected to be the world’s largest entertainment city with an area of 129 square miles, triple that of Florida’s Disney World (42 square miles). The project will include theme parks, entertainment centers, sports arenas, and other amenities.
  • The Red Sea global tourist destination is another venue that will cover 50 islands and 13,000 square miles, which would be an area larger than the country of Belgium.
  • NEOM is a proposed $500-billion high-tech megacity spanning an area of 10,000 square miles

The main issues that El Mallakh pointed out were the scale and scope of these projects are incredibly large, have a high difficulty level of implementation, and will all be incredibly expensive to fund.

She discussed the idea to raise capital through the proposed Saudi Aramco IPO of 5% of the company, which is tentatively scheduled for next year. The target is to raise $100 billion. Currently the Kings Exchange of Saudi Arabia is the only exchange that has agreed to host trading of the public Aramco shares. The IPO is so big, it would make up 30%-40% of the entire exchange, and trading Aramco shares could potentially crash the exchange, El Mallakh said.

El Mallakh went on to discuss the crown prince and his kingdom-wide ‘anti-corruption’ campaign last fall.

“It’s very important for us to remember that the anti-corruption campaign could be viewed and construed in different ways, which is that MBS made a lot of enemies in November last year when he detained a number of the princes, the wealthier business owners in the kingdom, along with some of the military people at the Ritz-Carlton in Riyadh, until he turned over some of their money. I think the problem with this is that it doesn’t instill confidence in foreign investors that there’s a rule of law.

“Their traditional stakeholders are not going to embrace the change that MBS wants, particularly on the religious establishment,” El Mallakh said.

[EDITOR’S NOTE: in Part II of this report, El Mallakh discusses the blockade of Qatar, MBS’s detention of royal family members and other wealthy power-holders in the crown prince’s anti-corruption campaign in November, 2017, and the possible effects on oil and investment in the kingdom.]

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