New Pipeline Could Trigger Biggest Changes in Gulf Since 1930s
A short oil pipeline inaugurated today in the Arabian Gulf is the start of changes that could strengthen US influence in the region and alter local power relationships in a fundamental manner for the first time since the 1930s.
Iran would be the big loser. Ironically, its theocrats are the cause of the shift because the pipeline is a reaction to their threats to close the Strait of Hormuz if the US, Europe, Israel and Saudi Arabia push them against the wall over nuclear fuel enrichment.
Crude oil exports have begun through the new pipeline that bypasses the Strait of Hormuz by connecting Abu Dhabi, the capital of the United Arab Emirates, to Fujairah on the Gulf of Oman. The operations of the 263-mile pipeline costing over $4 billion are small but sufficient to blunt the impact of any Iranian attempt to seal the Strait of Hormuz.
Along with Singapore and Rotterdam, Fujairah is among the world’s three biggest refueling ports for commercial ships. In case Iran does not make good on its threats, the pipeline still makes economic sense because a new $5 billion refinery will be built on Fujairah, one of the U.A.E.’s seven sheikhdoms, for local sales of oil products. A terminal will also be built at the port for transiting liquefied natural gas.
Regardless of Iran’s actions, the oil pipeline and its later extensions will forever break dependence on the narrow and vulnerable Strait of Hormuz for oil bought by the US, Europe and the Far East. It renders hollow the ability of Iran’s mullahs to blackmail its Arab neighbors and the West to extract concessions for its regional ambitions.
The pipeline will also dampen the impact on the global economy, if Israel does bomb Iranian nuclear installations later this year or Washington leads sharper coercion of Teheran. Currently, about one fifth of world’s oil transits through the Strait of Hormuz. Abu Dhabi, which holds over 90 percent of the UAE’s oil, has taken a risk by angering the Iranian regime, although Teheran has dismissed the pipeline’s potential as Western propaganda.
However, Iran may be hit by a double whammy because prospects are increasing of turmoil in world oil and gas prices. In July, energy tensions became worse after the European Union started implementing a nearly total ban on oil imports from Iran as part of Western sanctions. Despite the tensions, influential experts think oil prices might plummet to $50 per barrel because of lower demand from China and more supplies from the US of oil extracted from shale rock through fracking.
Iran could become bankrupt but consequences for the Gulf sheikhdoms would also be dramatic because they would no longer be able to protect their non-democratic regimes by buying social peace. Growing American supply is turning the US into a decider of world crude oil prices overshadowing Saudi Arabia. American light-sweet crude is not easily exportable but the large supply capacity combined with heavy investments in infrastructure will allow the US to boost exports of products that substitute for other types of oil.
Proven shale oil reserves have risen by 68 percent in North America since 1990 and the US may become self-sufficient by 2025 in both oil, and gas as fracking becomes safer and widespread. It will no longer have to be nice to Saudi Arabia or handle Iran with so much caution.
A recent OPEC meeting turned into a brawl between Saudi Arabia and the others because the Saudis would like to keep oil prices below $110 per barrel and worry that the near shutdown of Iranian exports will cause an upsurge in prices. That might encourage countries like China, India, Japan, South Korea, Italy and Greece to bust the sanctions against Teheran because they are among Iran’s best customers. But most OPEC members oppose the Saudi’s because they do not want to speed up the medium to long term declining trend in oil and gas prices. Overall, these developments work in favor of the US.