Saudi Arabia was attacked on September 14 in an assault carried out by the Houthis, who are involved in the war in Yemen. The U.S. administration has held Iran responsible for the incident.
On the other hand, Saudi Arabia said that the attack came from the north (with Yemen in the south) and that Iranian weapons were used. Unlike the United States, Saudi Arabia is not interested in launching an intervention against Iran. This attitude has political reasons as well as economic and energy reasons. This article explores why Gulf countries do not support the intervention in Iran from an economic and political perspective.
The U.S. global strategy for bilateral negotiations
The U.S. follows a three-stage strategy in world politics: destroy, impose sanctions, raise its hand in favor of military intervention and convince the other party to come to the table. After that, the leader, convinced to take part in negotiations, faces a bilateral process instead of a multilateral one. Only the U.S. and the country it’s pressuring have the chance to be part of the negotiations. The North Korean negotiation process and the bilateral meeting between U.S. President Donald Trump and his North Korean counterpart Kim Jong-un in 2018 and 2019 are examples of this strategy. Before the Trump administration’s bilateral format for the North Korea issue, six countries had been involved in the peace talks. It’s understood that Trump is applying the same method for Iran as well.
Although the U.S. endeavors to push Iran into bilateral negotiations, Iran has refused to meet with the U.S. alone. Tehran prefers multilateral meetings in which Russia, the EU, and China also take part. For this reason, Iranian President Hassan Rouhani rejected Trump’s offer to meet at the UN General Assembly in New York. The U.S. Congress is also against military intervention in Iran due to the upcoming presidential elections in 2020 and the economic results of China’s rise.
The dilemma of the Gulf states
Iran has control over the Strait of Hormuz, which is an important transit route for oil and LNG shipping. Twenty percent of the world's oil supply and one-third of the oil transported by ship are transferred on a daily basis through the strait. The main energy producers in the region, Saudi Arabia, Iran, the United Arab Emirates, Qatar, and Kuwait, use the Hormuz Strait to supply oil and natural gas to the Asia Pacific region. According to August 2019 data from the website Tanker Trackers, 17 to 19 million barrels of oil pass through the strait daily. However, the strait has been at the top of the global agenda with news of sabotage attacks since May 12. Sabotage attacks or any other setback runs up the bill for Gulf country producers for two reasons.
In terms of the central dynamics of the energy market, it’s the case that a producer’s market share and profits are directly affected by the surrounding political and security conditions. Thus any incidents that increase tension in the Hormuz Strait cause two important impacts. First of all, such sabotage increases costs for oil hedge fund investors. Secondly, regional oil producers have to take additional measures to supply oil to the address by the requested date, such as buying more insurance. We can easily estimate an additional bill for the security of the supply.
For example, let’s say producers pay $1 extra per barrel in insurance fees since the first attack on May 12. $1 may seem like a small increase, but when one considers that a tanker carries 2 million barrels, that results in an extra cost of $2 million per tanker. What’s more, the Gulf’s main market in the Asia Pacific region is China, which imports 12 to 15 million barrels per day. Just considering the Chinese oil market alone, the producers need to cover an extra $10-15 million in additional expenses per day. If a producer has its own tanker, at first this may seem fortunate, since a producer like Saudi Arabia doesn’t have to pay extra, while others have to pay for insurance. However, if a military intervention led by Saudi Arabia goes ahead, it can be assumed that Iran and its allied groups will target the Kingdom’s transporters.
The future of the Hormuz strait and sabotage attacks currently have a limited impact on Iranian oil exports due to their exclusion from the international market since oil sanctions were imposed by the U.S. on November 6, 2018.
The Gulf’s economic policy after the 2014 oil shock
Energy export revenue is the main economic driver of the Gulf states. However, with the oil shock in 2014, these states faced budget deficits, income cuts, and economic recessions. Overdependence on energy income leaves Gulf countries vulnerable to oil price fluctuations. Economic authorities strongly recommend diversification beyond the energy sector to avoid such turmoil. Since 2014, with Saudi Arabia in the lead, the region’s energy-rich countries have attempted to diversify economically and attract foreign direct investments.
For instance, Saudi Arabia published the National Transformation Plan for 2030 detailing a reduction in the country's dependence on energy by 2016. The plan is based on the idea of direct foreign investment for 350 targets in the Saudi economy, and the involvement of Saudi investors in international projects.
The 2018 Saudi Arabian Investment Summit, in which Riyadh called for and encouraged various companies and international banks to invest in Saudi Arabia, was a notable example in this regard. China took on the lion’s share of participation in the summit, with dozens of companies and banks present.
China’s global economic strategy and the Gulf’s diversification efforts have aligned, leading China to be the main investor and creditor in the region. According to the most recent data, from 2005 to 2019, China invested $31.3 billion in Saudi Arabia, $27.4 billion in the U.A.E., $20.8 billion in Iraq, $7.3 billion in Qatar, $5.3 billion in Jordan and $4.3 billion in Oman. In addition to its investments, China has provided $21 billion in loans for the region for 2 years. Besides China, Japan is also on the road to increase investment in the region.
To sum up, Saudi Arabia is the regional leader in terms of economic diversification, and it generally prefers the Strait of Hormuz for oil transport. Therefore, besides Tehran, any military intervention against Iran will cause great damage for Riyadh as well. Moreover, reciprocal asymmetrical attacks will make it difficult to keep foreign investment in the Gulf in addition to the turmoil in the oil market.
On the other hand,Saudi Arabia made public that the attack was organized from North toSouth, which excluded Yemen, at the press meeting. Moreover, TheKingdom said Iran weapons were used. Unlike the United States, SaudiArabia does not take an interest in an intervention in Iran. Thisattitude has political reasons as well as economic and energyreasons. This article approaches why the Gulf countries do notsupport the intervention in Iran from an economic-politicalperspective.
The U.S. global strategy for bilateral negotiations
The US followsthree-stage strategies in world politics: destruct, grab thesanction, raise hands for military intervention and convince theother party to sit the table. After that, the leader, who convincedfor negotiations, faces to bilateral process instead of themultilateral one. Only the US and its counterpart have the chance tobe part of negotiations. North Korea negotiation process and thebilateral meeting between the US President Donald Trump and NorthKorean counterpart Kim Jong-un meetings in 2018 and 2019 are thebest-known examples of this strategy. Before Trump administrationbilateral format for North Korea ıssue, The Korean Peace Talks werebased on six countries joint meeting. It has already known thatTrump aims to apply the same method with Iran as well.
Although the USendeavors to push Iran to the bilateral negotiation, Iran has refusedto meet with the US lonely. Tehran prefers multilateral meeting whereRussia, EU, and China are also part of it. Due to fact that IranPresident Hassan Rouhani has rejected Trump’s offer meeting at theUN General Assembly in New York. However, not only Iran but also theUS Senate and Congress set against military intervention against Iranby reasons of the upcoming presidential election in 2020 and theeconomic result of rising of China.
The dilemma of the Gulf states
Iran has controlover the Strait of Hormuz, which is an important transit route foroil and LNG shipping. Hurmuz is one of the most vital transit pointcenter, where 20 percent of the world's oil supply and one-third ofthe oil transported by ship are transferred on a daily basis. Mainenergy producers of the region, Saudi Arabia, Iran, the United ArabEmirates, Qatar, and Kuwait, use the Strait to supply oil and naturalgas to the Asia Pacific Region. According to Tanker Trackers August2019 data, 17-19 million barrels of oil pass through the Strait ofHormuz daily. However, the strait has been at the top of the globalagenda with sabotages news since 12 May. Sabotages or any othersetback run up the bill for of the Gulf region producers for tworeasons.
Concerning maindynamics of the energy market, a producer’s market share and profitare directly affected by surround the political, security andpolitical conditions. Therefore any instances or sabotages, whichincrease the tension in the Strait of Hormuz, cause two importantresults for the Gulf. Firstly, the expenses of the oil hedge fundshave risen since the first sabotage action. Secondly, the regionaloil producers need to take additional measures, generally,insurgency, to supply oil to the address on the requested date. Wecan easily estimate an additional bill for the security of supply.
With a simple calculation to secure transport and trustful supplier image producers pay $1 per barrel for additional insurgency fee since the first sabotage on 12 May. In the first place, $1 seems a little charge. When considered a tanker carries 2 million barrel at one sitting which bring $2 million extra costs per a tanker. Moreover, the Gulf state’s main market in the Asia Pacific region is China, which imports 12-15 million barrel per a day (b/pd). As it means just for the Chinese oil market, the producers need to cover an extra $10-15 million additional expenses per a day. If a producer has its transport tanker, it looks like lucky like at first place. Since tanker owner producer like Saudi Arabia doesn’t need to pay extra amount while others pay for additional insurgency payment. However, if a military intervation against Iran lead by the Kingdom launches, Iran and its supporter groups will unsurprisingly target Saudi’s transporters.
The future of Hormuzand sabotages have limited impact on Iran oil export due to excludinginternational oil market since the US has imposed the oil sanctionssince 6th November 2018.
The Gulf economy policy after 2014 oil shock
Energy exportrevenue is the main economic driver of the Gulf states. However, withthe oil shock in 2014, these states faced budget deficits, incomecut, and economic recession. Over-dependency to energy income leavesthe Gulf countries vulnerable against oil prices fluctuation. Theeconomic authorities strongly recommend economic diversification outof the energy sector to avoid such economic turmoil. Since 2014, withleading of Saud Arabia, the region energy-rich countries haveendeavored for economic diversification and attract foreign directinvestments.
In the case of SaudiArabia, the Kingdom published the National Transformation Plan for2030 for reducing the country's dependence on energy in 2016. ThePlan is based on the encouragement of direct foreign investment for350 targets in the Saudi economy and the involvement of Saudiinvestors in international projects.
Saudi ArabianInvestment Summit in 2018, where Riyadh calls for and encouragesvarious investment companies and international banks to invest inSaudi Arabia, was a notable example in this sense. China took onlion’s share of the summit, which participated more than dozens ofcompanies and banks while the US share diminish.
Conformity betweenChina global economic strategy and the Gulf states diversificationeconomy effort have led up China to be the main investor and creditorof the region. According to the last data, China invested to $ 31.3billion to Saudi Arabia, $27.4 billion to the Emirates, $20.8 billionto Iraq, $7.3 billion to Qatar, 5.3 billion to Jordan and $4.3billion to Oman between 2005 and 2019. In addition to investments,China has provided $21 billion in loans for the region for 2 years.Besides China, Japan is also on the road to boost investments in theregion.
To sum up, SaudiArabia is the leader of economic diversification policy and generallyprefer the Strait of Hormuz for oil transport. Therefore, besidesTehran, any military intervention against Iran, which the US hasdevoted its economic cost to Saudi Arabia, will cause great damagefor Riyadh as well. Moreover, reciprocal asymmetrical attacks willmake it difficult to keep investors in the Gulf in addition to theturmoil in the oil market.