The Geopolitics of Oil: How the Middle East's Oil Reserves Have Shaped Global Politics

Contemporary international political economies surrounding oil are marked by conflicting elements. On one side, oil-producing nations generally grow much slower than their non-oil producing counterparts.

However, America remains committed to its goal of containment of Iran and Iraq through authoritarian regime maintenance in the Arabian Gulf and safeguarding domestic and international oil interests.

Table of Contents

1. The Persian Gulf

Oil discoveries in the Gulf region have proven both an asset and liability for those countries that possess it. Krane explores competing trends that either promote or limit global oil demand while attesting to failed strategies to diversify economies dependent on rents from this resource.

One such issue is the “resource curse,” which suggests that countries rich in natural resources experience lower growth, less democracy and poorer development outcomes than countries without them. Partly attributable to natural resource-related foreign exchange inflows often appreciating against real exchange rates thus diminishing competitiveness of non-oil exports as they reduce relative sizes within domestic economies.

Procyclicality of oil revenue presents another obstacle. Many oil-producing nations have addressed this by creating oil stabilization funds (OSFs) which store part of their revenues abroad in order to ward off foreign exchange inflows. While OSFs provide some protection from fluctuating oil prices, other factors have disproved any correlation between Middle East conflict risk and rising prices and oil stabilization funds’ effectiveness.

2. The Arabian Gulf

As the global shift away from fossil fuels gathers pace, Middle Eastern nations must find new sources of prosperity – until recently this meant oil revenues. They have done just that by modernizing societies while remaining at the heart of global energy markets through organizations like OPEC.

United States of America is a major Middle Eastern oil consumer, and both its domestic and foreign policy goals depend upon stable pro-American governments in the region and relatively low world petroleum prices. Thus, US foreign policy initiatives often seek to support such governments while simultaneously preventing anti-U.S. powers or blocs from emerging and maintaining high enough global petroleum prices for US military power justification.

However, the recent decline in world oil prices has disrupted this equilibrium and caused strain in US-Saudi relations; Saudis now realize they cannot trust America to maintain the status quo on world oil markets as in years past.

3. The Middle East

Oil revenues were the driving force behind much economic expansion in the Middle East, helping Dubai go from being a sleepy pearl diving town to an international financial center in an instant. Yet their over-reliance leaves nations vulnerable to price fluctuations of this resource.

In the 1970s and 1980s, annual population growth rates in oil economies exceeded those in non-oil economies by two percentage points; by late 90s however, both rates had become closer to global average levels.

Based on its broadest definition, Middle East and North Africa (MENA) consists of 24 oil-exporting countries and territories that collectively produce approximately $2 trillion at PPP exchange rates or 4.3 percent of world GDP. While their economic structures and institutions vary considerably between them, many aspects remain common across them all; as a result, considering them collectively makes more sense; their oil resources define political interests and power dynamics within each state – this phenomenon is known as oil diplomacy.

4. The World

At a time of war and unrest in Gaza and Syria, as well as sanctions against Iran and Venezuela, the United States appears to be shifting away from policies centered around the Gulf region. Instead, European powers, Japan, and Russia may pursue oil policies more independent of those advocated by America; seeking non-Gulf supply from OPEC or elsewhere.

Fossil fuel emissions have seen an unprecedented increase worldwide, having an adverse impact on air quality and climate patterns. While oil has brought tremendous economic development, its use has also generated many social issues that now need addressing.

Historical fundamentals have dictated oil prices. Over time, price volatility has fluctuated widely and market participants now appear to be viewing current geopolitical risk with little premium attached. Conflict between Israel and Hamas as well as indirect strikes against Iran and Hezbollah have added risk into markets; however, their pricing impacts appear limited.