Published on February 26, 2014
Recently, the Western sanctions imposed upon Iran were partially suspended as a result of which international pressure on the country has been waning. Persian Gulf nations have started re-establishing diplomatic and economic relations with Iran. Middle East is delighted with the development, whereas UAE is keen to bury the hatchet and enhance energy cooperation with their once distant neighbour.
Once Iran and UAE reach an agreement on the three long-disputed islands near the Strait of Hormuz, Iran will retain sea bed rights around the said islands while UAE will own the land. In 2011, the strait carried nearly 35 per cent of all seaborne traded oil. This deal will definitely boost the economy of UAE; however, it could probably isolate Saudi Arabia from discussing about key issues affecting the Persian Gulf Cooperation Council and the global oil trade.
Saudi ships 3 times more crude oil via the Strait of Hormuz than any other Persian Gulf nation. Nonetheless, countries in the Persian Gulf have started distancing themselves from the kingdom, primarily due to their confrontational stance on Iran.
Oman is now considering setting up a pipeline connecting it with Iran’s natural gas fields as part of a $60 billion agreement to improve cooperation and business between the two nations. Iraq is also planning to join forces with Iran in order to raise its oil output to 9 million bpd, thereby challenging Saudi Arabia’s command over OPEC. Thus, Iran’s re-entry into the oil markets is going to be a major issue for Saudi Arabia.
Saudi finds itself pitted against Iran. And despite enjoying immense economic prosperity, the kingdom has decided to reduce its dependence on its massive oil resources.
Emaar Economic City, a real estate firm in Saudi, has started business on the country’s first privately owned port on the Red Sea coast. The project will lead to construction of a SEZ, named King Abdullah Economic City (KAEC), which will host nearly 2 million people and will also help expand the Kingdom’s economy beyond oil- into shipping, packaging and pharmaceuticals. The Red Sea carries nearly 25 per cent of the global trade, an advantage which has not been leveraged in the region. The Red Sea handles shipping and oil traffic bound for Europe and the Western hemisphere through the Suez Canal. The project is scheduled to be completed by 2020 and is expected to become a global logistics hub.
This project will also encourage investors as the SEZ will be operated by a private company with a local stock market listing, which would help distribute the revenue generated by the project among the investors and the local population.
Saudi Arabia is relentlessly trying to reduce its reliance on oil. In January, the country signed agreements with French and Japanese firms that intend to support Saudi’s nuclear energy program. Saudi Arabia is Middle East’s largest oil consumer and has a huge oil capacity; however, the country has failed to generate enough electricity to meet its domestic use.
The rising energy demand and the increasing population are the reasons for Saudi Arabia’s energy shortfalls. It’s believed that the increasing domestic energy consumption could lead to a loss of 3 million barrels of crude oil exports per day. Saudi is hoping to lean on nuclear energy to fulfil its domestic needs, thereby freeing up more oil for exports.
Thus, Saudi Arabia must continue investing in plans and projects that help expand its revenues and resources- this is the only way to uphold its competitive edge.
