Iran Returns to Global Energy Market: Issues and Prospects

Introduction

Signing of the Joint Comprehensive Plan of Action (JCPOA) between Iran and the P5+1 in July 2015, popularly described as the nuclear deal, has opened the possibilities of Iran returning to the global mainstream including the world energy market. Importantly, Iran is returning to the energy scene at a time when the structural changes and intra-regional conflict has eroded the strategic salience of the region as the market leader. According to the prognosis of the Organization of Petroleum Exporting Countries (OPEC), it would be losing its market share by 2020 because demand for its oil likely to be 30.70 million barrels per day (mb/d) as against 30.90 mb/d in 2016 (Lawler, 2015). Clearly the power dynamics of the global oil market is changing because while OPEC has low surplus capacity, inventories in the market are high. Unlike the years of oil scarcity when control over the Middle Eastern energy resources was the dominant narrative of regional geopolitics, the new text is to contain the influence of the region, riddled with prolonged conflict. In the words of Heidi Heitkamp, Senator of oil rich North Dakota in the US:

By opening up the US crude oil to the rest of the world, we would not only provide our allies with a more stable energy trading partner, but we would also reduce the power of countries like Russia, Venezuela, and volatile regions of the Middle East that use their energy dominance to exert influence over our nation and our allies. (Firstpost, 2015)

Energy Department of US indicates that the country would become a net exporter of crude in the next decade. Thus, while the region would continue to remain the major source of global hydrocarbon supply, its power to define the market would be eroding.

This does not undermine the importance of the region as a global supplier of hydrocarbon with which it is richly endowed. By all estimates hydrocarbon would continue to remain one of the principal component of global energy mix. Thus the Islamic Republic of Iran, which has the fourth largest reserves of oil and the second largest deposits of natural gas, would remain an important player. However, its potential and possibilities are dependent on its capacity to regain market share and returns on investment. The sanction years have so adversely impacted upon the oil and gas sector of the country that Iran needs huge investment and technological support from the external suppliers to monetize its energy assets.

This would demand not only reconfiguration of the Iranian energy regime but a credible government as well. Iran would undoubtedly like to re-position itself in the global energy market to maximize the returns to finance its economy. The maximalist positioning of Iran’s global energy engagement would have its bearing on the regional and global energy order. Iranian officials made it eloquently clear that the country would like to double its exports, that is, 2.3 mb/d as against 1.2 mb/d, once the sanctions are lifted (Faucon, 2015). Its consequences need to be appreciated in the backdrop of the world market which is already in over supply by 2 mbd. The article examines the geostrategic implications of Iran’s return to the energy market at regional and global levels and argues that despite its resource base, Iran would be facing constraints due to emerging global energy dynamics where the supply side of the equation is determined by larger flow of hydrocarbon coming from outside the region and the demand side is influenced by de-carbonization of the economies. As observed by IEA Energy Outlook 2015, “Policy preferences for lower carbon energy options are reinforced by trends in costs, as oil and gas gradually become more expensive to extract while the costs of renewables and of more efficient end-use technologies continue to fall” (IEA, 2015b, p. 6).

Furthermore, Iran has to come to terms with Saudi Arabia which has been playing the energy card aimed at America at the global level and Iran at the regional level. By allowing oil prices to drift, Saudi Arabia assumes that it would be marginalizing the impact of US shale in the market and deny Iran the oil money that it needs desperately to revamp its production capacities toward meeting the growth targets. However, despite constraints from both within and outside, Iran’s sheer geopolitical clout would make its inclusion necessary for market stabilization. It cannot be denied that it is going to be player of consequence in the global energy market. It can even be argued that the structural transformation in the hydrocarbon regime with uncertain market conditions necessitates Iran to get dynamically engaged with global processes to augment capacities and capabilities to position itself strategically. This would critically depend upon the space that global geopolitics is likely to provide to Iran and the outreach drive of the Iranian leadership to cultivate its relations with the global community.

Iranian Oil and Gas Regime: Changing Trajectory

Iran according to BP Report of 2015 is the repository of 157.89 thousand million barrels of proven oil reserve with global share of 9.3 percent, larger than Iraq and the UAE. Similarly its gas deposits are estimated at 34.0 trillion cubic meter (tcm) with a global share of 18.2 percent. Since its discovery, oil has been defining the political economy of Iran both domestically and internationally. If the huge resource endowment made the economy to drift toward rentierism, it also contributed to its strategic salience of a regional power. Iran could position itself as Western ally in the Middle Eastern security matrix. Prior to the 1979 Islamic revolution, it was perceived as one of the pillars of US Middle East Policy. This was illustrated by the Iran–US agreement for cooperation on civil uses of atomic energy under Atoms for Peace Program of President Dwight Eisenhower. It was in the 1960s, with the formation of OPEC, that Iran along with Iraq, Saudi Arabia, Kuwait, and Venezuela transformed the power equation of global oil politics. This also contributed in the structural shift of its economy. The growing profile of oil revenue during the 1960s and 1970s made the country rich but heavily dependent on the oil and gas sector. It accounted for nearly 80 percent of the budget and in the process the economy became vulnerable to global oil prices and sanctions at a later date. The stakes of Iranian economy on global market became quite significant. Oil and gas, thus, become one of the prime drivers of its foreign policy. Prior to revolution, for example, Iran was producing 6 mb/d in 1978, thus becoming the second largest OPEC producer and exporter, and the fourth largest global producer of oil.

Since the revolution, the oil and gas policy of the government has undergone change. The Islamic regime recognized the significance of oil and gas to the economy and planned to use it for diversification. However, the eight years of Iran–Iraq war and later sanctions restricted its potential. According to the EIA:

International sanctions have stymied progress across Iran’s energy sector, especially affecting upstream investment in both oil and natural gas projects. The sanctions have prompted a number of cancellations and delays of upstream projects. The United States and the European Union (EU) enacted measures at the end of 2011 and during the summer of 2012 that affected the Iranian energy sector more profoundly than any previously enacted sanctions. The sanctions impeded Iran’s ability to sell oil, resulting in a near 1.0-million b/d drop in crude oil and condensate exports in 2012 compared with the previous year. (USEIA, 2015b, p. 1)

The revenue loss faced by the country could be seen by the fact that as per the IMF estimate, it came down from US$118 billion in 2011–2012 to US$63 billion in the next year, registering a decline of 47 percent. It further declined to US$56 billion in 2013–2014 (ibid.). In addition, the sanctions impacted the development of the oil and gas sector, resulting in the industry facing a structural crisis. The economy remains dependent on it but the ageing oil wells, technological obsolescence and inadequate investments have made the regime recalibrate its policy. According to Iranian estimates, the oil industry would require an investment of US$150 billion during the Sixth Plan (2016–2022). The private and foreign investments would be to the tune of US$100 billion (Iran Daily, 2015).

Apparently this would mean a larger flow of foreign investment. It is reported that the government has reviewed its buyback policy and indicated more flexible terms “on price fluctuation and investment risks to make the sector financially attractive to foreign investor” (Bozorgmehr, 2015b). While oil companies are keen to go to Iran, there is a sense of uncertainty on the credibility of the regime. The market sentiments are that energy-related negotiations with regime are not going to be less difficult than the nuclear deal (Bozorgmehr, 2015a).

Recognizing the necessity of global engagement to promote its oil exports, especially to Asia, Iran is gearing up its oil diplomacy toward the region. China, Japan, South Korea, and India are the largest buyers of its oil. To augment its oil engagement, Iran is exploring the possibilities of building refineries in foreign countries as a long-term arrangement for its oil. “Building refineries abroad with the participation of international investors can guarantee the security of sales and exports of crude oil from Iran for a period of 20 to 25 years,” observed the Iranian Deputy Minister of Petroleum Abbas Kazemi (Press TV, 2015a). Among the countries with which negotiations have been initiated include China, Brazil, and India.

Natural gas is going to be the trend setter in Iran’s energy diplomacy. The largest reserves of the country have remained unexplored due to sanctions. Iran has been a visible loser in the global gas market because from the same South Pars gas field, Qatar has been able to exploit its potential and emerge as a leading player in the global gas market, especially LNG, while Iran has yet to acquire the wherewithal to exploit South Pars which is estimated to be the largest reservoir of gas on the border between Iran and Qatar. Unlike oil, gas is recognized as cleaner energy, hence is going to be the preferential fuel with growing market demand. Though shale gas is seen as a game changer, and is likely to put a latecomer like Iran into tough competition, Iran can position itself as player on the strength of its strategic location as a supplier to Europe and Asia.

According to Iranian estimates, the country would be producing gas output to 1.3 billion cubic meters (bcm) by the end of the Sixth Five Year Plan, that is, 2016–2021 (Pakistan & Gulf Economist, 2015). The plan also envisages the possibilities of exporting gas through a network of pipelines as Iran sees the possibilities of exporting gas to Europe. It is argued by some Iranian sources that if the US could be a supplier of gas to Europe, Iran could do so at cheaper rate. “Russia is currently exporting natural gas to Europe through a 3,000-kilometer pipeline,” Azizollah Ramezani, the director for international affairs of the National Iranian Gas Company (NIGC), said and hence “Iran can also export its gas to Europe through a similar pipeline scheme.” “The country’s huge natural gas reserves had for years made it a prime source for supplying future exports to Europe” (Press TV, 2016a). According to European Commission estimates, the bloc imports could reach to 25 billion to 35 bcm by 2030 (Steinhauser & Norman, 2015). Arguably:

Behind the scenes, however, work has been accelerating in recent months, according to European officials. Under a first tentative plan, the vast majority of the up to 35 BCM of gas from Iran would come in the form of natural liquefied gas, or LNG, and is expected reach the EU via Spain, which currently has the biggest LNG-import capacity in the EU. (ibid.)

During President Mohammed Khatami’s regime, Iran and the EU reportedly worked on a wider frame which included energy as an important component (ibid.). Iran is exploring the possibility of exporting gas to Europe by Turkey route and the Trans Anatolian Gas Pipeline (TANAP) is considered one possibility for transporting Iranian gas (Yucel, 2015).

Iran’s capacity to export oil and gas also hinges upon its domestic consumption. Like other oil exporting countries, energy prices in Iran too has been highly subsidized. Consequently, high and inefficient consumption is having bearing on its export capacity, more so when sanctions are going to be lifted. The domestic primary energy consumption is estimated at 244 million tonnes and oil provides 98 percent of it. Significantly, the consumption has gone up by 50 percent in the last 10 years. Recognizing the implications of high intensity of energy consumption and inefficient usage, the regime has initiated moves to reforms and rationalization by pruning down subsidies in two phases, first in 2010 and then in 2014. According to Elham Hassanzadeh: “In December 2010, the Government of Iran undertook bold economic reforms to phase out subsidies to energy products and replace them with nationwide cash transfers as compensation for rising energy prices” (Hassanzadeh, 2012, p. 2). Subsequently,

In March 2010, the Iranian parliament ratified the Targeted Subsidies Reform Act calling for a gradual increase of energy prices within a five-year period (2010–2015). The retail prices of petrol, diesel, fuel oil, kerosene and liquefied petroleum gas (LPG) are required to increase to no less than 90 per cent of Persian Gulf free on board (FOB) prices. Natural gas retail prices are also envisaged to increase to at least 75 per cent of average export prices after deducting transmission costs and export taxes. For electricity and water, the prices are set to increase to cover full cost price. (ibid.)

The second phase was initiated in April 2014 when petrol prices were raised by 75 percent. The reforms also contributed in changing the energy mix from oil to gas. Iranian capacity for exports is going to be determined by its policy on utilization of oil revenue. Iran is compelled to invest in the energy sector but it also needs to invest in other sectors to diversify its economy which is not only an economic choice but involves political judgment as well.

Global Energy Market: Unfolding Dynamics

The changing geography of energy is redefining the geopolitics of energy not only due to new discoveries made possible by technological revolutions but also by a shift in the global energy mix in favor of renewable, triggered primarily by the ecological consequences of the hydrocarbon-based energy regime. The existential threat posed by climate change to which hydrocarbon too is a factor made the search for non-carbon fuel a necessity. Shift in energy mix thus is the strategic choice. An IEA special report on Energy and Climate Change observes:

Greenhouse-gas emissions from the energy sector represent roughly two-thirds of all anthropogenic greenhouse-gas emissions and CO₂ emissions from the sector have risen over the past century to ever higher levels. Effective action in the energy sector is, consequentially, essential to tackling the climate change problem. (IEA, 2015a, p. 20)

However, it cannot be ignored that globally 1.3 billion people are living in poverty with no electricity, and its access cannot be denied. Oil would continue to be a significant contributor to the global energy mix.

What is proposed is that the share of oil be contained by alternative sources of energy and consumption be reduced by enhancing efficiency factor so that the carbon emission could be reduced. IEA estimates that by 2040, the world energy supply mix would be equally shared by oil, gas, coal, and low carbon sources (IEA, 2014). The pressing need to bring larger shift in energy mix comes from the fact that as IEA puts it:

Policy choices and market developments that bring the share of fossil fuels in primary energy demand down to just under three-quarters in 2040 are not enough to stem the rise in energy-related carbon dioxide (CO₂) emissions, which grow by one-fifth. This puts the world on a path consistent with a long-term global average temperature increase of 3.6°C. The Intergovernmental Panel on Climate Change estimates that in order to limit this temperature increase to 2°C—the internationally agreed goal to avert the most severe and widespread implications of climate change—the world cannot emit more than around 1,000 gigatonnes of CO₂ from 2014 onwards. (IEA, 2014, p. 2)

While at one level the hydrocarbon space is getting restricted, at another level within the restricted hydrocarbon space there is a visible shift both at supplier and consumer end, thereby unfolding new market dynamics. The arrival of shale gas in the energy market has changed the power matrix at least in the short run. The United States, the leading consumer of hydrocarbon, now meets only 27 percent of its requirement from imports. Its imports from the Persian Gulf countries has come down from the high of more than 3 mb/d in September 2001 to 1.29 mb/d in September 2015 (USEIA, 2015a). The shale revolution has transformed the matrix of the geopolitics of energy and has made the US to reduce its dependence on imports and has even promised them the status of exporter. Significantly, the shale gas potential is spread across continents, assuring a phase of hydrocarbon abundance. It is observed that oil recoverable from known reserves is almost two and half time higher than in 1980 (Dale, 2015). With clearly no supply constraints, resulting in moderate price regime, the hydrocarbon market is bound to expand.

In recovering its share in the global energy market, Iran has to face tougher challenges due to the American decision to export oil. The US being an oil importer might not have direct bearing on oil prices as observed by the OPEC Secretary General. ¹ However, the US as an oil exporter would have bearing on the geopolitics of oil and gas. It is reported that the US exported 586,000 barrels of oil in April 2015, more than Libya and Ecuador, the members of OPEC (Chakraborty & Parija, 2015). It is argued that “While new oil exports likely would not amount to much immediately, they would provide another challenge to already fractured OPEC. The Organization of the Petroleum Exporting Countries has been allowing market forces to set prices for the past year, abandoning its previous policy of manipulating prices through the use of output quotas” (Domm, 2015). Countries like Nigeria—light sweet crude producer—might find difficult times as their exports to the US would be declining and might face competition coming from the American exports in the global market (Rascouet & Smith, 2015).

Iran in New Energy Power Game

The downward swing in the oil market since 2014 from US$110 to US$40 amidst a conflict situation in the Middle East has contested the old wisdom of conflict leading to price escalation. Of significance is the fact that Iran would have to be a part of the new energy game where the market is over supplied and exporters are not agreeing to production cuts to restore the market price. Under sanctions, Iran was exporting only one million barrels per day and was denied oil revenues that it deposited with banks. To meet its quota under the OPEC, Iran would have to augment its capacity. Thus, the first question that would impact Iran’s return would be how much and at what time it would be able to meet its quota.

Estimates vary, with the Iranian government of the view that Iran can supply 500,000 barrels per day, immediately, on the strength of its stock and could produce a total of 4 mb/d within three months of the lifting of the sanctions. According to Mohsen Qamsari, director of international affairs at National Iranian Oil Company, Iran “will try to maximize our crude export capacity to Europe and restore 42 to 43 percent share in the European market before the sanctions were imposed” (Kharpal, 2015). The contrary view is that “There isn’t going to be this great flood of pent-up supply hitting the market and it looks as if the process will be far more gradual than people expected” (ibid.). According to a study by Meghan O’Sullivan, Iran might take a year to bring additional oil in the market and observes that “Iran could well reach production levels of over 5 mnb/d by 2020, but this depends more on Iran’s ability to attract foreign investment into the oil sector” (O’Sullivan, 2015, p. 5). ²

Iran has yet to project an investment-friendly regime both in terms of ideology and procedures. Within the country there is a desire to invite foreign companies but the ideological divide is very strong about the scale, the volume, and the terms and conditions to invite outsiders. There are sentiments in the oil industry that with sanction getting off Iran, out of sheer compulsion, would be revisiting its policy and attitude toward foreign companies especially in the oil and gas sector. It is argued that Iran’s position on oil and gas sector would demonstrate its policy on foreign investment, “a failure by Iran to capture early economic gains (in the energy sector or elsewhere) will create challenges to the durability of the agreement over the medium and longer terms” (ibid., p. 6).

Iranian Energy Diplomacy

Iran is redefining its energy diplomacy because it perceives that the low price regime is sustained to harm its interest. President Hasan Rouhani minced no words when he observed: “During the days [that Iran was under the pressure of the sanctions], some big producers of oil that are dependent on world powers decided to reduce the price of oil from US$110 per barrel to US$40 per barrel to undermine Iran and recently even Russia” (Press TV, 2015b). Spelling out Iranian intent he also observed that “in a post-sanctions era, it will be Iran that will decide how much oil it will produce, in which market it will sell its oil, in which bank it will deposit the revenues thus obtained, and how it will use those revenues” (ibid.). Iran is reformulating its global energy engagement while taking cognizance of the market realities and is visualizing a strategy of “Building refineries abroad with the participation of international investors can guarantee the security of sales and exports of crude oil from Iran for a period of 20 to 25 years,” Abbas Kazemi told the Mehr news agency, adding: “In other words, with the construction of refineries abroad, Iran can count on permanent and stable customers for a couple of decades and guarantee demand and supply for long terms” (Press TV, 2015a).

Negotiations have been held with several groups of investors, including China, Brazil, and India, for the purpose. Iran has signed an MoU with Brazil to construct a refinery in the Latin American country for processing 300,000 barrels per day of crude oil. “Under the agreement with a Brazilian company, the refinery will merely use crude oil as feedstock” (ibid.). Reportedly negotiations are also being conducted with India for construction of refinery to process 400,000 bpd of crude under a 50-50 partnership (ibid.). According to Iranian sources, in the first nine months of the year starting from March 21, 2015, Iran has exported more than one billion liters of gas oil to countries like Afghanistan, Armenia, Iraq and Pakistan by land route and to South Asian markets by ship (Iran Daily, 2016).

The Large Frame

It would be relevant to refer to the OPEC meeting held on December 4, 2015 to capture the tensions that Iran has to negotiate with to maximize gains from oil exports. Since the oil prices have been on the decline, there has been pressure on the OPEC to cut production to restore the prices but Saudi Arabia has been maintaining that OPEC needs to work for market share than price, and the OPEC also has not been able to agree on supply cuts. This has hugely impacted the revenue of many oil exporters, with Iran being one of them. The IEA estimates that OPEC revenue may fall to US$550 billion from an average of one trillion dollars. Once out of the purview of sanctions, Iran intends to go back to its pre-sanctions’ oil production levels and this would inevitably add to the supply. Despite pressures, Saudi Arabia apparently did not agree to production cuts but significantly the OPEC has not fixed the ceiling (existing output is fixed at 30 mbd) on production. The OPEC Secretary General reportedly admitted that the number cannot be fixed. “Iran is coming back. So we decided to postpone the decision until the next Opec meeting, when the picture will be clearer” (Raval, Sheppard, & Hume, 2015). In practice, however, the OPEC has been producing 31 mbd, more than its ceiling.

This possibly goes in favor of Iran which can now pump more oil without offending OPEC discipline. As Iranian oil minister Bijan Zangeneh observed: “We have no decision, no number.” Asserting his position, he even observed that limiting Iran’s output was “not a matter of negotiation” (ibid.). Saudi Arabia argues that high prices market is cornered by high cost producer, hence it would like a lower price regime to restore its market share by eliminating high cost producers. Reportedly, Saudi Arabia agreed for a cut if others including non-OPEC producers like Russia and Mexico agreed to it. It even wanted Iran and Iraq to join the production cut. Apparently, this was not acceptable to any of them. It is suggested that behind the low-price strategy of Saudi Arabia is the motive to inflict injury to Iran and the US as at “current prices, Iran’s new output would generate roughly US$175 million a day in oil revenue. But if Saudi Arabia allows oil prices to climb back to the US$80 range, that daily revenue would rise to US$350 million. The additional cash would give Iran additional power, something the Saudis want to avoid” (Egan, 2015). According to Zangeneh, “there is a political will behind OPEC indecision over production ceiling in the organization” (Press TV, 2016b). Hence, Iran is proposing return to the quota system that was given up by the OPEC in December 2011 and even called the scrapping of quota a “historic mistake” and proposed “making up for this big mistake and reviving the quota system in OPEC” (ibid.).

The OPEC is facing a crisis because its market share has been shrinking and since the 1998 financial crisis when OPEC and non-OPEC producers jointly helped the market to recover, the two have not cooperated any further. “Since then top non-OPEC producer Russia has repeatedly resisted calls for joint action and grown its output by 70 percent” (Nasralla, 2015). It can be argued that the oil market is facing a kind of attrition and Saudi Arabia has been defining the position of OPEC and within the group the divide of have and have-nots is reaching its tipping point. For Saudi Arabia, immediate term consolidation of its regional strategic position is very crucial and it could even be argued that very legitimacy of its regime rests on its strategic stature in the region. Oil certainly is seen as an instrument. Hence on the strength of its financial salience, Saudi Arabia would like the regional order to be constructed on its terms. Russia and Iran in the regional strategic matrix are on the opposite side; hence, Saudi Arabia would not like them to be empowered by oil revenue especially when both Russia and Iran need oil revenue because of budgetary compulsions. However, given the strategic stakes, both are putting up a brave face to deal with the situation without blinking. Russian deputy finance minister Maxim Oreshkin admitted: “In our estimates, one should hardly expect any serious growth of the oil price above $50 … The oil industry is changing structurally and it may happen that … the global economy would not need that much oil” (Tully, 2015).

From the geopolitical perspective, in recent times the role of non-state players in oil trade has assumed significance as suppliers or price spoilers. The Islamic State of Iraq and Syria (ISIS), in particular, has been actively controlling oil smuggling to finance their activities. It is observed that ‘Oil is the black gold that funds Isis’ black flag—it fuels its war machine, provides electricity and gives the fanatical Jihadis critical leverage against their neighbours’ (Solomon, Chazan, & Jones, 2015). The important source of oil control by the ISIS include Deir ez-Zor province in Syria where production has been between 34,000 to 40,000 barrels a day (ibid.). “The price of the oil depends on its quality. Some fields charge about US$25 a barrel. Others, like al-Omar field, one of Syria’s largest, charge US$45 a barrel. Overall, Isis is estimated to earn about US$1.1m a day” (ibid.). The oil traded by the ISIS is not only within their territory but smuggled across to countries like Turkey.

The recent escalation of tension between Saudi Arabia and Iran, following the execution of a Shia cleric by Saudi Arabia, has further exposed the vulnerability of oil exporters from the region. Unlike the past when such escalation would have led to a price upsurge, in the present context prices have reported to have gone down further. Saudi Arabia apparently intends to deny Iran the advantage of earning oil revenue to finance its economy. In its estimate, the regime in Iran under President Rouhani would find it difficult to negotiate a low-price regime domestically and hence would be moderating its profile in the region. Saudi Arabia, despite losing oil revenue, could sustain a low-price regime at least in the short run.

Thus it is anticipated that oil prices might go down further with the Saudi-Iranian rivalry growing up in scale. Iran could be a great loser because deterioration in regional security environment would deter foreign companies to invest in the country. Iran certainly would not like the price war to escalate. As observed by Mohsen Qamsari, a senior official of the National Iranian Oil Company (NIOC): “We will be more subtle in our approach and may gradually increase output, I have to say that there is no room to push prices down any further, given the level where they are” (Verma, 2016). The question arises whether Iran would get that space when Saudi Arabia is bent on restraining Iran’s rise in the region. The prevailing Saudi–Iranian tension could unfold in two ways: one, it scales up to war thereby enhancing the risk factor impinging on price escalation. This would not serve the purpose of either of the parties because given the capacity of the two Saudi would be the gainer. In the second scenario, both the countries would like the tension to remain at a moderate level or wage a war of attrition. Domestic politics in either case is not strong enough for the ruling governments to go for direct confrontation. There is the view that the execution of Shia cleric was not intended to target Iran though eventually it has moved in that direction (Lobe, 2016). Saudi Arabia may have the power to push the oil prices down but not the leverage to restore beyond a point, say US$60– US$80 per barrel. “Even if the Saudis were to reverse course and limit the kingdom’s oil production to drive the price of oil back up, it’s unlikely that their oil income would rise high enough to sustain all of their present lavish spending priorities” (Klare, 2016). Furthermore, though Saudi Arabia has so far been able to force the OPEC to follow its dictate how far it would be able to sustain it remains uncertain. Pressure is mounting on the OPEC to call an emergency meeting to review strategy (Middle East Online, 2016).

Conclusion

The structural shifts in global energy order are not only reflecting in the economic domain but transforming the relationship between geopolitics of energy and the Middle East. It is a dilemma for oil producers that the economics of price recovery demands cutting down of production. However, no country intends to cut down the production more than Iran which is waiting to join the global market shortly. The new geography of energy is changing the energy power dynamics, taking away the leverage from the Middle East in business-as-usual context. Oil prices are low and the US production remains at the same level. This is a time of uncertainty in the region which does not rule out the possibilities of the region getting drifted into a phase of radicalization. Regimes with low oil revenue are quite vulnerable politically.