The international nuclear agreement with Iran, signed on 14th July, has encouraged widespread speculation and expectation concerning many potential aspects of what is in effect being seen as Iran’s re-entry to the ‘international community’. Beyond the specifics of tighter international control and verification of Tehran’s nuclear programme, many commentators have already started to contemplate the potential consequences of the likely realignment of Western relations with Iran, particularly in the context of the United States. There has also been extensive analysis of the potential for new economic and diplomatic relations, and the impact these may have on long-standing security relationships in the Arabian Gulf.
One specific area that is attracting intense interest is the impact that the presumed lifting of sanctions may have on Iran’s relations with the GCC. Some experts see this as a possible arena for cross-Gulf engagement as well as for continuing conflict. It is germane that all parties are members of OPEC with shared concerns over the value of oil and market share within global energy markets. Moreover, some commentators believe that Iran could become more interested in developing renewable sources of energy in partnership with their Gulf neighbours – touted as a potential low-intensity area for early co-operation and confidence building.
Assuming the US Congress and Iranian parliament endorse ratification of the nuclear agreement, the process of lifting both multilateral and unilateral sanctions will begin before the end of this year, leading in turn to the re-opening of global energy markets to Iranian output. Recent analysis by Rand suggests that Iran will initially be looking to raise daily output from current levels of around 1.5 million barrels per day (bpd) by some 800,000 to some 2.3 million bpd. By the end of the decade some experts are predicting that Iran will seek to double this output again, thus restoring the country to a production level that will be roughly equivalent to its pre-revolutionary peak in the 1970s.
While some sceptics have also pointed out that Iran’s dilapidated energy infrastructure requires at least $100 billion of expenditure to realise these levels of output, it seems likely that foreign investors will be only too willing to invest in Iran’s oil production sector. In this regard it is noteworthy that even before the 14 July agreement was signed, senior executives from Royal Dutch Shell, Total SA and Eni had travelled to Tehran for exploratory meetings with Iran’s petroleum minister, Bijan Namdar Zangeneh.
The potential consequences of Iran’s imminent reappearance as a major oil exporter are therefore likely to be profound, not least for the UAE and the rest of the Gulf states. Most importantly, economists are starting to suggest that the general assumption that oil prices will eventually recover to the benchmark $80 per barrel level is now unlikely to be realised. Just at the moment that Iran’s renewal of supply comes on stream, the global energy market appears more efficient than at any time in history. In turn, the surprising resilience of fracked oil, concern to reduce carbon footprints, the drive to maximise energy efficiency and generally reducing global demand, suggest that the market for oil will continue to weaken. Accordingly, economic analysts are likely to accept that the recent dip in oil prices should not be dismissed as a temporary phenomenon but accepted as the “new normal” with average prices now likely to move between $40 and $50 per barrel rather than at the $100 level which was widely assumed until late last year.
Pursuing this logic, the consequences for the UAE will be mixed – and not altogether negative. On the positive side of the balance sheet, the projected expansion of energy availability is calculated to incur a global rebalancing of $1.7 trillion (1) from energy producers to energy consumers. While this will reduce the UAE’s revenue from oil, the country’s consumer economy should benefit strongly from the overall boost to world trade. Indeed, it would appear that the UAE leadership is already alive to the possibilities of structural readjustment within the country’s economy. As has been widely reported, the UAE announced its bold decision at the end of July to lift fuel subsidies, becoming the first Gulf state to defy conventional wisdom concerning the political necessity of a “cradle to grave” structure of public subsidies. At the same time, the UAE government has floated the prospect of introducing some form of sales taxation, most likely a Value Added Tax (VAT), and corporation tax. These measures not only allow the UAE leadership to show that it is aligning the country’s economy more closely with international fiscal norms but also that it is starting the process of shifting the burden of state provision of services from wholesale reliance on oil revenues to a more equitable balance between the UAE’s private and public sectors.
For both Abu Dhabi and Dubai, the burgeoning international enthusiasm for Iran again seems likely to have direct benefits for the value of international trade flowing through the Emirates. Moreover, the UAE’s long-held ambition of reducing internal consumption of oil may be helped by the possible re-opening of Sharjah’s Crescent Petroleum pipeline which could see up to 600 million cubic metres of natural gas being pumped from Iran into the UAE energy grid.
While the UAE leadership is likely to remain wary of the political and strategic re-emergence of Iran on to the world stage, particularly in what is still widely seen as a protracted ideological struggle for Sunni or Shia supremacy over the Islamic world, economically the direct and indirect economic benefits for the UAE could be immense. Dubai has long been regarded as one of the trading gateways to Iran. The Sharjah Crescent gas pipeline seems to offer an important opportunity for the UAE government to continue the process of maximising the value of export oil. And the projected global benefits of a sustained lower oil price should assist the UAE’s strategic goal of rebalancing its economy away from reliance on oil and towards the development of a knowledge-based economy.
Together these projected macro-economic shifts seem likely to enhance the
UAE’s position within the GCC, within the Middle East and within the global economy. Perhaps the greatest challenge for the UAE will be working out how to grasp these opportunities without antagonising less agile and forward-thinking neighbours, and at the same time avoiding being dragged backwards by the weight of half a century’s presumption of reliance on oil.