Despite the vigor with which the new plan was launched, those championing it face an uphill battle. The Saudi public sector is massive, but its real capacity to enact dramatic reform on a compressed time scale is very much in question. An even greater obstacle is the Saudi labor market, which does not yet have the talent and expertise needed to transform the economy into a more dynamic one where the private sector is a driver of growth and provider of jobs. The energy boom in the United States is not only an impetus for reform, but could also be an obstacle, as cheaper natural gas in North America deprives Saudi Arabia of some of its relative global competitiveness in manufacturing and petrochemicals; this competitiveness will be further eroded by the lifting of subsidies on energy feedstocks, which will be inevitable under the new reforms.
Yet the fortunes of MbS, Saudi Vision 2030, and Saudi Arabia as a whole do not rest solely—or even primarily—on the matter of economics. The success of these economic reforms will ultimately require Saudi Arabia to make simultaneous political and social reforms. The connection between the two is obvious in some areas, such as attracting foreign direct investment, bringing women into the workforce, or encouraging Saudis to spend their leisure time in the kingdom. Changes to lubricate these reforms will require deft handling and the expenditure of political capital, particularly as they will encroach on issues of importance to the powerful religious establishment, whose backing the royal family relies upon as a source of its legitimacy.
Even more precarious, however, are reforms that will be required as MbS essentially renegotiates the contours of the social contract. As mentioned, the reform plans have already chipped away at subsidies that most Saudis feel are their entitlements. Additional planned steps, such as the adoption of a value-added tax and the reduction of public wages as a proportion of the budget, will further put to the test the support of Saudis. MbS and others may hope the promise of more jobs and continued public services will be enough to convince Saudis to adjust to the new burdens. But if my conversations during a 2016 trip to the kingdom are any indication, Saudis will look for more than maintaining privileges in a renegotiation of the social contract. While not every Saudi with whom I spoke asked for the same changes in return for losing subsidies and paying taxes, many expressed a desire for greater transparency into the finances of the royal family, more equity, and less corruption. If MbS can deliver on such expectations, he will have a wider berth for realizing his vision of Saudi Arabia in 2030.
The range of outcomes for Saudi Arabia is not binary. The plans may eventually succeed, fail, or end up at a thousand points in between. However, if reform plans do not achieve at least a moderate level of success, the future of the kingdom will be bleak. While popular uprisings are not impossible to imagine, a failed effort to renegotiate the social contract is more likely to invite more government repression and create a more disaffected population. A poorer, more repressive, more radicalized Saudi Arabia would not only be bad for Saudis, but it also would be destabilizing for the region and the world.
Iraq: Reinforcing the Unity of the State
Ashti Hawrami, a brilliant British-educated petroleum engineer from Sulaimaniya, a Kurdish town near the Iranian border, was the mastermind behind the swift emergence of the Kurdish region of Iraq as an energy force in its own right. While other Kurds fought Saddam’s forces in the mountains as their contribution to Kurdish freedom, Hawrami’s input was developing the economic options of the region. Over the years since 2007, under Hawrami’s watchful eye, the Kurds opened their previously unexplored territory to international oil companies, discovered significant oil reserves, began producing them, and constructed infrastructure to sell their oil to global markets through Turkey.
All of this was done without Baghdad’s involvement and often over its objections. In fact, the development of the energy wealth of Iraqi Kurdistan has been a point of contention between Baghdad and Erbil, the Kurdish capital, since the ouster of Saddam in 2003. Partially in an effort to repress the Kurds, Saddam never allowed for the exploration of the Kurdish region for oil and gas. While many other parts of Iraq were found to be awash in these resources, the Kurdish region seemed to be bereft of them.
In complex negotiations of which I was a part during my time in Iraq, the Kurdish region decided to resist the long-standing pull of declaring independence in 2003 and to remain part of the Iraqi state at least conditionally. American pressure and other geopolitical realities played an important role in this decision. But also critical were new arrangements with Baghdad that made Iraq a federal country (and the Kurdistan Regional Government a federal region), gave the Kurds considerable autonomy, and stipulated a budget arrangement in which the Kurdish region would receive 17 percent of all the revenues accruing from the sale of Iraqi oil and gas produced elsewhere in the country. These arrangements also meant that Kurdistan would have the ability to explore and develop whatever oil and gas resources it might have.
While assurances of a significant portion of Iraq’s revenue were agreeable to the Kurds, their long, troubled history with Baghdad made them reluctant to be dependent on the center for their well-being. For decades, Kurds had suffered—including genocidal acts and the use of chemical weapons—at the hands of Saddam and a powerful Iraqi state. While there was a new beginning in Iraq, the Kurds were wary that Baghdad could again become more authoritarian, with devastating consequences for them. For this reason, the efforts of Hawrami and others to develop Kurdistan’s own resources were critical to the Kurdish project. In a few short years, the Kurdish region of Iraq was able to boast its own considerable production—dramatically changing the outlook for this little corner of the world.
Never disguising his disdain for the power center of Baghdad, Hawrami openly and frequently “did the math.” In spring of 2014, sipping a glass of French wine in the guesthouse of the Kurdish prime minister, and speaking over the rush of a water fountain in the indoor courtyard, Hawrami asked me a rhetorical question, “How many barrels of oil does Kurdistan need to produce and sell in order to exceed the revenues it is owed under the budget agreement from Baghdad? At what point would it make greater sense for Kurdistan to simply rely on the sale of its own oil, rather than to be dependent on Baghdad for its economic well-being?” He paused, then confided, “We are closer than you might think.”
In early 2014, with oil prices at a steady and healthy high, Hawrami could probably taste Kurdish “economic independence.” With oil prices north of $100, it would not be long before Kurdish oil production was sufficient to garner as much or more than the revenues the regional government was supposed to receive while staying in Baghdad’s orbit.
Rarely are so many damp cloths put over a dream at the same time. Over the course of six short months in 2014, the idea of an independent Kurdish entity lost its air of inevitability and imminence as events took unexpected and discouraging turns. Pressuring governments from Italy to Morocco, Baghdad waged a largely successful international campaign to dissuade buyers from purchasing Kurdish crude. The Iraqi government even enlisted American courts in its efforts, leading a U.S. court in Houston to interpret Iraq’s constitution and determine what should happen to an oil tanker filled with Kurdish crude that had spent more than five months circling a navigational buoy sixty miles off Galveston, Texas, while awaiting permission to dock and unload. Turkey refrained from helping Syrian Kurds under siege in the border town of Kobani, stoking wariness among Iraqi Kurds already nervous about putting their fate in the hands of Ankara, a former adversary. Most dramatically, the Islamic State—ISIS—steamrolled across western and northern Iraq, suddenly threatening the sparkling malls and restaurants of Erbil and leading to a mobilization of the Peshmerga, the Kurdish regional security forces whose last military encounters had been with Saddam.
Perhaps most significantly, the price of oil fell by more than half, punching several holes in Hawrami’s careful math. International oil companies shifted from being eager to being reluctant to be part of the Kurdish energy scene a
s prices fell and political risk rose. The volume of exported oil needed to meet the region’s budgetary needs without Baghdad’s help skyrocketed from within reach to far from it.
Both Baghdad and Erbil felt the financial squeeze at the same time, making rapprochement between the national and regional governments attractive—perhaps even essential—to both sides. Iraq could no longer send the oil produced in its vast southern fields north for export through Turkey; ISIS controlled the territory through which the pipeline ran. With its exports already constrained by insufficient infrastructure in the south, Baghdad suddenly saw value in a Kurdish pipeline able to carry crude to Turkey without traversing territory held by ISIS. In a low-price environment, Iraq needed to export every barrel of oil possible to fill dwindling coffers. An arrangement in which increased exports of Kurdish oil would contribute to the national kitty was also attractive for the same reason. Lubricated by new and more visionary leadership in Baghdad, the two governments struck a deal in December 2015. Although the deal did not last, it marked the first meaningful energy cooperation between Baghdad and Erbil in years, and elements of it persisted, such as Baghdad’s acquiescence to the export of oil by the Kurds through Turkey.
The push for Kurdish independence from Baghdad is of course about much more than economics and is set again to intensify in the aftermath of the ejection of ISIS from the northern Iraqi city of Mosul. After enduring decades of repression under Baghdad, and having preserved their own culture and language for centuries, the Kurds are eager to be masters of their own destiny. Steps taken by the United States and others to fight ISIS have inadvertently strengthened the Kurds and their quest for a separate state. Many would be willing to pay an economic price if that was the only one to be incurred for political independence. But given the spate of additional political and security calculations that must be made in the drive for independence, the dramatically changed energy and economic environment created a pause for cooperation. It opened the door for one more chance for Iraq to maintain itself as a unified state. Even if Iraqi Kurdistan eventually breaks with Baghdad, the more sober energy environment has cooled the fervor of those wishing to hastily make such a move—and may have created the possibility for interim arrangements that could lead to a more peaceful and sustainable outcome.
Israel: Gas Monster
Further west, the new energy abundance has presented intriguing possibilities for peace between Israel and some of its neighbors. In 2010, American and Israeli companies working in tandem discovered Leviathan, a large natural gas field off the shore of Israel. Named for the biblical sea monster in the Old Testament, Leviathan is not far from the Tamar field that had been found one year earlier. Together, the two fields are believed to hold 32 trillion cubic feet of natural gas, or twice as much as the U.S. Geologic Survey says is recoverable from the National Petroleum Reserve in Alaska. This amount is more than enough to meet Israel’s domestic needs and offers Israel the prospect of becoming a natural gas net exporter by 2020. Despite threats from Hezbollah, a Shi’a militant group based in Lebanon and considered to be a terrorist group by Israel and the United States, Tamar started production in March 2013. After working through a range of antitrust suits and regulatory problems, Leviathan looks set to be developed, with the first gas expected at the end of 2019.
These developments have fueled hopes among many Israelis that natural gas might serve as a platform for peace in the region. There are already indications that at least some of these hopes can become realities.
In May 2010, the world watched transfixed as a flotilla of boats carried Turkish and international peace activists across the Mediterranean to the Gaza Strip. The group intended to break the Israeli and Egyptian blockade of Gaza by delivering aid and to raise global awareness of what it perceived to be an illegal cordon. In a predawn raid, Israeli commandos rappelled onto the Turkish ship Mavi Marmara from circling helicopters. Although they sought to verify that there were no weapons or ammunition onboard the boat, fighting broke out immediately, soon leaving nine Turks dead and one fatally wounded.
The incident led to a bitter fallout between Israel and Turkey. The two countries had been close allies until that moment, but the raid on the flotilla precipitated multiple inquiries, the withdrawal of ambassadors, and icy relations for six years. The rhetoric was vicious. Turkey was once Israel’s closest ally in the Muslim world, but, in 2014, Turkish prime minister Recep Tayyip Erdogan accused Israel of having “surpassed Hitler in barbarism.” In a telephone call orchestrated by President Obama in 2013, Israel apologized for the deaths, but a full rapprochement was stalled by disagreements over compensation and other matters.
It was not until a 2016 meeting in Rome that Turkey and Israel finalized the elements of an agreement and normalized relations between the two countries. Surely, the deteriorating security situation in the region was one spur to the new accord. But energy undoubtedly was also a major impetus. Relations between the two capitals began to thaw in late 2015, not coincidentally after Turkey shot down a Russian plane over Syria. That action had prompted Gazprom, Russia’s natural gas behemoth, to (at least temporarily) suspend construction of TurkStream—a pipeline to deliver Russian gas to Turkey and beyond.
Israeli prime minister Benjamin Netanyahu was explicit about the role that the prospect of natural gas deals played in the reestablishment of relations between Turkey and Israel, both when I met him privately with a small group of former U.S. officials in Israel in August 2016 and in public. At the time of the diplomatic agreement, Netanyahu stated, “This agreement opens the way to cooperation on economic and energy matters, including the gas issue. Gas is so important and contains the possibility of strengthening the Israeli economy and state coffers with vast capital. . . . Leviathan could supply both the Egyptian market we intend to work with and also the Turkish market as well as the supply of gas through Turkey to Europe, and this is a strategic issue for the State of Israel. This could not have come sooner without this agreement, and now we will take action to advance it.”
Israel’s hopes to showcase the benefits of peace by forging substantial and mutually beneficial economic partnerships with the only two Arab states with which it has signed peace agreements—Egypt and Jordan—are also on track to be at least partially realized. In September 2016, Jordan’s state-owned national power company signed a $10 billion deal with the developers of the Leviathan field to provide natural gas to Jordan. Because of both the physical proximity of Jordan to Israel and infrastructure already in place, the sale of natural gas can still be economical in a low-price-energy environment. Israel had similarly sought to sell substantial amounts of natural gas to Egypt; that country’s two LNG export terminals have been idle due to lack of gas for the last several years. Domestic debates about Israel’s regulatory structure, however, slowed the finalization of agreements to do so, and fate intervened. Late in the summer of 2015, Eni, the Italian energy company, announced it had discovered a “super giant” natural gas field off the shores of Egypt’s Mediterranean delta. Zohr, as the field was named, is believed to contain enough gas to both meet Egypt’s domestic needs and supply Egypt’s LNG terminals. As a result, the prospects of Israeli natural gas providing a lifeline to a gas-thirsty Egypt—and the political benefits that may have accompanied such an arrangement—are now far less likely to materialize.
Syria: An Outside Chance
No country in the Middle East—or perhaps the world—needs a push for peace more than Syria. The death toll of its civil war is staggering, with nearly half a million Syrians killed since the conflict erupted in 2011. Equally astonishing is the number of displaced Syrians. The country is being depopulated. At a time when other Arab states are battling “youth bulges,” Syria is becoming a country without children. Its absolute population has declined from almost 21 million in 2010 to 18.5 million in 2015. Fully half its population has been driven from their homes, with a third in foreign countries and two-thirds uprooted within Syria’s borders. The economy has been de
stroyed and infrastructure is devastated. A video clip filmed by a drone flying over the city of Homs—a major industrial center that was at a time Syria’s third largest city—shows the once vibrant city to be nearly abandoned and in ruins.
While one can imagine a scenario in which energy plays a palliative role in the war, the pressures of the new energy abundance have not yet worked in favor of resolution. There is one exception that is relatively small given the scope and complexity of the conflict: the new energy realities have clipped the financial fortunes of ISIS. The group had commandeered oil fields in both Syrian and Iraqi territory in 2014 and initially reaped significant financial gains from operating them. But the dual developments of low oil prices and aerial bombing of these locations has limited the contribution these oil sales have made to the coffers of the extremist group.
Although Syria itself was never a large oil producer, nearly all major external actors in the Syrian conflict have significant interests in energy. Russia, Iran, Saudi Arabia, and the United States are five of the top seven oil producers in the world; only the budget of the United States is not dramatically impacted by the price of this commodity. One might therefore think that major budgetary pressures on Russia, Iran, and Saudi Arabia would have the potential to curtail the involvement of these countries in the conflict. Thus far, however, there is little evidence that the cost of intervention is weighing heavily enough to spur any shifts in course, particularly given the enormous strategic stakes all sides perceive to be at risk in Syria.
For the United States, Russia, Saudi Arabia, and even Iran, the cost of intervention in the conflict in Syria pales in comparison to their overall military expenditures. Russia and Saudi Arabia are the third and fourth largest military spenders in the world, with military budgets of $70 billion and $61 billion respectively. While neither country wants an expensive, long-term military engagement in Syria, the costs of involvement are not the primary drivers of their commitment. Iran’s official military budget is smaller, at $12 billion, but that figure does not include “paramilitary” spending. The $500 million that the United States used to fund a failed effort to train and equip Syria opposition figures in 2014 and 2015 was less than 1 percent of the overall Pentagon budget.
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