The Quest: Energy, Security, and the Remaking of the Modern World

by Daniel Yergin

  Bouazizi’s plight was the match that ignited the kindling whose accumulation had been building up for years: A huge bulge in the number of young people for whom educational options were limited and for whom there were no jobs, no prospects, no economic opportunity; pervasive corruption, lack of political participation, overwhelming and inefficient bureaucracies, and low quality of government services; a “freedom deficit” and a “women’s empowerment deficit”; arbitrary political power, secret police, and permanent “states of emergencies”; economic stagnation and enormous obstacles to entrepreneur-ship and initiative.6

  All these were the factors that set in motion what has been called the “Arab Spring” among young people who had also reached the breaking point. It quickly gained momentum. Massive street demonstrations toppled the long-ruling government in Tunisia.

  The protest movement spread to Egypt, where, day after day, hundreds of thousands of people packed into Tahrir Square in Cairo to demand the resignation of President Hosni Mubarak, who had ruled Egypt for 30 years. All of this played out on television and the Internet. The Arab world was transfixed, for Egypt plays a unique role in the region. It is a quarter of the total Arab population, and its influence reaches throughout the area. As one Saudi said, “We were all taught by Egyptians.” It had also signed a treaty with Israel, and a kind of cold peace existed between those two former belligerents. Egypt’s size—and the scale of its armed forces—make it the foundation of the geostrategic balance of the region. Finally, on February 11, 2011, Mubarak gave up power. The nature of Egypt’s future government would have great significance for the entire Middle East.

  The events in North Africa triggered protests and demonstrations across much of the Middle East. Syria was racked by constant protests against the Assad government, which were met with bullets. Three countries of particular significance to the Gulf were Iran, Bahrain, and Yemen. Iran used whatever force was necessary to put down demonstrations. In Bahrain, the longtime tense relationship between the Sunni elite and the majority Shiite population make it a proxy for contention between Saudi Arabia and Iran. It is a very small country in terms of population but it is only a couple of dozen miles by causeway from Saudi Arabia and the world’s largest oil field. It is also the home of the U.S. Fifth Fleet, the mission of which is to maintain freedom of the seas in the Gulf. When protests turned into protracted violence, the Gulf Cooperation Council, led by Saudi Arabia, sent troops into Bahrain to help restore order.

  Yemen was particularly vulnerable because of its strong tribal tensions and regional splits, the 33-year rule of the autocratic Ali Abdullah Saleh, its low per capita incomes, and what is thought to be the strongest Al Qaeda affiliate. Adding to the significance of what happens to Yemen is its position on the narrow Bab el-Mandab choke point, the entrance into the Red Sea, and its rugged 1,100-mile border with Saudi Arabia. The specter of chaos and violence in Yemen leads some Saudis to talk about the threat of having “our Afghanistan” on its frontier.

  Altogether, unfolding events throughout the region had demonstrated that social instability had become a critical factor for energy security. In Libya protests turned quickly into a civil war that divided the country between rebels in the east and Ghaddaffi forces in the west. As Ghaddaffi’s forces advanced on Benghazi and what seemed likely to be a bloodbath, the Arab League called for a no-fly zone, and U.S. and European forces, operating under U.N. and NATO authorization, intervened on the side of the rebels.

  By March of 2011, virtually all of Libya’s oil production was disrupted, removing about 1.5 percent of supplies from the market. But that, combined with rising demand, started to narrow once again spare capacity. As unrest and turmoil continued in the Middle East, anxiety rose about the potential for further disruptions to supply. Oil prices surged once again both on the actual disruption and on fear of “what would happen next,” taking the Brent price at least for a time, toward $130 a barrel. The rising oil prices were now seen as the biggest risk to global economic recovery. And, as long as there was uncertainty about the Middle East, oil prices would reflect the risk premium. Thus, the social foundations and the now uncertain geostrategic balance of the region would prove to be crucial in the formation of world oil prices, which in turn would have much wider impact.

  Yet there is no single answer to how the uncertainty will be resolved. The differences among the countries in the region are very great. Egypt, like Iran, has about 80 million people, and per capita income in Egypt is about $5,800 a year. By contrast, many of the key oil producers have small populations; depend on a large number of expatriates to make their economies work; and are, in effect, cradle-to-grave welfare states with high per capita incomes.

  What all the countries share, whatever their differences, is an enormous youth bulge. About a third of the population in the region is between the ages of ten and twenty-four. Historians have observed, going back to the European revolutions of 1848, the link between such bulges and turmoil and upheaval. In addition, what these countries lack is jobs, especially for frustrated and educated young people. Unemployment may range as high as 30 percent, and many of those who are not unemployed are underemployed. In addition to disappointed expectations and economic difficulties, the mass lack of employment feeds smoldering resentment against the governing system for all the reasons already noted.7

  What made the critical difference was the galvanizing power of new communications technologies, which eroded the control of information that is so essential to authoritarian regimes. The development of Arab satellite networks, beginning in the 1990s, was already bringing both views of the outside world and domestic news that was not censored by the ministries of information. For many, these networks became the most important source for news. But then cell phones and the Internet—in particular e-mail, Facebook, and Twitter—provided a way to share information, mobilize for action, and outwit the traditional instruments of control. Lack of political participation was offset by participation through these new channels, as social networks came to challenge the traditional prerogatives of national sovereignty.8

  It has been recognized for years that creating opportunity and jobs is a challenge in much of the Middle East, owing both to rapid population growth and the nature of the economies. This need has now gone from chronic to acute. But industries like oil and gas and petrochemicals are capital intensive; that is, they create good jobs but not a lot of jobs. This is where countries face the risk of the resource curse and the structural problems of the petro-state. That applies even to the wealthy petro-state that can provide cradle-to-grave welfare. These industries are so big and so dominant that an entrepreneurial economy gets squeezed out. Subsidies can ease the tensions, but they are not a substitute for job creation.

  THE MIDDLE EAST YOUTH BULGE

  Percentage of the population 29 years old or younger in 2011

  Source: U.S. Census Bureau

  But jobs, on a large scale, cannot be created overnight. That takes both higher economic growth rates and time, along with openness, stimulation of entrepreneurship, reduced regulation and control, and dampening down of corruption. China and the other countries of East Asia have created jobs by intensively integrating with the global economy. Taiwan and South Korea were at the same stage of development as Egypt in the 1960s. Now Taiwan and South Korea export more to the world economy in two days than Egypt does in a year. But opening to the world economy brings with it the forces and values of globalization, which in the Middle East are seen as threatening and are resisted, sometimes fiercely, and often with religious exclusions. This stagnation leaves the young—especially young men—with no jobs and often no spouses, no homes of their own, alienated, and nowhere to go.9 The potential of political participation brings the possibility of moving beyond stagnation. But the expectations for economic improvement are way ahead of how fast economies can actually change and generate opportunity. So the hopes and optimism of the Arab Awakening will have to contend with the disillusionment that comes wit
h the uncertain pace of economic improvement.

  IRAQ’S POTENTIAL

  For decades, Iraq’s potential to rank among the very top producers has been recognized—along with the fact that it was producing well below its potential. By 2009, six years after the U.S.-led invasion, and a after years of violence and sabotage, output was almost back to the 2001 level of 2.5 million barrels per day. The postwar government realized that it needed enormous investment and technology transfer from outside the country, and starting in 2009 it held bidding rounds for a number of fields. As would have been expected, the winners included oil companies from all over the world. Surprisingly, however, U.S. companies were notably underrep resented. Iraq was asking among the stiffest terms of any oil-exporting country, and a number of the U.S. companies could not make the economics work.10

  Some of the projections bruited about for Iraqi output are exceedingly optimistic. To make the leap from 2.5 million or 3 million barrels per day to 12 million barrels a day, as one Iraqi minister had suggested, seems almost impossible. Much more reasonable is that by 2020 Iraq could be around 6.5 million barrels per day.

  Yet even that lower target faces considerable obstacles and uncertainties: Development on such a scale requires political stability and physical security for the oil fields and pipelines and loading terminals. There needs to be a political consensus about the need for international investment and the fiscal terms so that the whole effort is not undone by subsequent changes in the rules of the game. These risks are further compounded by the sheer logistical complexity of delivering people, services, skills, and equipment—and the building of pipelines and export facilities—in a country that was technologically shut off from the global industry for decades. The companies that are investing recognize these risks. But they also see the potential and have concluded that it would be too risky to find themselves sidetracked from what may be one of the biggest oil opportunities of the twenty-first century.11

  One further obstacle could well stand in the way of the steady development of Iraq’s resources: Iran. And that may be the most important of all. Iran regards any substantial expansion in Iraqi output as a threat because that could lead to lower oil prices. From a geopolitical point of view, Iran does not want Iraq to supplant it as the second-largest producer in the Gulf and in OPEC. Tehran made this clear in 2010 when Iraq decided, based upon the bids and new exploration, to raise its estimated oil reserves from 115 billion barrels to 143 billion. Iran waited hardly a week to leapfrog back over Iraq, lifting its own reserve estimates from 138 billion to 150 billion barrels.12

  The longer-run question is to what extent Baghdad will come under the lasting sway of Tehran. Although Iraq is at least 75 percent Arab, and Iran is primarily Persian and Azeri, religion and religious authority tie Shia Iran together with the majority Shia population of Iraq. Since 2003 Iran’s deep involvement in Iraq, and its support of various groups, has not been a secret. Moreover, geography is inescapable. As one Iranian official told a U.S. diplomat, “Eventually, you will have to leave Iraq. But we’re not going away.”

  SEEKING HEGEMONY

  For decades, under the rule of the shah, Iran had competed with Saudi Arabia to be the dominant oil producer in the Gulf. In the 1970s Iran tried to do more—to take on the role of “regional policeman” of the Gulf and fill the security vacuum created by the withdrawal of the British military umbrella from the region in 1971. The ambitions were suspended by the Iranian Revolution of 1978–79 and then by the eight-year Iran-Iraq War.

  Iran’s oil production had peaked under the shah at six million barrels per day; it plummeted to as low as 1.3 million barrels per day during the Iran-Iraq War, and in recent years it has fluctuated around four million barrels per day. But given the country’s petroleum reserves, the Iranian industry also produces well below its potential. It has been hamstrung by a host of factors: political battles among the factions ruling the country; lack of investment; the tough and painful way in which Iran negotiates with international companies; and, in more recent years, international sanctions that have sharply reduced its access to technology and finance. All this has hampered the development of the industry. Moreover, it has to import about 25 percent of its gasoline to make up for a shortage of refining capacity at home.

  While Iran has the second largest conventional natural gas reserves in the world and is a founding member of the newly formed Organization of Gas Exporting Countries, it exports negligible quantities of gas, and only to immediate neighbors. In fact, it actually has to import some gas to make up for its domestic shortfall.

  “THE GREAT SATAN”

  In the first months of the Iranian Revolution in 1979, it was not clear whether the new regime would be reformist or fundamentalist. But the path was clearly set when militants stormed the U.S. Embassy in November 1979 and took 66 U.S. diplomats hostage, holding them until January 1981. The country’s new leader was the stern cleric Ayotollah Ruhollah Khomeini, who had returned to Iran after 15 years of exile. Khomeini and his followers used the seizure of the hostages—and the immediate cleavage it created with the United States—to consolidate power and eliminate effective opposition to the new theocratic fundamentalist regime. At one point, in a “letter to clergy,” Khomeini wrote, “When theology meant no interference in politics, stupidity became a virtue.” In the new Iran, ultimate political power lay in the hands of mullahs and, specifically, the Supreme Leader, Ayatollah Khomeini.13

  Khomeini’s hatred for the shah, who had exiled him in 1963, was matched by his hatred for Israel, and for the United States. America as the implacable enemy—the “Great Satan”—became one of the organizing principles of the Islamic Republic and indeed a backbone of its legitimacy, critical to holding together the apparatus of control. The U.S. support for the 1953 coup that toppled the nationalist prime minister Mohammad Mossadegh and brought back the shah was a powerful historical memory that the fundamentalists could manipulate, and that story became part of the catechism of Iranian politics.

  In the early 1990s, with the war with Iraq over, Iran resumed its revolutionary campaign. It stepped up its efforts to subvert other regimes along the Persian Gulf, fostered terrorism, targeted U.S. interests, and embarked on a military buildup. The hand of its clandestine Qods forces, the international arm of the Revolutionary Guards, could be seen in terrorism around the world. By 1993 Iran had earned the sobriquet of “the most dangerous sponsor of state terrorism.”14

  NORMALIZATION?

  Khomeini died in 1989. He was succeeded as Supreme Leader by one of his acolytes, Ali Khamenei, who had been president for eight years and who embraced the hard line of his predecessor.

  Yet at various moments, glimmers of normalization appeared. The marketoriented president Hashemi Rafsanjani thought that a reduction in tensions with the United States was in Iranian interests and that commercial relations was the way to begin. That seemed to accord with the Clinton administration’s new policy of using economic engagement to improve relations with adversaries. Tehran sought to communicate its signal through oil. Iran deliberately awarded the first contract to a foreign company since the revolution not to a French oil company, but to an American one—Conoco.

  Under U.S. sanctions policy, no Iranian oil could be imported into the United States, but it was legal for an American oil company to do business in Iran. For three years Conoco had been negotiating with Iran for rights to develop two offshore oil and gas fields. The two sides finally signed the deal on March 5, 1995, in the dining room of a government guesthouse that had formerly belonged to a Japanese auto company. In factionalized Iranian politics, a deal with an American company was a considerable victory for Rafsanjani. The contract could not have been signed without the approval of the Supreme Leader, Ayatollah Ali Khamenei. But that approval must have been very reluctantly given. For Khamenei deeply hated what he called the “Great Arrogance”—the United States—which he declared wanted to impose its “global dictatorship” on Iran. In his worldview, as he once sai
d, that “enmity with the United States” was essential to the survival of the regime.15

  The internal struggle within the Iranian leadership may well be why Conoco did not know, almost to the last moment, whether it would win the contract. The competitor, the French company Total, was told that Iran had chosen an American company to send a “big message.”16

  Conoco executives had briefed State Department officials a couple of dozen times over the course of its negotiations with Iran, but those briefings turned out to be insufficient. Members of Congress attacked the deal with fury. Secretary of State Warren Christopher, who years earlier had led the arduous negotiations for the release of the American hostages, now denounced the oil deal as “inconsistent with the containment policy.” He added that in the Mideast, “Wherever you look you find the evil hand of Iran.” The deal did not even survive two weeks. On March 15, 1995, President Clinton signed an executive order forbidding any oil projects with Iran. The deal was seen in Washington not as an opening, an opportunity for economic engagement, but rather in the context of Iran’s support for terrorism, exemplified vividly in the attack on a Jewish center in Buenos Aires several months earlier that had killed 85 and wounded hundreds of others. Moreover, at that time, the United States was trying to persuade other countries to restrict trade with Iran.17

  With Conoco abruptly forced to withdraw, the deal went instead to Total. Subsequently, at an OPEC meeting in Vienna, Gholam Reza Aghazadeh, Iran’s then oil minister and a Rafsanjani man, summoned two American journalists to his suite in the middle of the night. Speaking in a slow, gravelly tone amid the shadowy light, he talked about the now failed deal and asked, “What is it that I don’t understand about America? Tell me what I don’t understand about America.” Why had the United States rejected the opportunity to open a door? The answer was that, whatever the signal, the door could not be opened; terrorism made economic engagement impossible. Soon after, a 1996 terrorist assault in eastern Saudi Arabia, which was apparently engineered by Iran’s own Hezbollah, killed 19 U.S. servicemen and injured another 372. That seemed to seal the door even more tightly shut.18