Energy and Global Environment: the GCC vs. Barack Obama

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I have been asked to comment on the possible evolution of relations between the US and the Gulf region under the new administration of President-elect Barack Obama. The difficulty of doing so, at a time when the new administration is barely taking shape, is only too obvious. I will perforce base my argument more on assumptions than on hard facts. We do, of course, have statements that the Obama campaign issued before the election, but one barely needs to stress that politicians newly elected to office do not always implement exactly the same policies as they have been advocating during their electoral campaigns.

In this case, the challenge may be especially acute. Because of the widespread international frustration with the conduct of the previous administration, there is clearly a danger of attributing to the new President the opposite of all that his predecessor did. Obama undoubtedly represents a major discontinuity in American political history, because he is not part of the political establishment and has a very short previous history as senator – in addition to his background and the much emphasized fact that he is the first Afro-American to reach to the pinnacle of the State. It is therefore legitimate to expect that he will bring substantial change – but it would be excessive to expect total change. Just to quote one issue on which continuity appears more likely than change, most observers do not expect that under Obama US policy towards Israel will be much different from the recent past.

Caution is required and conditional statements should be the norm - but there are certain key campaign themes, central inspirational values that are not likely to be abandoned or forgotten. In particular, I believe it is fully to be expected that the new administration will abandon the extreme unilateralism which has characterized its predecessor, and will move decisively towards injecting new life into multilateral approaches and institutions.

This will not translate into unconditional acceptance of everything that originates from the UN, but greater attention to international opinion will surely be paid.

In this context, one cannot fail to note that the one area in which the United States under George W. Bush have been more thoroughly isolated has been the debate on climate change, and the implication of the same on the global supply of energy. Notwithstanding the frequent divisions within Europe, this is one theme on which the EU member countries have consistently agreed. Even the UK, Washington’s staunchest ally, has systematically distanced itself from the US on this point. The climate change agenda was pushed in the context of the G8 by the British (Gleneagles 2005) as well as the German (Heiligendamm 2007) and Japanese (Hokkaido Toyako 2008) presidencies. The US was isolated in all cases, and had to substantially soften its stance on the topic, finally accepting some ambitious targets for the reduction of emissions at the conclusion of the Hokkaido-Toyako G8 summit last July. In contrast to George W. Bush, Barack Obama has made of policies towards climate change a key theme in his campaign.

It is, in conclusion, highly justified to expect that the attitude of the new US administration on environmental issues will change markedly. And, because of the very close relationship between policies to counter climate change and choices related to our energy future, we may derive expectations on the future contours of US energy policy, which is of keen interest to the GCC oil and gas producing countries.

Issues shaping US-GCC relations

That said, it is also necessary to acknowledge that energy and the environment are not likely to be the main policy issues shaping US-GCC relations. Although I have chosen to focus on this aspect of the relationship – because this is where my expertise lies – nevertheless I believe it is quite obvious and natural that US-GCC relations will inevitably be shaped primarily by the evolution of the security situation in Iraq and the Iranian nuclear file.

Both issues are of supreme importance for the GCC countries. The latter, with the exception of Kuwait, viewed the US intervention to topple the regime of Saddam Hussein with considerable misgivings. They fully understood how difficult it would be to stabilize Iraq following the invasion, and feared the negative impact that a destabilized Iraq might have on their own domestic politics.

Such fears have been fully justified by subsequent developments. When the Baker-Hamilton report suggested committing the US forces to a clear calendar of withdrawal, the GCC countries opposed this course of action. Now, following the relative success of the “surge” and the new strategy implemented under the command of Gen. Petraeus, conditions might be more favorable for withdrawal: the new status of forces agreement reached between the departing Bush administration and the Iraqi government indicates 2011 as the date that all US troops shall leave Iraq, and Obama has consistently called for a clear calendar of withdrawal, also in order to be able to dedicate more forces to Afghanistan. However, it is certainly not a foregone conclusion that Iraq is now solidly advancing towards democracy and mutual acceptance of ethnic groups, sects or factions within each of them. The danger still exists that the country might precipitate into civil war as soon as the American troops are over the horizon.

Of course the Iraqi situation is interconnected with the second main political and security issue, i.e. the Iranian nuclear program. Obama has indicated that he will seek to engage the Iranian leadership in a dialogue without preconditions, in this way aligning the US on the long-standing position of the GCC and several European countries. However, as the well known saying goes, you need two to tango: it is not at all clear that the Iranian leadership is interested in responding positively to the US overture, when that will materialize. In the absence of a dialogue, or if the latter were to prove as inconclusive as it has been with the European troika so far, Obama also has indicated that he considers the prospect of a nuclear-armed Iran as totally unacceptable. The GCC countries agree with him in this respect, but the obvious question would need to be addressed: so, what is there to do? Opinions may then sharply differ.

As mentioned already, I believe that a change in the US policy towards Israel – which the GCC countries would care a lot about, in particular to see the US more explicitly support the King Abdullah peace initiative, which remains on the table – is extremely unlikely. The appointment of Hillary Clinton to the position of Secretary of State makes it even doubly unlikely. It goes without saying that the GCC countries will reluctantly accept that this is reality, and will let the Palestinian issue quietly shift to the back burner.

Gulf regional security and the energy market

Policies towards Iraq and Iran also have direct consequences on the energy markets, both physical supplies and prices. The future of security in Iraq impacts directly on the prospects for increased exploration and production in the country, which is widely recognized to have very significant potential for increasing its share in global oil supplies. The collapse of Iraq into civil war would probably limit Iraqi exports to little more than 1 million b\d in the worst scenario; while the restoration of security and peace in a context in which a new petroleum law is agreed, and foreign investors are called in could rapidly increase exports to at least 3 m b\d. In other words, the “swing factor” connected to Iraqi domestic politics is of the order of 2 m b\d at least.

The Iranian case is more complicated, because of the deeply rooted nationalist preference and the difficulty that the regime has encountered in shaping any kind of national consensus when it comes to oil matters: it is quite possible that even in the event of a successful launch of dialogues with the US, accompanied by the abolition or scaling down of sanctions imposed on Iran so far, the country’s oil and gas production and exports might not change radically. Yet also in the case of Iran

prospects for increased oil and, especially, gas exports are surely very substantial.

Is it conceivable that Obama will take the military option out of the table in dealing with Iran’s nuclear program? The Bush administration has said that it would give priority to diplomacy – and has abstained from using military tools – but has refused to rule out the use of force.

Can a compromise be found which will allow a way out of the nuclear stalemate acceptable to both sides? Such compromise would need to save Iran’s face and at the same time address the threat perceptions of the GCC countries as well as of Israel, Jordan, Egypt etc. While technically possible, the road to such a compromise remains very narrow indeed.

Among other difficulties, the search for a compromise in all likelihood also requires a new approach towards the issues of non proliferation and the revision of the NPT. So far, nothing that Iran has done runs counter to its obligations under the NPT; similarly, the interest in civilian nuclear energy that the GCC countries have prominently expressed in the last couple of years cannot be condemned on the basis of the fear that it might open the door to proliferation. The US credibility as opponent of proliferation has been significantly eroded by the de facto acceptance of proliferating powers – from Israel to India passing through Pakistan and North Korea. Only a fundamental revival of the NPT, including a significant reduction of the American and Russian nuclear arsenals, can re-establish the credibility of the process. In the campaign, Obama has pledged to respect the pledge to reduce the nuclear arsenal that is part and parcel of the NPT, and to reinforce the latter “so that nations that don't comply will automatically face strong international sanctions”. However, it is not clear if sanctions would be applied also to countries that never signed the treaty, such as India or Israel.

It is thus evident that issues of regional politics and security are closely intertwined with energy issues. Although energy may not be the main preoccupation of the Gulf countries, they will view energy issues as being closely linked to regional security; and the same of course will apply to the US and its main allies.

The Obama energy and environment platform

What then can we expect of the new administration with respect to policies towards the global environment and energy? We shall base our discussion on the Obama-Biden campaign material, although, as said already, it is to be expected that not all that was proposed in the campaign will be implemented by the new administration.

Energy and the environment figured very prominently in the campaign until about August of this year, when the financial crisis exploded and became the foremost preoccupation of the two candidates. This preoccupation is obviously still there, and the president-elect has concentrated his attention on economic woes even before taking office. It is fully justified to expect that the first priority of the new administration will be to launch a package of measures to revive the economy.

The question is: to what extent will these measures incorporate policies addressing energy and environmental issues? In the campaign, Obama insisted that tackling environmental and energy problems also serves the purpose of reviving the economy: in other words, you can kill three birds with one stone: revive economic activity, reduce carbon emissions, improve energy security. He asserted that his energy policy would “help create five million new jobs by strategically investing $150 billion over the next ten years to catalyze private efforts to build a clean energy future[1].” In the light of the seriousness of the economic crisis, it is likely that this amount of money, or even more, might be made available for spending in an even shorter period of time. However, the difficulty of actually setting in motion an ambitious investment plan which, by its very nature, would require the convergent decisions of millions of independent actors – some big, like the automakers who need to radically renew their models; some small, like the homeowners who will be expected to invest in insulation, or maybe shift to a smaller home, closer to work in order to reduce commuting costs – should not be underestimated.

Other key points included in Obama’s energy policy manifesto are:

• “Put 1 million Plug-In Hybrid cars – cars that can get up to 150 miles per gallon – on the road by 2015, cars that we will work to make sure are built here in America”

• “Ensure 10 percent of our electricity comes from renewable sources by 2012, and 25 percent by 2025”

• “Implement an economy‐wide cap‐and‐trade program to reduce greenhouse gas emissions 80 percent by 2050”

On the first point, the president elect has hinted that he would consider a bailout of the auto industry, as requested by the three big American automakers, only contingent upon the companies quickly offering to the market a new range of fuel efficient cars. It is not likely that all of these will be plug-in hybrids, but surely the car manufacturers will be requested to offer a choice of these alongside other, more energy efficient traditional internal combustion engines and non plug in hybrids. This position was reiterated by the President elect in his press conference of November 24[2]. The gravity of the financial situation of the Detroit national champions puts the new administration in a very strong bargaining position, and offers the possibility of pushing a highly symbolic change of strategy for the industry.

But other points are not as easily pursued in the immediate. The goal of producing 10 percent of electricity from renewable resources by 2012 is unlikely to precipitate much new investment in the short run. In fact, the immediate effect of the impending recession and of the (temporary) collapse in oil prices has been the postponement of several projects for power generation out of renewable sources, mostly solar and wind. This might be reversed with measures offering privileged access to credit at favorable conditions and priority access to the grid, but consumers may not be happy about paying the higher cost of electricity that supporting new investment in producing power from renewable sources inevitably entails.

But the biggest challenge will be the implementation of the proposed cap-and-trade program for emission permits, which is also the most significant of all measures because it is coherent with the spirit of the Kyoto protocol, establishes a base for international coordination with the existing EU program, and tackles the major sources of stationary emissions, which offer the greatest benefits towards containing emissions. It is very unlikely that this program will be launched for as long as the US economy is in recession, because it would evidently add to the cost burden of heavy industry companies, which already face very critical market conditions.

Nevertheless, the President-elect reiterated on November 18 that despite a deepening economic crisis, he would still push forward with his aggressive cap on industrial carbon emissions, which he added would be an economic stimulus and create badly needed jobs. "My presidency will mark a new chapter in America's leadership on climate change that will strengthen our security and create millions of new jobs in the process," Obama was reported[3] to have said in taped remarks before more than 800 participants in the Bi-Partisan Governors Global Climate Summit in Los Angeles. He also spoke of his proposed cap on power plant, oil refinery and other industrial emissions, which he said would rejuvenate the US economy. "That will start with a federal cap-and-trade system," Obama said. "We will establish strong annual targets that set us on a course to reduce emissions to their 1990 levels by 2020 and reduce them an additional 80% by 2050." Such declarations leave little doubt as to the intended direction, but I still believe that much depends on the speed of the economic revival, and on the effective demonstration that jobs can be created by pushing the containment of carbon emissions through a cap on the largest emitters.

It may be rather more likely that the administration will push measures to encourage energy savings, although very few details are included in Obama’s platform on this side of the coin. Requiring energy certification of appliances and possibly banning the sale of clearly wasteful ones (beginning with incandescent light bulbs?) is a possibility, but the major savings would have to be expected from a progressive modification of the suburban lifestyle, with families moving to smaller, more energy efficient homes, and seeking locations closer to work and/or public transportation in order to minimize commuting costs. The Obama electoral platform proposes “a national commitment to weatherize at least one million low‐income homes each year for the next decade”. This process is unlikely to be easy considering that the mortgage crisis is at the source of the financial maelstrom, and families are not in a position to consider important new investment. In a sense, the real estate crisis may speed up the process, forcing families to abandon large new homes for smaller ones, but the loss of value in all real estate property would obviously discourage investment in home improvement, such as insulation. Families that are already suffering under the burden of large mortgage payments can ill afford to raise additional finance to pay for the required improvements. Distant suburbs may see the value of housing decline, but they are unlikely to be abandoned. Overall, it is not at all clear that the real estate crisis will be beneficial for reducing the pattern of energy consumption, at least in the short run.

Another point of relevance in Obama’s electoral platform has been the intention to “crack down on excessive energy speculation”. He proposes to do so by way of “loopholes in Commodity Futures Trading Commission regulations” which “have contributed to the skyrocketing price of oil on world markets.” He also proposes to use the strategic petroleum reserve to resist excessive price increases (originally, he said bring prices down – this might no longer be relevant).

Impact of the Obama platform on US-GCC energy relations

How does this ambitious approach to energy and the global environment affect relations with the Gulf countries?

Obama’s electoral platform is rich in statements that point to the desirability of energy independence and specifically speak of imports from the Gulf countries as a threat to the security of the United States. “America has always risen to great challenges, and our dependence on oil is one of the greatest we have ever faced. It’s a threat to our national security, our planet and our economy.” “Barack Obama and Joe Biden believe the doubling of oil prices in the past year is a crisis for millions of Americans and the transfer of wealth to oil producing countries, many of them hostile to our interests, is a threat to our national security.” Specifically, the platform promises to “within 10 years save more oil than we currently import from the Middle East and Venezuela combined”.

Such statements are part and parcel of the inevitable rhetoric in American political life, but in practice one administration after the other have had to come to terms with the inevitability of growing global dependence on OPEC oil, and the futility of attempting to make the US independent of specific exporters. The oil market is global, and, whether one imports oil from Canada or Iran, in the end the price is determined by the global demand and supply equilibrium. The promise to save “more oil than we currently import from the Middle East and Venezuela” obviously does not mean that within 10 years the United States will import no oil from either the Middle East or Venezuela. This is because US import demand is constantly increasing, and in the absence of the aggressive policies proposed US imports would in fact increase further. Furthermore, it is not clear that, even if US import growth is contained or even reversed, it will be possible to reduce imports specifically from the Middle East and Venezuela, because production in other parts of the world may well decline, or find a more remunerative market elsewhere.

The latest projections from the International Energy Agency, included in the World Energy Outlook 2008, confirm the expectation that the world will need increasing supplies from the OPEC countries, notably from the Gulf. In the reference scenario, which represents the consequences of “business as usual”, global oil demand increases by 1% per year on average, and passes from 85 million b/d in 2007 to 106 in 2030. This represents an important downward revision from the previous edition, by 10 m b/d. In fact, the IEA expects that OECD demand will marginally decline, and all of the projected increase comes from non-OECD countries. The bulk of the required increase in oil output is expected to come from OPEC countries, whose share in global production would increase from 44 to 51%. Specifically, the production of Saudi Arabia is projected to increase from 10.2 m b/d in 2007 to 15.6 m b/d in 2030. It should be noted that in all official statements, the Saudi authorities have ruled out the possibility of expanding production beyond the 15 m b/d mark.

Of course, what Obama is proposing is not business as usual. We should therefore refer to the two alternative scenarios proposed by the Agency, which are characterised, respectively by stabilisation of greenhouse-gas concentration in the atmosphere at 550 and 450 parts per million (ppm) respectively.  The 550 scenario predicts OECD lower oil demand relative to the reference scenario, by about 2 mb/d by 2020 and about 4.5 mb/d by 2030; global demand keeps rising to 97.6 mb/d by 2030. The 450 scenario has global oil demand declining after 2020 to 90 mb/d in 2030. OECD demand is reduced by 17% relative to the reference scenario. This last scenario would see little change in Saudi production relative to the current level. As for US imports, even with declining consumption, imports might need to increase, unless domestic production is stabilised. Emphasis on expanding domestic production has been the characterising theme of the Bush administration: Obama speaks of “promoting the responsible domestic production of oil and natural gas” and of “getting more from our existing oil fields”, but a stabilisation of production is extremely unlikely.

From the above we derive the conclusion that even the aggressive pursuit of reduced dependence on fossil fuels and lower carbon emissions would not translate into the marginalisation of the Gulf producing countries. In fact, the business as usual scenario still requires an increase in their production level that may go beyond the wishes of the respective governments, while the 450 ppm scenario (which is nothing short of an energy revolution, in the words of the same IEA; and would require a degree of international cooperation which makes it quite low probability) would envisages a stabilisation of production levels while also expecting very high prices (required to justify investment in alternative energy sources).

It is, in this light, not necessarily very productive to frame the proposed energy and environment policies of the OECD countries as being motivated by the need to specifically reduce dependence on OPEC production, whose member countries are viewed as “hostile”. Obviously such statements, when read in Riyadh or the other capitals of oil producing countries, have the effect of discouraging investment in adding to capacity – which in the short run is absolutely required for continued growth.

The same IEA has expressed the opinion that the current oil prices (50-60 $/b) are dangerously low and may discourage investment, setting the stage for a new crisis of insufficient capacity as soon as global growth will be revived.

The GCC countries, climate change and alternative energy sources

The position of the Arab Gulf countries with respect to global environment issues and alternative sources of energy has considerably evolved in recent years. Throughout the 1990s, when global demand still was short of global production capacity, and some of the latter had to be shut in notably in the Gulf, calls to contain emissions and the use of fossil fuel were in most cases viewed as a ruse of the industrial countries in order to undermine the future of OPEC. Today, this is no longer the case: genuine appreciation for the danger and disastrous potential consequences of climate change, coupled with the wish to not increase much further oil production and investment in additional capacity have opened the door to a substantial change in the rhetoric. All GCC member countries have signed and ratified the Kyoto Protocol.

In recent months, the Saudi Minister of Petroleum and Mineral Resources, Ali Naimi, has repeatedly spoken in favour of alternative sources of energy. In an interview with French oil newsletter Petrostrategies, he stated: “For a country like Saudi Arabia ... one of the most important sources of energy to look at and to develop is solar energy”. He further added: “One of the research efforts that we are going to undertake is to see how we make Saudi Arabia a centre for solar energy research and hopefully over the next 30 to 50 years we will be a major megawatt exporter. In the same way we are an oil exporter, we can also be an exporter of power.”

More recently, speaking in Beijing on 7-8 November, the Minister underlined the important role of technology in addressing climate change. “I firmly believe that when it comes to technologies aimed at mitigating climate change, the world has barely scratched the surface and the research, development and innovation in this area need much greater attention than is presently the case. The list of what we can do includes, but is not limited to, multiple ways of greatly enhancing the efficiency of energy use in a variety of applications, cleaner and futuristic forms of conventional and unconventional fuels, and numerous ways of carbon capture and sequestration, besides many breakthrough technologies that are not even on the horizon today.”[4]

Solar and other alternative energy sources figure prominently in the research agenda of such Saudi institutions as the King Abdulaziz City for Science and Technology and the King Abdullah University for Science and Technology, and Saudi Aramco is interested in carbon capture and sequestration.

In Abu Dhabi, the Masdar initiative, launched in April 2006, is presented as “a bold and historic decision to embrace renewable and sustainable energy technologies”. Abu Dhabi claims that “as the first major hydrocarbon-producing nation to take such a step, it has established its leadership position by launching the Masdar Initiative, a global cooperative platform for open engagement in the search for solutions to some of mankind's most pressing issues: energy security, climate change and truly sustainable human development.”[5]

Masdar has initiated the Masdar City project, which intends to create a carbon-emissions-free community. It has also launched a CCS project which represents “the first phase in a series of facilities capturing carbon dioxide emissions from Abu Dhabi’s industrial and power generation plants. The CO2 will be transported in a pipeline network and injected in Abu Dhabi’s oil reservoirs for enhanced oil recovery.”[6]

It should be noted that the Gulf oil producers are very favourably positioned to make systematic use of carbon capture and sequestration, because of the concentration of carbon emission sources in their territory (oil refineries, petrochemical, steel and cement plants, power generation) and the potential for sequestration in oil and gas field using CO2 injection as enhanced oil recovery method. They have much to gain out of international schemes promoting CCS, for example through a form of revamped or extended Clean Development Mechanism.

Thus it would be a mistake to interpret the interests and policy stance of the GCC countries in a narrow perspective, in which the only concern is maximising short-term oil revenue. The Arab Gulf countries are fully conscious of the fact that their future survival and prosperity depends on diversification away from hydrocarbons. In this sense, they themselves view excessive reliance on oil and gas as a problem. Of course, they wish to protect the value of their natural resources, but this does not translate into pushing production and prices as high as possible.

The position of the main Arab Gulf producers with respect to production is conservative. We already mentioned that Saudi Arabia has consistently ruled out pushing production capacity beyond 15 m b/d: this is a level of production which the Kingdom might be able to maintain for a period of 50 years, and the policy objective is to extend the lifespan of Saudi reserves for a very long time horizon.

With respect to prices, it should be noted that the Arab Gulf producers never welcomed very high prices, as were recorded in the spring and summer of this year. They have a strong interest in the well being of the global economy and also understand that very high prices will strengthen the bargaining position of other producers, with whom they do not necessarily see eye to eye. Thus, for economic as well as for security considerations, the Arab Gulf countries always were in favour of moderate prices.

Another important aspect is the strong and unanimous will, expressed by the GCC as well as by other Arab countries, to invest in nuclear power generation. In the last two years, the UAE especially has moved very forcefully to launch a nuclear power generation programme, in full compliance with international obligations and in close cooperation with the IAEA. This policy direction has frequently been interpreted as being connected with Iran’s nuclear program and having a primary security motivation. In contrast, I believe that there are very strong economic motivations to support the nuclear power option in the GCC, and, if anything, preoccupations related to possible proliferation stand as an obstacle potentially retarding progress. Indeed, this is the reason why the governments of the region are so keen to stress their close cooperation with the IAEA.

I conclude that the GCC countries would see much merit in a new US posture that would promote coordinated global policies to contain carbon emissions, including promoting solar energy and carbon capture and sequestration; as well as in more forceful engagement of the US in revitalising the NPT process, including facilitating international cooperation for all peaceful uses of nuclear energy.

Two scenarios

How can we envisage US-GCC energy relations evolving in the near future? I will propose two scenarios, which, in my opinion, represent the two extremes of the spectrum of possible outcomes.

Green Growth

The first scenario (Green Growth) is optimistic and based on the assumption that the new US administration will indeed launch an ambitious economic revival programme, based on massive investment for energy efficiency, sources diversification and carbon emissions abatement. The second scenario (Prudence Prevails) is rather realist, and assumes that economic recovery is slow, international cooperation limited, and investment in energy is slow.

The rationale for the first scenario is that the current economic crisis is such that a revival of global growth is possible only if there is massive fiscal stimulus and widespread international cooperation. This is apparently already accepted in most key countries, and one can expect that a serious attempt will be made to move accordingly.

The main difficulty with an internationally coordinated fiscal stimulation policy is that it is politically difficult to shape a consensus on what to spend for. Ruling out the possibility of dropping money from helicopters or hiring unemployed workers to dig holes and then fill them back, what is required is a broad purpose for spending government money which will receive sufficient political support. This is extremely difficult to find at the international level, but if expenditure is increased purely for domestic purposes the door is opened to free riding and to protectionist tendencies. Thus, if we wish to be very optimistic we shall note that the fight against climate change and the search for a more secure energy future are objectives around which international consensus might be established, allowing a fiscal stimulation package that is not purely national. Of course, most fiscal packages will remain primarily national, but an international effort to revive growth and turn it green may add a significant international dimension, which might have an impact on investment and discourage protectionist tendencies,

Thus, the scenario envisages a new phase of multilateralism, very much centred on energy and climate issues. The UN family of international organisations (from the World Bank to UNFCC, to the IAEA and many more) would be mobilised to establish a cooperative platform to invest in non-fossil fuel based energy sources, promote energy saving and contain emissions through CCS and other technologies. This effort should ensure the cooperation of the main emerging economies, notably China and India, as well as the oil exporters. To achieve this, mechanisms of investment coordination (including reinforced CDMs, carbon trading and stabilization of oil prices) must be put in place.

The possibility of reaching a broad agreement for the stabilization of oil prices should not be discarded. This should not be viewed as taking the shape of a price band or even less a fixed price, but the functioning of the international oil market can be improved in order to limit the impact of speculation and make prices more responsive to fundamentals. Greater transparency and more extensive trading of physical oil may help in this respect. Loose coordination in the management of official and/or strategic oil stocks would also greatly enhance the situation. A degree of international coordination exists in the management of currencies – not always effective but nevertheless real – and the same should be aimed at with respect to oil prices.

The scenario also envisages rapid progress on NPT revision and implementation to “unlock” the potential for investment in nuclear power generation. The world needs much increased mobilization of human and financial resources to serve the rapidly increasing demand for new nuclear power plants, and for personnel required for their operation thereafter. Resources for this purpose will not be available in the absence of a revival of the NPT, which was exactly meant to facilitate the adoption of nuclear technology for peaceful purposes in all signatory countries, and has ended up achieving the opposite.

Prudence Prevails

One barely needs to underline that the Green Growth scenario requires an extraordinary level of political leadership and international coordination. As for any venture that is based on consensus action, the probability of success can only be very small. The fundamental change in US political direction may offer an opportunity for shaping the required international consensus, but it would be little short of a miracle.

If we are not interested in visions that are likely to remain dreams, we shall expect to fall back on the Prudence Prevails scenario. As the name indicates, this scenario would be characterised by prudence, rather than boldness. Countries will adopt fiscal stimulation packages, but they will not be able to coordinate, they will take more time, more limited measures, and wait to see the outcome.

Under these conditions, global economic recovery will be slower. All countries will be affected, including the emerging economies, and things may still become worse before they improve again. Protectionist temptations will grow stronger in all countries, including the US (and the new administration might not be immune from the desire to protect US industry). Several years of slow growth before a recovery clearly takes shapes would have to be expected.

Energy prices would remain relatively low, as demand slows down, and investment in new energy sources would be discouraged. The perceived urgency of addressing energy issues will be reduced, and investors will tend to postpone costly projects. Governments will refrain from aggressive policies to reduce emissions, to avoid adding to the burden of struggling domestic industries.

The GCC countries will suffer in this scenario on many counts. First of all, as major investors in the industrial economies they will see the value of their investment decline (this has happened already) and will be encouraged to progressively redeploy their assets in new regions and countries, with whom they might develop a more satisfactory division of labour. Secondly, they will review and postpone investment projects (again, they have already done so), waiting to see more clearly how global oil demand will evolve.

In this context, attempts at closer economic cooperation between the GCC countries and major emerging clients, such as China and India, will intensify. This trend will be viewed with preoccupation in Washington, leading to a continuation of past misgivings. The Prudence Prevails scenario is not necessarily one of acute conflicts, although those too are a possibility; it is rather a scenario of muddling through, in which an opportunity for redefining the global economic landscape is lost, and we see more of the suboptimal performance that we are accustomed to.

Conclusion

The possibility of a constructive phase in US-GCC relations exists. In a context of revived multilateralism, the potential for global convergence on fundamentally important goals such as avoiding climate change and ensuring energy supplies to a rapidly growing global economy is not to be excluded. Important unresolved problems – such as the Israeli-Palestinian conflict – would not necessarily be insurmountable obstacles.

However, the world has moved a long way towards undermining multilateral institutions, resist change and disregard mutual trust. Much time has been lost in putting in place the necessary ingredients for a new phase in global growth, and this time cannot easily be recovered.

Hence we should neither be too optimistic nor exaggerate the extent of differences. Potentially, the GCC countries are important partners, rather than enemies, of the new environment and energy agenda of President-elect Barack Obama. 

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