During the past seven days, energy investors were left confused by two major geopolitical decisions – one in the United States and one in the Middle East.
The first was President Trump’s decision to withdraw the United States from the Paris Climate Accords. Following the announcement on Thursday, June 1, oil prices dropped, which some saw as a reaction to the decision. In truth, Trump’s decision should have no fundamental impact on short-term oil prices. American gasoline demand will not rise as a result of this decision, because the U.S. already has significant regulations that impose fuel efficiency standards and limit other uses of fossil fuels.
Trump’s decision may indicate a willingness to open U.S. territory to more oil and gas drilling, but this should impact markets in the long-term rather than the short-term. In the equities markets, however, the decision is just one more indication that the U.S. government may be preparing to reduce the incentives, subsidies, grants and tax breaks that have helped “green” energy businesses for more than a decade.
Early Monday morning, June 5, Saudi Arabia, Bahrain, the UAE and Egypt severed diplomatic and many commercial ties with neighboring Qatar. These countries are taking a stand against what Saudi state news called Qatar’s “[embrace of] multiple terrorist and sectarian groups aimed at disturbing stability in the region, including the Muslim Brotherhood, ISIS (Islamic State) and al-Qaeda.” (Qatar denied that it has connections with terrorist groups but has not denied that it paid off an al-Qaeda group and an Iranian group in exchange for Qatari hostages held in Syria and Iraq).
Oil futures rose immediately but then quickly dropped. Initial reactions from international observers included warnings that Qatar would go to war with Saudi Arabia; Qatar would leave OPEC; or that Qatar would gravitate towards Iran – all resulting in greater tension in the Middle East. All of these dire scenarios would entail increased instability in the Middle East. None of them are likely.
Qatar cannot fight a war against Saudi Arabia, because it lacks the military personnel and equipment and cannot cross a desert. Qatar will not leave OPEC, because Qatar is a small oil producer and would lose all leverage (though Qatar is a major exporter of liquefied natural gas, LNG). In addition, OPEC countries have always maintained their cartel relationship, despite political or diplomatic conflicts – including major wars. Qatar could increase its ties with Iran, but the Emir of Qatar can see the contemporary examples of Syria and Yemen as warnings. Both are now sites of Iranian proxy wars.
The purpose of the decision by the four Arab countries is actually to isolate Qatar so it will reform and thereby contribute to greater stability in the region. These countries are using economic and diplomatic pressures, much as the U.N. does when it imposes sanctions against deviant states. The impact on Qatar’s oil and gas industry will likely be minimal and seems confined to some minor tanker refueling and docking issues in the Persian Gulf. The people of Qatar—who get 40% of their food from Saudi Arabia, and Qatari businesses, such as airlines, will be the ones who suffer. This pressure may compel the Emir to tighten what has long been perceived as Qatar’s lax stance towards terrorist organizations.