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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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How a New Middle East Alliance Could Reshape the Global Energy Landscape

  • Iran and Iraq's partnership is significant due to their vast oil and gas reserves, strategic geographic location, and influence in the Middle East.
  • This cooperation strengthens the Shia Crescent of Power, with Iran extending its influence through political, economic, and military means.
  • China and Russia gain geopolitical advantages from this alliance, including control over key oil and LNG shipping routes in the Middle East.

Iran and Iraq last week agreed to create a series of executive committees aimed at increasing cooperation in all areas of the energy sector and beyond. Given that the U.S. is now the world’s leading producer of crude oil, natural gas, and liquefied natural gas, many Americans may wonder why this matters. The answer is that the world runs on energy, most of the world’s energy resources are still in the Middle East, and the ongoing struggle to control them is a key determinant in how the world functions politically, including the U.S. Out of all the Middle East’s big oil and gas powers, Iran and Iraq are the most important, and closer cooperation between the two will either be a blessing or a curse, depending on which country is looking at the situation.

One of the reasons why Iran and Iraq are the two most important oil powers in the Middle East is that together they have the biggest oil and gas resources in the region by far, as analysed in full in my new book on the new global oil market order. Iran has an estimated 157 billion barrels of proven crude oil reserves, nearly 10 percent of the world’s total. As great as its oil reserves are, its gas reserves are even greater, with Iran holding proven natural gas reserves of 1,193 trillion cubic feet (Tcf), 17 percent of the global total. Additionally, Iran has a high success rate of natural gas exploration, in terms of wildcat drilling, which is estimated at around 80 percent, compared to the world average success rate of 30-35 percent. In the face of huge ongoing sanctions, Iran produces around 3.4 million barrels per day (bpd) of oil, and over 1 billion cubic metres per day (bcm/d) of gas. Realistically, it could increase oil production to 6 million bpd within three years at most, and to 1.5 bcm/d within the same period, with relatively modest investment, technical upgrades, and development discipline. Its unofficial oil and gas reserve estimates are much higher and are likely to be proven accurate over time. The same is true for Iraq, but officially it still has about 145 billion barrels of proven crude oil reserves, around 8 percent of the world’s total. With the same caveats as with Iran, it could realistically increase oil production to 7 million bpd within three years at most, and then to 9 million bpd, and possibly then to 12 million bpd. Little has been done to truly assess or develop its associated and non-associated gas reserves, but they are likely to be on a similar scale to Iran’s. The fact that Iran and Iraq share many of their largest oil reservoirs also increases the strength of their alliance, and their importance. By dint of these shared fields, Iran has long been able to send as much oil and gas as it wants to virtually anywhere it likes through several methods analysed in full in my new book Related: U.S. Defense Official Visits Guyana Over Threat To Oil-Rich Essequibo

The second reason why the two countries are the most important energy powers in the Middle East is that that literally form the geographic centre of the entire region, marking a gateway from the Far East into Europe to the northwest and into Africa to the southwest. This makes them key to the success of China’s economic and military multi-generational power-grab ‘Belt and Road Initiative’ (BRI), and to Russia’s political and military ambitions along the east coast of the Mediterranean, both of which are also analysed in detail in my new book on the new global oil market order. One long-running ambition on Iran’s part, and also Russia’s, has been to use Iran and Iraq to create a permanent ‘land bridge’ from Tehran to the Mediterranean Sea by which it could exponentially increase the scale and scope of weapons delivery into southern Lebanon and the Golan Heights area of Syria. These would have a huge force multiplier effect for Iran’s own Islamic Revolutionary Guard Corps (IRGC) in Syria - and for its proxy Hezbollah forces in Lebanon and Hamas in Palestine – to use in attacks on Israel. The aim of this on Iran’s part is to unite the world’s Islamic countries against what it believes to be an existential battle against the broadly Judeo-Christian democratic alliance of the West, with the U.S. at its centre. 

Russia’s interest alongside Iran in such a land bridge plan aligns with Moscow’s broad foreign policy objective of creating chaos where possible, into which it can eventually project its own solutions. Under the Russian- and Iranian-backed regime of President Bashar al-Assad, Syria has four huge strategic advantages to Russia, as also analysed in depth in my new book on the new global oil market order. First, it is the biggest country on the western side of the Shia Crescent of Power, which Russia has been developing for years as a counterpoint to the U.S.’s own sphere of influence that had been centred on Saudi Arabia (for hydrocarbons supplies) and Israel (for military and intelligence assets). Second, it offers a long Mediterranean coastline from which Russia can send oil and gas products (either its own or those of its allies, notably Iran) for cash export, plus weapons and other military items for political export. Third, it is a vital Russian military hub, with one major naval port (Tartus), one major air force base (Latakia) and one major listening station (just outside Latakia). And fourth, it shows the rest of the Middle East that Russia can and will act decisively on the side of the autocratic dynasties across the region. 

The heavy influence of Iran and Iraq over the Shia Crescent of Power, as also detailed in my new book, is the third broader reason why they are the two most important countries in the region. As the principal Shia power in the world, Iran is at the very centre of this Crescent, but its influence through its political, economic, religious, and military proxies over the non-sanctioned Iraq allows its much greater freedom to project each of these levers of power out into the wider world. Iran (with Iraq’s help) is already in a dominant position in three of the key countries in the Shia Crescent - Lebanon, Syria, and Yemen. It continues to push its political messaging, with Russia’s assistance, into those countries on the edges of the Crescent in which it already directly or indirectly has a foothold. These notably include Azerbaijan (75 percent Shia and a Former Soviet Union state) and Turkey (25 percent Shia, still furious at not being fully accepted into the European Union, and an increasingly robust ally of Russia). 

For China and Russia, control over Iran (and therefore over Iraq too), has brought with it a plethora of positive geopolitical advantages, especially since the U.S. broadly left the region entirely at the end of 2021 when it ended its combat mission in Iraq. One such advantage – currently being highlighted in the major disruptions to shipping around the Red Sea – is that they have control over the key oil and LNG shipping routes around the Middle East. The problem for ships of countries seen as aligned supposedly to Israel (but in reality to the U.S. and its allies) actually begins before the Red Sea is reached – in fact, somewhere east of the Oman coast of the Arabian Sea, which then flows into the Gulf of Aden, on the south coast of Yemen. It is at this juncture that ships must pass through the crucial chokepoint of the Bab-el-Mandeb Strait. This 16-mile-width waterway flows between the west coast of Yemen on the one side, and the east coasts initially of Djibouti and then of Eritrea on the other, before it joins the Red Sea. 

Through its influence over Iran – cemented in the all-encompassing ‘Iran-China 25-Year Comprehensive Cooperation Agreement’, as first revealed anywhere in the world in my 3 September 2019 article on the subject and also analysed in full in my new book on the new global oil market order -  China has been able to control much of what happens through these vital shipping routes. The 25-year deal with Iran gave China enormous influence over the Strait of Hormuz, through which around 30 percent of the world’s oil travels. The same deal also gave it a major hold over the Bab el-Mandeb Strait (controlled on the Yemen side by the Iran-backed Houthis), and on the other side by Djibouti and Eritrea (both of which owe money to Beijing as part of ‘Belt and Road Initiative’-related loans made to them). At the moment, China appears to be using this influence to reduce the chances of a dramatic widening out of the Israel-Hamas War but how long this will last remains to be seen.

By Simon Watkins for Oilprice.com


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