The Strategic Importance of Oil from the Gulf of Kuwait

The Strategic Importance of Oil from the Gulf

Security in the Gulf is so important, strategically, to the United States because the U.S. is the biggest oil consumer in the world. We use roughly 25% of the world’s oil. However, we produce only half the oil we consume and import the rest. Furthermore, the U.S. has oil reserves equal to less than 10 years of production at current rates and our reliance on imported oil will go up. The Middle East, on the other hand, is where the oil is. Two-thirds of the world’s oil is in the Middle East, concentrated in just five countries: Iran, Iraq, Kuwait, Saudi Arabia, and the United Arab Emirates. However, just as the world’s oil is concentrated in the Middle East, within the Middle East the oil is concentrated in the Northern Gulf. It is important to understand just how great the disparity in reserve distribution is between the Gulf and the rest of the world.

The proved oil reserves of the entire United States, including Alaska, are about 23 billion barrels. The Ghawar field in Saudi Arabia has ultimate reserves of 75 billion barrels. The Khafji/Sfaniyya Field (just over the border in Saudi Arabia) is the largest offshore oil field in the world with about 40 billion barrels of oil. The Burgan Field in Kuwait has about 60 billion barrels of oil, which is more oil than the proved reserves of the entire former Soviet Union. All in all, half the oil in the world lies within a 300-mile radius of Kuwait City.

The Oil Situation in Kuwait  
Kuwait has returned, essentially, to the status it had before the Gulf War. The oil well fires have been out for over six years, and if you drove down to the oil fields, you would see very few signs that there had even been a war. The country’s production capacity is back to 2.5 million barrels per day and refining capacity is at 800,000 barrels per day. Kuwait, by the way, has substantial upgrading capacity in its refineries and is one of the biggest suppliers of jet fuel to the U.S. military.

Within OPEC, the primary tension since the Gulf War has been between Iran and Saudi Arabia. Iran, which really can’t increase its production capacity, is a “price hawk” and wants OPEC to drive up prices as high as it can to maximize revenue. The Saudis, on the other hand, have substantial reserves and production capacity and want to maintain moderate prices to ensure a long-term market for their crude. Kuwait has aligned itself solidly with the Saudis on this issue within OPEC.

Outlook for Oil in the Region
There are several big issues, with regard to oil, that will have to be resolved over the next several years. The return of Iraq to oil markets is one. There has been a lot of concern in the past that, when sanctions on Iraq are lifted, it will disrupt oil prices worldwide. Although there is still a lot of concern among the oil producing states, we sense a growing consensus that a booming demand may minimize the impact on the market.

Further out, there is the very real concern that there could be a supply shortfall by the end of this decade. One major oil company predicts that, if current prices are maintained, the call on OPEC crude will be 40 million barrels a day by 2005. That’s 15 million barrels a day more than current production. One big question is “where will that oil come from?” We haven’t found anyone yet who plans to add that kind of capacity.

The next logical question is “will it come from our friends in the region or from our adversaries?” Given the possibility of higher production rates AND higher oil prices, the evolution of power in the Gulf may well be determined by who takes the lead now in building production capacity.

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