How to Ruin OPEC's Birthday

The Middle Eastern oil cartel celebrates its 50th anniversary this week. Here's how to keep it from running our lives for another half-century.
BY GAL LUFT | SEPTEMBER 9, 2010

Fifty years ago this week, five of the world's top oil-producing countries convened in Baghdad to form the Organization of the Petroleum Exporting Countries (OPEC). The goal of the cartel was to "assert its member countries' legitimate rights" and gain "a major say in the pricing of crude oil on world markets." OPEC did just that. In the decades that followed, its members nationalized international companies' oil fields and infrastructure assets, instated a quota system, and gained the upper hand in price negotiations. Within a decade, they had become the most powerful cartel in modern history.

As their collective power grew, OPEC members learned to use oil as an instrument of geopolitical power. Their boldest experiment occurred in 1973, when the cartel's Arab members imposed a painful five-month oil embargo to deter Western nations from supporting Israel in the Yom Kippur War. Since then, OPEC has earned a reputation as a club of greedy, non democratic governments whose oil ministers, who gather in Vienna every few months to set the price of crude, hold everyone else's economic fate in their hands.

But OPEC's well-deserved reputation as a bully obscures another fact: For all its bluster, the group seems almost uninterested in actually getting all its oil out of the ground. Today, the cartel's 12 members account for 78 percent of global oil reserves, but produce only one-third of the actual oil supply; the world's non-OPEC producers, with little more than a fifth of the world's oil at their disposal, pump twice as much. Even with the 2007 induction of two new members, Angola and Ecuador, who collectively produce as much oil each day as Norway, OPEC produces today less oil than it did before the 1973 embargo.

And though OPEC prides itself on controlling almost all the market's spare production capacity -- the main protection the world's economy has against supply disruptions -- its performance as a buffer against oil shocks is similarly unremarkable. The cartel has seldom used its vaunted capacity to rescue an oil-starved market. Time and again when disruptions occur, OPEC drags its feet and ignores consumers' pleas to open the spigot and provide some relief. Instead, it insists, as it did when oil prices spiked to nearly $150 a barrel in July 2008, that the market is well-supplied and that high oil prices are the work of speculators and SUV-driving soccer moms.

OPEC members, meanwhile, are in most cases responsible for the very same supply disruptions they claim to be interested in countering: We have the cartel's members to thank for not just the 1973 embargo, but also Saddam Hussein's attacks on Iran and Kuwait, Nigeria's endless war in the Niger Delta, and the 2003 oil strike in Venezuela. OPEC may claim to be the global economy's fireman, but its members have spent more time behaving like arsonists. The cartel's machinations have gone toward exactly one end: maintaining a virtual monopoly over the world's most necessary fuel, while blocking competition from alternative energy sources.

Half a century of a transportation sector dominated by OPEC has numbed us to this reality and led us to accept the cartel's shenanigans as a fait accompli. We shouldn't. In a modern global economy where free trade, open markets, and strict anti-trust laws are bedrock principles, there is no room for a cartel dominating any commodity -- not least the most strategic one of all. So far the U.S. Congress has mainly fought OPEC the American way: in court. In 2000, the Senate Judiciary Committee unanimously approved the NOPEC (No Oil Producing and Exporting Cartels) bill, which would have enabled the Justice Department to sue in federal court "any nation ... that is engaging in cartel or conspiracy to limit the production of oil." Responding to the public's rage over high gas prices the House of Representatives passed the measure in 2008. The Senate did not, but George W. Bush's White House announced that it would veto NOPEC if it ever made it into law, sparing us the media circus that would have inevitably followed had the U.S. government tried to sue Venezuela's Hugo Chvez or Iran's Mahmoud Ahmadinejad. Amid the NOPEC theatrics, the United States surrendered the only actual leverage it ever had over OPEC: In 2005, it approved the admission of Saudi Arabia -- which effectively runs the cartel -- to the World Trade Organization.

Efforts by Congress and successive administrations to address OPEC's domination over the oil market through policies that increase either the availability of petroleum (like domestic drilling) or the efficiency of its use (like increasing mandatory fuel-efficiency standards) have proved equally futile, due to the global nature of the oil trade and humanity's near-total reliance on the fuel for transportation. Whenever non-OPEC producers like the United States increase their production, OPEC decreases supply accordingly, keeping the overall amount of oil in the market the same. OPEC's response to conservation is similar. When gasoline prices soared in 2007 and 2008, American drivers reduced their consumption by as much as 10 percent -- a savings of nearly a million barrels a day. In response, OPEC throttled supply down by 4 million barrels a day. In other words, when we drill more, OPEC drills less. When we use less, OPEC, again, drills less.

To weaken OPEC we must change the playing field altogether -- we must force the cartel to compete against not just other oil suppliers, but other fuels and energy sources. We need new vehicles that enable a whole new kind of fuel competition.

A shift from cars powered by oil to cars powered by electricity -- whether plug-in hybrids or pure electric vehicles -- would have tremendous impact on the oil market. Electricity is cheap, clean, scalable, and readily available. Most importantly, 98 percent of U.S. electricity is generated from non-petroleum energy sources such as coal, natural gas, nuclear power, and renewable energy.

But studies project that electric vehicles will not reach a market penetration deep enough to threaten OPEC before 2030, which means that we need near-term solutions as well. One option is a simple technical fix which, according to General Motors, costs just $70 per car: turning every new vehicle sold in the United States into a flex-fuel vehicle. Cars powered by internal combustion engines could run on any combination of gasoline and alcohol fuels such as ethanol and methanol made from coal, natural gas, and biomass. The spot price for methanol from natural gas, currently under $1 a gallon, is competitive on a per-mile basis with gasoline.

Congress could make this happen by imposing an open fuel standard, requiring new vehicles to be flex-fuelcapable. Such a standard would put a virtual cap on the price of oil. Consumers would opt for the most economic fuel on a per-mile cost basis and thus shift to substitute fuels the next time OPEC allows the price of oil to exceed a certain threshold. Because no automaker can give up on the U.S. market, the open fuel standard would become a de facto global standard. Cars sold anywhere in the world would be flex-fuel models, allowing small and developing countries to develop competitive fuel markets and domestic alternative fuel industries, while protecting themselves against economically devastating oil shocks.

An open fuel standard would add just $70 to the cost of a new car, the equivalent of filling up a couple of tanks at the pump. Such minimal investment would enable the United States for the first time to challenge OPEC using the weapon the cartel fears most: competition at the pump. Neglecting to adopt such a standard, and thus maintaining oil's virtual monopoly over transportation fuel and strategic importance, is the best birthday gift the United States could give its least-favorite cartel.

Iraq: We're back in the game

Posted By Steve LeVine Monday, October 4, 2010 - 12:25 PM Share In the world of oil reserve forecasting, Iraq is hunky, handsome, and -- to its dissatisfaction -- often overlooked. Today, it sought to rectify this negligence with the announcement of a whopping 24 percent increase in its estimated reserves. With a poke in the eye to a traditional rival, Iraq's oil minister said the country had overtaken Iran as the world's fourth-largest petrostate, with 143 billion barrels of oil, or more than half of Saudi Arabia's mother lode. Hussain al Shahristani appears to be targeting two audiences with his announcement, writeBloomberg's Kadhim Ajrash and Nayla Razzouk: cash-rich foreign oil companies and, more importantly, the Organization of Petroleum Exporting Countries (OPEC), which at some point will reassign Iraq a production quota. Bluntly speaking, Shahristani was giving the following notice to OPEC: We are big, really big, and can shake up global oil prices if left to our own devices. Meaning that the house of petulance and jealousy that is OPEC is going to have to move back and create a significant space for Iraq, which has ambitions of producing 12 million barrels of oil a day, and might get halfway there. (Currently, Iraq produces about 2.4 million barrels of oil a day.)

Not everyone is impressed. Reuters, for example, queried a number of nonplussed industry analysts. Bassan Fattouh, at the Oxford Institute for Energy Studies, noted that OPEC determines quotas based on actual production, not reserves. "So I'm a bit surprised by the statement," Fattouh told Reuters. "I expect OPEC to continue having a wait-and-see approach and deal with this when Iraqi output and exports actually start increasing." Andy Sommer, of the Swiss trading firm EGL, agreed. "I do not see Iraq getting any OPEC quota for the time being until production reaches something like 4 million barrels per day, which is similar to Iran's production. Everyone knows Iraq needs every penny it earns from oil to rebuild the country." Phil Flynn, an analyst with PFG Best, is impressed, but for different reasons, he wrote in his daily column today. "Oh well," he said, "another setback for peak oil theorists."

How Iraqi Oil Is Changing the World

OPEC could be in for a serious shake-up.
BY STEPHEN GLAIN | MARCH 17, 2010

When the world's top oil-producing countries sat down today in Vienna, there was a new 800-pound gorilla joining them in the room. It's not a rising oil price, which now hovers at $80 per barrel; nor is it the U.S. Federal Reserve meetings, where governors will likely leave interest rates near flat. No, the 800-pound gorilla is far closer to home for most members of OPEC: It's Iraq. If Baghdad's own projections are to be believed, Iraq could match Saudi Arabia's daily crude output of 10 million to 12 million barrels within the next seven years, up from just 2.5 million barrels today. That means price stability, OPEC's sine qua non, could go from being Saudi Arabia's solo prerogative to a shared franchise of two states: one an entrenched monarchy, the other an unruly democracy with an uncertain future. And since Iraq held a successful tender for new oil exploration work in December, the country's oil minister, Hussain alShahristani, has made it clear that Baghdad will ramp up production regardless of any restraints agreed upon by the world's oil cartel. It would be quite a change from the near hegemony that Saudi Arabia enjoys within OPEC today. For decades, Saudi Arabia has served as the world's central banker of oil supplies. In unstable times, most famously in the wake of Iraqi's 1990 invasion of Kuwait, it has drawn from its spare production capacity of some 1 million barrels to bring prices to heel. Today, Iran weighs in at a distant second place within the cartel, producing just over 4 million barrels per day. So at this week's OPEC meeting, members paid Saudi Oil Minister Ali bin Ibrahim al-Naimi the appropriate levels of deference and respect. When Naimi appealed to his counterparts to keep production limits in place for the sake of a still-fragile global economy, most of them obeyed. When he departed for his ritual morning jog along the Viennese boardwalks, they likely said a quiet prayer for his safe return. Iraq's revival as a prominent oil exporter is bound to reshuffle a careful power balance in the energy-rich Arab world, particularly between bitter rivals Saudi Arabia and Iran. Saddam Hussein's 2003 toppling created a vacuum that both sides rushed to fill, for example deploying proxy forces at the height of Iraq's sectarian civil war. OPEC is another battlefield for the Saudi-Iran rivalry, and the Saudi kingdom is in no hurry to lose its uncontested status as No. 1. Now, as Iraq stabilizes politically and slowly rebuilds its oil-production capacity, both sides will have to accommodate a more assertive Baghdad. Even if oil production doesn't reach the Iraqis'

goal, it will likely be higher than the approximately 1.7 million barrels per day that Iraq was producing just prior to the U.S. invasion. "The Iraqis are saying, 'Look, we're not going to be on par with Iran; we have to be equal with Saudi Arabia,'" says Raad Alkadiri, an Iraq expert at PFC Energy, a Washington-based consulting firm. "They note how OPEC has benefited from the fact that Iraq has not produced to its potential, and given its reconstruction demands, its need of revenue must be acknowledged." So the emergence of Baghdad as a rival to Riyadh could lead to some rancorous deliberations within the cartel. Naimi, highly regarded as a consensus-builder, will have to work overtime to win over Iraq when it comes to price targets; the last thing he'll want is a revitalized Baghdad openly defying production ceilings for the sake of revenue. He already has his hands full dealing with inveterate quota smashers like Iran and Venezuela, who routinely oversell to pay for their costly entitlement programs.

Of course, Iraq won't be ramping up production tomorrow. The biggest obstacles are political, not technical. Iraq's politicians, divided as they are along ethnic and sectarian lines, have yet to pass a petroleum law. The recent parliamentary elections are only expected to complicate matters, particularly as Iraq's Arab and Kurdish constituencies battle over who will control oil-rich Kirkuk.

Iraq also has yet to rebuild the expertise needed to develop its energy resources, and it will have to rely heavily on foreign help. The country's fraternity of energy elites, once considered the Middle East's finest, was scattered by decades of war and sanctions, followed by the U.S. invasion and the chaos that followed. To compensate, the best the Oil Ministry can do is usually to dispatch teams of administrators to work with foreign developers on new projects.

But though the challenges are clear, the country's projections are not entirely unfeasible. Having cleaned up the Iraqi Oil Ministry of the corruption that thrived under his predecessor, the resourceful Ahmed Chalabi, Shahristani has awarded a series of development contracts to oil giants ranging from independents like BP to state-controlled companies like China's Sinopec. They are structured so that the faster the developers pump oil, the greater will be their returns on investment. And even if Iraq could more or less double its daily crude output to 5.5 million within the decade, as Alkadiri and other oil analysts say is a more reasonable target, it would become the second-largest OPEC member, surpassing Iran.

That would effectively transform OPEC into a bipolar cartel, one in which close coordination between Riyadh and Baghdad would be vital for price stability. A mere ripple of tensions between the two sides, be they over production quotas or worse, geopolitics, could have dire consequences for energy markets.

Shahristani appears to have no delusions about how difficult the path he has set for himself will be. Although not a career oilman like Naimi, who learned his trade as a boy working for the Americans who controlled the Saudi oil industry before it was nationalized, Shahristani is at least shaping up to be a worthy junior partner.

That would be just the kind of gradual transition that reassures oil markets -- if not the Saudis.

Is Saudi Arabia ready to play hardball with Iran?

Posted By John Hannah Friday, November 13, 2009 - 7:07 PM Share By John Hannah Are the Saudis prepared to constrain oil prices to weaken Iran? It's an intriguing possibility that, if implemented, could have major implications for U.S.-led efforts to curb the Islamic Republic's nuclear program.

In no small part because of a weakening dollar, oil prices have risen for most of the past year from a low of close to $30 per barrel to around $82 per barrel last week. But since then, prices have been slowly sliding back, dipping below $77 yesterday. Most media attributed Thursday's decline to a report that U.S. oil inventories had increased higher than expected, and that U.S. consumers continued to reduce energy use in a still sluggish economy. No doubt true. But other factors have been at play as well. Specifically, the near-record stockpiles of oil that currently exist not only in the United States, but across the developed world, have been made possible by the fact that OPEC has been increasing output at the fastest pace in two years. Earlier this week, Bloomberg reported that the cartel has boosted production more than a million barrels a day since March -- despite the worst global recession since World War II. OPEC's largest producer, the Saudis, have helped lead the way, increasing exports four out of the past six months. Saudi output has increased almost 300,000 barrels per day since earlier this year. Overall OPEC production reached its highest level in 10 months in October. The Saudis have said that $75 per barrel is an appropriate target price. This week, a Saudi government advisor told the press that, at over $80 per barrel, prices had reached "the high end of our range" and any further rise could prompt the Kingdom to further tap its unused capacity -- which currently stands at approximately 4 million barrels a day. The Saudis have publicly explained their effort to moderate prices as a function of their desire to protect a fragile global economy. But it's hard not to notice that the Saudi strategy also has the side benefit of pinching Iran. Specifically, while the Saudis in 2009 require an average oil price of about$51 a barrel to cover their budget, Iran needs an average price in excess of $90. If the price holds steady at the Saudidesignated range of $70-$80 for the rest of this year, the Saudi treasury could come in with a slight

surplus. The Iranians, by contrast, have reportedly been forced to consider phasing out food and energy subsidies in an attempt to battle their looming fiscal problems. Of course, reducing subsidies on essential commodities is almost always political dynamite -- especially in a place like Iran, where the economy is already in a shambles, and where millions of Iranians have taken to the streets since the fraudulent June 12 elections to make known their hatred of the current regime. The fact is that the Islamic Republic is desperate for increased cash flow that could be used to buy off as many of its disaffected citizens as possible and cover up its gross economic mismanagement. Saudi determination to limit any price spike -- for whatever reason -- is clearly an impediment.

With daily exports in the range of 2.5 million barrels per day, Iran stands to lose about $900 million annually from every one dollar drop in the price of oil. With excess capacity of 4 million barrels per day, the Saudis are clearly in position to go much farther than they have to date in squeezing Iran if they so choose. An aggressive Saudi effort to depress oil prices well below the current $75 target could prove extremely harmful to Iran's already reeling economy and tumultuous political situation. Almost certainly, such an effort could inflict as much pain on the Iranian regime as many of the sanctions currently being discussed by the United States and its international partners -- and, given Russian and Chinese reluctance to get tough with Iran, would almost certainly be quicker and easier to implement. Would the Saudis really be prepared to play hardball with Iran in this way? In the past, the answer has usually been no. Taking big risks to offend more powerful neighbors has generally not been the Saudi way. A transparent effort to inflict major damage on the Iranian economy would certainly incur the Islamic Republic's wrath. The Saudis no doubt recall that a similar charge about depressing oil prices led Saddam Hussein to invade Kuwait in 1990. Even if an Iranian military attack is not likely in the cards, the Saudis have good reason to fear the kind of mischief Iran could cause within the Kingdom -- especially among the large, potentially restive Shiite population that is concentrated in its oil-rich Eastern Province.

That said, there's no doubt that Saudi King Abdullah views Iran -- and the near-term prospect of its acquiring nuclear weapons -- as nothing short of an existential threat to the House of Saud and its preeminent position in the Islamic world. There's at least some chance that he may be prepared to consider doing things now that in the past would have been unthinkable in order to prevent his worst nightmare from coming to pass -- especially if he's provided sufficient support, encouragement and guarantees from the United States and our major European allies.

In this regard, the current crisis in Yemen, in which Saudi forces have been drawn into combat on their southern border against Iranian-backed Shiite rebels, has only upped the ante. As with almost everything Iran does, Abdullah no doubt perceives the Islamic Republic's involvement in Yemen as the latest maneuver in a grand strategy whose ultimate target is the Kingdom itself and control of the Islamic holy sites of Mecca and Medina.

The big question is how far the Saudis are willing to go in drawing on their oil power to really do something about it -- something, that is, that actually stands a chance of either 1) compelling the Iranian regime to fundamentally re-calculate its nuclear ambitions, or 2) speeding the regime's unraveling at the hands of its already seething population. Of course, encouraging the Saudis to use oil as a political weapon is not without its downside risks; after all, the United States was on the receiving end of just such a Saudi gambit during the oil embargo that followed the 1973 Arab-Israeli war. But given the enormity of the stakes now at play vis a vis Iran -- both for the Kingdom and for the United States -- it's clearly an option that at least deserves serious consideration. One hopes that it's already the subject of intense consultations between Washington and Riyadh, preferably at the highest levels. Should the United States conclude that the potential benefits outweigh the risks, it will need to muster every instrument at its disposal to steel the Saudi king to take unprecedented measures to face down Iran's unprecedented challenge.

The perils of bowing to kings

Posted By Gal Luft Tuesday, April 14, 2009 - 9:05 PM Share

What would the world look like without the radical, dictatorial Saudi regime? One can only dream. By Gal Luft Last week's hullabaloo over Barack Obama's seeming bow before King Abdullah of Saudi Arabia centered mainly on the question of whether it was appropriate for a U.S. president to pay obeisance to a foreign dictator. But the real problem lies deeper than that. King Abdullah's alliance with the United States, combined with his oil wealth, has allowed his radical breed of Islam, Wahhabism, to flourish, poisoning the Middle East. With so much at stake, is it irrational to yearn for a world in which the Saudi regime just miraculously ceased to exist and there was no King Abdullah to bow to (or not) at all?

The House of Saud affects the world in three main ways: It is the world's largest producer of oil and holder of most of the market's spare production capacity; it acts as custodian of Islam's holy places and the religious center of Sunni Islam; and it maintains Wahhabism as a state-sponsored sect. When it comes to the first two elements, a world without the Saudi kingdom would not necessarily be a better one.

As long as petroleum continued to fuel the global transportation system, energy security would still remain a distant goal even without Saudi Arabia guiding production. Iran and Venezuela, the two countries first in line to succeed Saudi Arabia as the de facto leaders of OPEC, would certainly not be more accommodating to consumers. Nor would the Saudis' disappearance calm religious tension in the Middle East. On the contrary, a vacuum in which various sects within Islam vied for control over Mecca and Medina would only allow Iran to materialize its ambitions to establish a Shiite hegemony in the Persian Gulf.

But when it comes to the third element -- Wahhabism -- a world without the Saudi regime is hardly an upsetting thought. Years after the September 11 attacks, the kingdom is still a center of ideological indoctrination, incitement, and terrorist financing. "If I could somehow snap my fingers and cut off the funding from one country, it would be Saudi Arabia," Stuart Levey, U.S. Treasury under secretary for terrorism and financial intelligence, told ABC News in 2007. Thanks to the kingdom's policies, countless young boys are brainwashed to hate Christians, Jews, and other "infidels" in Saudi-funded madrasas from Bangladesh, to Bosnia and Herzegovina, to Indonesia, Uzbekistan, Spain, and even in the United States. Pakistan, perhaps of the most concern, has some 12,000 madrasas, many of which are Saudi-funded. Wahhabism provides not only the breeding ground on which Islamist terrorism flourishes, but it also threatens to overshadow other, more moderate traditions within Islam. As Lawrence Wright described in The Looming Tower, with a little over 1 percent of the world's Muslim population, the Saudi Wahhabis support 90 percent of the entire faith's expenses, radicalizing many bastions of moderate Islam beyond recognition. Despite all that, because of the kingdom's chokehold over the global economy, Washington has had to accept its abysmal human rights record, its treatment of women and non-Muslims as second-class citizens, its brutal attitude toward gays, and its financial support for radical Islamist institutions. Without the Saudi state, the veneer of political correctness that has characterized the U.S. attitude toward Wahhabism would quickly dissolve, and the United States would be free to fight back against radical Islam openly and decisively. Such a world might not be free of terrorism, but at least it would spare Americans the indignity of paying for both sides in the war on radical Islam, classifying 28 pages in the congressional report that dealt with Saudi Arabia's role in the September 11 attacks, and watching one U.S. president after another, Democrat and Republican alike, bend a knee before a human rights-abusing tyrant.

The Middle East's Interrupted Atomic Dreams

As oil prices drop, nuclear power is becoming less attractive in the region. So why is Iran still hanging on to its program?
BY CHEN KANE | DECEMBER 29, 2009

In light of Iran's rapidly accelerating nuclear program, more than a dozen states in the Middle East have also announced their intention to develop nuclear energy programs. The trend has caused much anxiety among members of the global community. It has sparked concerns about the spread of nuclear technology that could contribute to nuclear weapons proliferation in the Middle East, intensify arms races in the region among all classes of weapons, and become a target for terrorist activity. On this site, Joe Cirincione, president of the Ploughshares Fund, wrote about the United Arab Emirates (UAE): "After they have developed nuclear technologies, trained nuclear scientists and engineers, and plugged into global nuclear markets, will they go one step further and build uranium enrichment and plutonium reprocessing plants that could be used to make fuel -- or bombs?" But the global economic crisis has disrupted the calculus of nuclear power. An alternative to oil that once appeared to be a clear cost-saver has now come to look very unattractive. And countries are responding by shuttering their programs. Currently, there is not a single operational nuclear power plant in all of the Middle East, and the only one scheduled to go live in the near future will be the Bushehr plant in Iran next year. The scaling back of the Middle Eastern nuclear industry seems rational and likely within the context of global trends -- and this fact raises serious questions about Iran's motivations as it ramps up its own nuclear program.

A few of these programs, such as the one in the UAE, originally progressed at a swift pace. The UAE signed memoranda of understanding with at least five potential supplier states, signed a nuclear cooperation agreement with the United States, established a federal nuclear regulatory authority, developed a nuclear material licensing and control system, passed relevant domestic legislation to govern efforts, and joined important international treaties, all within a span of three years. (The average estimated time for a new nuclear energy program to become operational is generally 15 years.)

The main justifications given for this planned growth in nuclear power were long-term security concerns and the need to develop diversified and safe energy resources. The UAE is not alone in having legitimate concerns about matching its energy demand with alternative supplies. Saudi Arabia, for example, has one of the highest

rates of electricity consumption in the world (ranked 19th among nations), and its energy needs are growing faster than any other Middle Eastern state's. To meet rising demand by 2030, the country will require additional generating capacity of an estimated 35 to 66 gigawatts.

There is also an emerging profit motivation. If demographic trends and existing policies remain unchanged, world energy demand is projected to grow by more than 50 percent by 2030 -- a demand the Organization of the Petroleum Exporting Countries (OPEC) nations, especially Saudi Arabia, will be increasingly central in filling. The International Energy Agency projects OPEC Middle East oil production will increase from 25 million barrels per day (mbd) in 2008 to 38 mbd by 2030, a 65 percent increase. By 2030, OPEC will provide more than half the world's total oil supply. For oil-producing nations, burning their own crude oil to generate electricity results in a considerable loss of potential export revenues. By building nuclear power plants to fill domestic needs, Middle East oil producers plan to free up their oil and gas production for export to a hungry global market.

Another potential motivation (feverishly denied by officials across the Middle East) is a fear of Iran's nuclear ambitions. The timing of these countries' interest in going nuclear suggests an unease over Iran's expanding program. Although a nuclear energy program will not give Middle Eastern states a nuclear weapons capability, it will allow them to maintain a sense of technical parity with Iran and provide them with the infrastructure to jumpstart a weapons program if they so elected.

Despite all this initial enthusiasm, however, these nascent nuclear energy programs still haven't fully materialized. Several of them have been abandoned altogether, and others have slowed to a crawl. Turkey, for example, announced in December 2009 that it had cancelled funding for new reactors, effectively ending its latest effort to introduce nuclear power. The decision came on the heels of Saudi Arabia's announcement in September 2009 that the country's future nuclear development would proceed more slowly than anticipated due to a need to build educational and technical infrastructure. Even the UAE, the acknowledged leader among Middle East proponents of introducing nuclear energy, has slowed its program. On its face, the UAE has shown continued progress. Earlier this month it exchanged diplomatic notes with the United States on a bilateral agreement for peaceful nuclear cooperation. And just this week it awarded South Korea the contract to build and operate its initial nuclear reactor. This said, however, the UAE made the contract decision after twice postponing it, and the South Korean company that won the

reactor tender, Kepco, did so by aggressively offering it at a price that is 50 percent of the estimated $41 billion estimated market cost. (All this came on the heels of a massive bond default by Dubai that prompted a bailout by the UAE.)

The main factor driving the slowdown in nuclear programs in the Middle East is the drop in the price of oil. A secondary reason is the uncertainty created by the global economic crisis. In a preliminary feasibility study, the International Atomic Energy Agency concluded that nuclear energy would be economically viable for oilproducing states only when the price of oil exceeds $50 per barrel (roughly $60 per barrel at the going global market price). But the power generation in these countries would first have to transition to market-based prices and burn up all the "associated gas" (gas by-products associated with oil production and unsuitable for export) currently assigned to domestic utilities. The "associated gas" is committed for use by utilities until 2025, after which they would have to burn natural gas or oil to allow nuclear energy to become competitive and begin to meet domestic demand.

Another factor is the massive start-up cost for any Middle Eastern country considering creating a nuclear program. It is easy to forget that the majority of Middle East states lack even the most basic technological capability, industrial base, and scientific expertise necessary to take such a step. The overnight costs of building a nuclear power plant (the cost of a construction project if no interest was incurred during construction) are around $4,000/kilowatt, or 8.4 cents per kilowatt-hour, which could translate into real costs of $5 billion to $10 billion for a 1,000-megawatt electrical plant. In states seeking nuclear power for the first time, developing safety, security, and nuclear waste regulations and organizations could also significantly increase the amount of time and money it takes to set up new plants. But Middle Eastern states' willingness to foot those bills seems to have markedly diminished now that oil no longer costs $147 a barrel.

Middle East states that have no readily available energy alternatives, such as Jordan, will probably continue with their programs (Jordan imports 95 percent of its energy, spending $3.2 billion per year, or the equivalent of 20 percent of its GDP and 24 percent of its total imports). The problem is that these countries, because of a lack of fuel income, often don't have adequate funding to start a nuclear program. In other words, the states in the Middle East that need nuclear energy cannot afford it, while the ones that can don't really need it.

This is not the first time the introduction of nuclear energy to the Middle East has failed. After the massive oil price increases from 1973-1974, Egypt, Iran, Turkey, Saudi Arabia, the UAE, and others considered building

nuclear plants. For a variety of reasons such as lack of financial resources, changes in basic cost-benefit calculus of such a program, and the shocking devastation caused by the Chernobyl accident, nuclear energy did not emerge and take hold. It seems likely that a similar process is at work today. So what does this tell us about where energy trends in the Middle East are going?

First, that short-term economic interests have triumphed over long-term energy security and climate-change concerns. Second, the enormous amounts of oil profits that were pouring into oil- and gas-producing states during the recent price spike are not arriving anymore. The global economic crisis has made forecasting the future far more uncertain, and every country in the region has curbed its nuclear ambitions accordingly.

Every country, that is, except Iran, which holds the world's third-largest proven oil reserves and second-largest natural gas reserves, and is OPEC's second-largest oil producer and the world's fourth-largest crude oil exporter. While other Middle East states are slowing down their nuclear programs, Iran continues full steam ahead, building centrifuges and stockpiling light enriched uranium -- allegedly as fuel for its future reactors. No wonder Tehran's claims of peaceful intentions for its nuclear program are being greeted with greater and greater skepticism.