The Middle East isn’t a gas station for the West anymore

Many think of the Middle East as just the gas station for the Western world. But that’s simply not the case: The region’s importance has grown alongside the expanding role of petroleum and petrochemicals in the global economy.

The Persian Gulf region’s focus now extends beyond oil and natural gas. Plastics, metals, fertilizer, aluminum and food additives are just a few of the goods that depend on products sourced from the region.

The Gulf nations have realized the need to diversify away from hydrocarbons—witness the United Arab Emirates’ arrival as a center for financial services, transportation and tourism as well as Saudi Arabia’s Vision 2030.

Petroleum-based fertilizers are essential in feeding families in both developed and emerging economies.

The International Energy Agency reports that more than 30% of global trade of urea, which is an efficient and low-cost nitrogen form, is shipped through the Strait of Hormuz.

The cutoff of transport through the strait is a direct risk for food prices, while the cutoff of the supply of liquefied natural gas is an indirect threat to the domestic production of fertilizers. The IEA also reports that 20% of the global trade in ammonia and phosphates, both ingredients in fertilizers, crosses the strait.

Additionally, the Gulf region produces around 8% of the global supply of aluminum, with the IEA reporting that 5 million tons of aluminum are shipped each year through the Strait of Hormuz from smelters in Bahrain, Qatar, Saudi Arabia and the UAE.

Finally, half of the global seaborne sulfur trade moves through the strait.

Sulfuric acid is used not only to produce fertilizers and chemicals, but also in the refining of petroleum and critical minerals like copper, nickel and zinc. 

Mutual dependence

Even as oil continues to provide revenue, Gulf states have diversified away from resource extraction to invest in manufacturing, finance, and leisure and hospitality.

Geopolitically, six Arab states have formed the Gulf Cooperation Council, a regional political and economic union: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE.

In recent decades, the United States and the GCC nations developed a symbiotic relationship that has provided the foundation for economic and security stability.

Put simply, the U.S. buys oil from GCC nations and offers them protection. They buy U.S. Treasury bonds and F-15s. But the relationship extends far beyond that.

U.S. consumers benefit from a stronger dollar with each worldwide purchase of dollar-based oil. This simple transaction demand for dollars has allowed households to get more for money spent on imports of oil and all other goods.

And because the Gulf nations have invested their dollar-based receipts into U.S. stock and bond markets, U.S. consumers benefit from the investment demand for dollar-based assets and lower interest rates resulting from each purchase of U.S. Treasury and corporate bonds.

This codependence of the U.S. and Arab states is shown in the co-movement of the S&P GCC Bond Index and the S&P 500 equity index.

As the Middle East has diversified and the economic partnership grows, the region’s petroleum assets have become even more important to the global economy.