Ber Cowen

Why Saudi Arabia needs Israel

Strait of Hormuz

In the past few months the world has watched tension mount in the tinderbox that is the Strait of Hormuz. Multiple incidents of sabotage and detentions of tankers have made the news, as Iran tries to assert itself in the Gulf waters and to project its ability to disrupt the 20% of world oil that flows through that narrow sea lane.

For countries that depend on that sea lane being open, this is a worrying development. Whilst there are many countries that rely on fuel from that source, the real concern is not with the fuel importers, who can find alternative sources of supply, but for the exporters of fuel, namely Saudi Arabia and other Gulf states, who have no alternative by which to export fuel, which for Saudi Arabia is a huge 50% percent of their GDP.

Should the Strait be closed, or even if the situation deteriorates so that importers look to other sources of supply, this would be devastating to the economies of the exporters. More alarming is the fact that they cannot rely on world powers to guarantee the opening of the strait. Donald Trump has already stated that America actually does not need the oil from the Gulf, and that the beneficiaries of this trade should stand up for themselves with only the general support and backing from the US. Israel, with no imports from the Gulf, also has no interest in a conflict that it does not benefit from.

It is hard to imagine the Gulf States unilaterally taking action to clear the waters, and the likely result would be a UN resolution (potentially blocked by Russia) against Iran for disrupting international shipping.

Saudi Arabia urgently needs to have an alternative route to export its oil. Bloomberg recently reported that Saudi Arabia is already talking to Israel regarding a pipeline from Saudi Arabia to Eilat only 40km away, in order to import natural gas from Israel. By extension however, this route could also be developed as an alternative way to get Saudi oil to the deep harbour of Haifa for export to Europe and the West. This is a much safer, faster and secure way to guarantee their exports to the west, by avoiding the Strait of Hormuz, and the troubled Bab el Mandeb strait in the Red Sea. It would also save on considerable transit fees in going through the Suez Canal.

The benefit of developing such a route is not only a matter of fuel export security for Saudi Arabia, but it can also open a new world of export markets for Saudi Arabia. At the moment, Saudi Arabia is looking to import natural gas, however with time, Saudi Arabia may move to develop its considerable natural gas reserves which are the 5th largest in the world. Israel, is also developing its reserves, however it doesn’t have enough to justify building a pipeline to Europe for export. This link with Saudi Arabia, however, can eventually tip the scale to provide a strong business case for the Eastern Mediterranean pipeline, which can be extremely lucrative for both partners.

About the Author
Ber Cowen is a Business Analyst with a multinational company in Melbourne Australia, and has a Master of Business (Supply Chain) from Monash University.
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