Hi and welcome to Ones and Twos, FP's economics podcast. Every week we take a couple data points, use them to try to explain the world. I'm Cameron Deati, FP's deputy editor with you in Berlin, Germany. Joining us as always is FP's economics columnist and Columbia University professor Adam Tooze, this week in Beijing. Hi Adam.
So we have one topic for you all this week. The data point there is 34, as in 34% of globally traded crude oil that used to pass through the Strait of Hormuz from the Persian Gulf region out to the rest of the world. That was together with 19% of liquefied natural gas that passed through the same strait, about 16% of the trade in refined petroleum products like diesel and jet fuel did the same thing. And yeah, we have spent the past few weeks concentrating on the immediate economic effects of the war in Iran. Those statistics I was just citing were a description of the status quo before the war. And it struck us that it might be worth taking a step back to kind of begin to contemplate the longer-term effects of this war on the global economy, to try to paint the portrait of the after scenario so to speak, of energy markets, the economics of the Persian Gulf region in general, and yeah, the more general fallout. We're going to try to evaluate if there are losers and winners from this war in the broader sweep of things. And Adam, to start off with, obviously there's a lot of discussion of the economic fate of the Persian Gulf countries themselves. And it struck me that we tend to refer to these countries as a group. I mean, we say the Gulf countries, but at the same time, those countries are also themselves differentiated from one another. And I'm curious how those differences among those countries bear on this war. I mean, just as a basic starting point, you know, Qatar is one of these countries, is obviously a major gas economy. Saudi Arabia is typically cited as the kind of classic oil economy. So, yeah, what are those differences and how do those align with what's happening there right now?
Yeah, it's really worth getting this straight because there is a lot of relatively undifferentiated commentary on this. You know, if we line up Qatar, UAE and Saudi, which are like in the kind of front line, they're really distinct economies in terms of size and specialization. Qatar really is a single city-state, two and a half million inhabitants, and 70% of its government revenue, 60% of its gross domestic product, 85% of its exports are LNG. So it's a city-state living off LNG essentially. The Emirates are 10 million people, much smaller share of energy, and Dubai in particular is an economy which is fundamentally based on trade rather than energy. Energy doesn't play a significant part in Dubai's economy directly, but it is of course the entrepôt that it is because it's attached to Abu Dhabi, which is the source of the oil. 10 million people, two and a half million people. Saudi, 38 million people, a large relatively diversified economy as you'd expect. The relative comparison here is with a Texas or something like that. So Saudi oil and gas make up about 22% of the GDP. I think for Texas it's about 15%. 55% of government revenue, which is one of the things which more properly qualifies it as a petrostate.
The most economically fragile states in the region are places like Oman, which don't have the same energy revenues and are much closer to the edge of financial crisis and may need bailing out by the others. But yeah, it really is, when we lump these together, we're lumping 2.5, 10 and almost 40 million together. One which is really absolutely a gas economy, the other the Emirates which are a diversified energy commerce hub, and Saudi which is a medium-sized economy with a whole lot of other things going on other than merely energy, of course seeded out of energy in each case but with very different proportions.
Yeah. You mentioned Dubai there as, you know, in part a tourist economy, and we've discussed it in recent episodes as a symbol of a sort of broader economic model that other countries in the Gulf have also tried to adopt, as sort of being a hub of, you know, international human capital, various types of high-end services. And this is a model that it strikes me could be in jeopardy. I mean, if this region isn't secure, does that put this model into jeopardy? Is that the foundation of this entire kind of concept that certain Gulf countries have adopted for themselves in terms of their economies?
You can see, I mean, you can see the force in that argument. I mean, I think it appears as a tourist economy probably largely from a European point of view. It's notoriously so in Britain apparently. There were a whole bunch of articles about how crazy the Brits are about Dubai, both positively and negatively. It's both loved and hated. I think from the point of view of American listeners, they won't think of Dubai necessarily as a tourist destination, but it is a popular spot for Europeans because of reliably warm weather in the winter and it's reasonably close.
In terms of the economy, the highest figure I've seen for Dubai, tourist share is less than 10% of GDP. So Dubai really is a commercial center, banking, trade, finance, insurance, all those kind of things. And there's no doubt of course that they will take a hit from the shock of the war. Real estate is another key component. People like having apartments there. The wealth of the whole world likes to have apartments there. Very low tax. Kind of a haven status if you like.
But I think there's a tendency towards skepticism when we're talking about services in general. It's sort of like, what's its basic means of support? It doesn't make anything. So sooner people feel insecure somehow it'll all evaporate. And I'm not, you know, I don't have a crystal ball. I'm not going to try and predict Dubai's GDP 10 years from now, but one shouldn't underestimate the resilience of hubs like this. In China right now, the Gulf is, despite the war, the war has sort of made people realize how invested they are in the Gulf.
The sense I think that this is simply going to evaporate, it was easy come easy go, phrases like it was built on sand, kind of clichés like this, underestimate the central role the Gulf States play, apart from everything else simply due to location. I mean, in really, really bad scenarios does some form of relatively normalized traffic through the straits not resume at some point. This war is, one has to underline after all, gratuitous. It should not have happened. There is no good reason for it other than Israeli geopolitics. At some point one has to assume that some kind of logic will be restored, and when it is one would expect these centers to come back because they sit at really nodal points in the global economy.
The demand for this oil and this gas is not going to collapse anytime soon. As soon as the straits open up, it's cost competitive. So absolutely, obviously it's devastating in the short run. And as we've spoken about on the show several times before, the people I'm most worried about, frankly, are the migrant workers who are there to service these economies. But I wouldn't expect it to change the course of their development permanently. Maybe being too optimistic there, but that's my hunch.
Yeah, that does make sense. I mean, what's clear is that the war is a shock to energy markets, and yeah, one way of examining the stakes of that are by sort of taking a closer look at the countries in the region that are affected by it. But strikes me that another way of examining the stakes are to look at the broader geopolitical order that is at stake in the energy conflicts right now. And you know, FP in fact just published a new essay that I thought was interesting in this context. It's written by Nils Gilman that describes what he calls a metabolic cold war that is being established, and this was written before the start of the war. I should say, you know, magazine essays are often many months in the making, although it was slightly updated to reference the war but it couldn't quite get into detail. And he describes a new kind of cold war that would pit a coalition of petrostates, basically oil economies, versus a coalition that he refers to as the green entente, broadly speaking, countries that are aligned behind renewable energy.
And yeah, it struck me that maybe the war that's ongoing could be seen as an intervention in coalition management within the kind of petrostate bloc that he's talking about. That is to say, Iran is obviously an oil economy. The United States is, you know, the putative leader of this petrostate bloc in Gilman's description. And yeah, perhaps the war could be seen as a way of getting Iran in line in the kind of petrostate axis. But you tell me, do you think this war fits into that framework or not?
Yeah, I mean, I think this distinction between electorates and petrostates is interesting in some ways. I played my own part in popularizing the distinction, I think. But I also have to say I have some second thoughts about it because, I mean, we know what we mean by saying there are petrostates. Generally what we mean is states that have a large share of GDP or state revenue that is to do with fossil fuels. And that's clearly true for the Gulf States, and it's true for Russia, and it's true to a limited extent for the United States, which is a petrostate in the sense it produces an awful lot of petrol and gas, but it's not in any way heavily dependent on it. It's just a huge producer.
But what also distinguishes the petrostates from each other, which is crucial, is the degree to which they actually can control demand for oil and gas. And the United States, with a huge domestic market for oil and gas, can of course do that. And so it becomes rational for die-hard last-ditch fossil fuel defenders in the GOP to imagine a kind of enclosed US oil and gas world in which America merely goes on consuming its oil and gas, and then of course it looks for buyers for surplus oil and gas abroad. But that actually creates a conflict, we'll talk about this in a minute, between American producers of oil and gas and American consumers, because the less that's exported the better from the point of view of American consumers.
But in any case, the US can shape a demand which is more or less adequate to the supply it can produce, and they're both at a very high level. Russia is not in that position. It's a substantial economy, 100 million plus people, but its oil and gas production is far too big to be absorbed domestically. And if that's the case for Russia, it's even more the case for the Gulf States. So they aren't petrostates in the sense that they can meaningfully imagine shaping a world through their own say-so in which oil and gas is still consumed. Their only real way of influencing that market is to be willing to offer oil and gas at very low prices, which means it becomes irresistible for some consumers.
Now, if that's the case, and you're a Gulf state and your strategy longer-term is to stay in the oil and gas game but to compete on price and quality, then you have a very high interest in diversifying the rest of your economy, which is what the Gulf States are all doing. And to do that, you actually turn yourself into a progressive electrate. So if you look at the Saudis, the Emiratis, they both have highly ambitious green electricity buildout programs, like Texas in fact, which also is the largest renewable investor in the United States with the biggest wind and solar program. And if you look at Texas's electric grid, increasingly during the daytime it's dominated by renewables. And the Saudis and the Emiratis have woken up to this.
I've literally witnessed in Beijing this week a combined audience of Chinese and Arabs applauding the future of their collaboration between Saudi Arabia and China, because China is going to supply Saudi Arabia with the solar panels, the batteries that it needs to expand a green hydrogen, green steel and desalination program all on the back of green electrification. So these choices are choices, and but only really for the United States does it make sense to imagine a fully enclosed 1950s-style fossil-fuel-forever kind of world. Not the Russians, not the Gulf States. They don't either of them really have the option of projecting that into the future.
The Russians will mess around and they'll try and find, you know, low-income consumers who want their discounted oil. But the Saudis are actually heading in this other direction entirely. And this is even before we begin asking ourselves whether it's really plausible that this is why the Trump administration did it. And I think, you know, I just think the story we're getting out of the Trump administration is so chaotic that the idea that somehow there was a grand strategy to corral all the oil and gas producers and somehow bang them into shape and get them under American control—Helen Thompson's been arguing about knocking them all out so as to create the space for an American market. I mean, would that it were the case that Washington was this concerted.
By far and away the most plausible interpretation is they're being instrumentalized by Netanyahu. And beyond that I think it's Trumpian cosplay geopolitics again. I just think he's making it up as he goes along and there are some hardcore interests in the US which were keen on a war with Iran forever, and the Israelis of course actually have, in terms at least in Netanyahu's sense, something to gain from this. But that is the crucial point. I think the crucial thing to make is that this idea of a petrostate that is truly self-sufficient really doesn't extend beyond the US.
This was also the crucial qualifier when you said earlier on that like 35% of globally traded oil goes through the Gulf. That's true. But the globally traded is a crucial qualifier because most of American oil is not globally traded. It is consumed at home. So basically the idea of a petrostate as a self-contained unit of oil production and oil consumption is rather particular, and is in fact particular to the US because the two other major contenders, Saudi Arabia and Russia respectively, neither of them, though they're mighty oil and gas producers, can corral the domestic market necessary to sustain that model.
And in the Saudi case, what that means is that they're interested in rapidly diversifying their economy. And for that, they're actually interested in green technology from China. So this idea, I think, of the United States welding together a coalition of petrostates makes more sense from the point of view of fossil ideologues than it does from the point of view of political economy.
