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Analysis

Can Saudis Survive Without Oil?

Can Saudis survive without Oil?

“Russia, Iran and Saudi Arabia depend on exporting Oil & Gas. Their economies will collapse if Oil & Gas suddenly give way to Solar & Wind.” (Yuval Noah Harari)

Oil has long been the backbone of Saudi Arabia’s economy and the driving force behind its development. As the world’s largest oil exporter, it’s challenging to envision a Saudi Arabia without oil. However, the country is now on a bold mission to reduce its dependence on oil revenue as the bedrock of its national economy. This push for economic diversification comes in the wake of a decade marked by oil market volatility, which has intensified the economic and political challenges faced by the ruling Al Saud family. Saudi Arabia possesses approximately 17% of the world’s proven petroleum reserves, making it one of the leading net exporters of petroleum and home to the world’s second-largest proven oil reserves. Saudi Aramco, one of the world’s largest integrated energy and chemical companies, operates across three segments: upstream, midstream, and downstream. In 2022, Aramco’s average hydrocarbon production was 13.6 million barrels per day, with crude oil accounting for 11.5 million barrels per day. The company proudly claims to produce the lowest-carbon barrel of oil in the industry and has committed to achieving net-zero emissions by 2050, ahead of the government’s 2060 target. Saudi Arabia continues to invest in cleaner conventional engines, carbon capture, utilization and storage (CCUS), hydrogen, and renewable energy sources. Despite these efforts, Saudi Arabia remains heavily reliant on oil, which contributes 42% to the country’s GDP, 90% of export earnings, and 87% of budget revenue.

Historical Context 

(March 3, 1938 CE: Oil discovered in Saudi Arabia) 

On March 3, 1938, an American-owned oil well in Dammam, Saudi Arabia, tapped into what would become the world’s largest petroleum reserve. This discovery profoundly transformed Saudi Arabia, the Middle East, and the global landscape—politically, economically, and geographically. Before the discovery, the majority of Saudi Arabians were nomadic, and the nation’s economy largely depended on the tourism industry, driven by religious pilgrimages to Mecca. The company responsible for the discovery, which later became Chevron, set the stage for a seismic shift in the country’s future.

In the wake of the discovery, Saudi engineers developed an extensive infrastructure of ports, refineries, pipelines, and oil wells. Today, oil accounts for 92% of Saudi Arabia’s budget, making the nation one of the world’s leading producers and exporters of petroleum. This wealth from oil has fostered high-level diplomatic relationships with the West, as well as with China, Japan, and Southeast Asia. Some argue that Saudi Arabia’s oil wealth allows it to wield significant influence over international foreign policy decisions, particularly those involving the Middle East.

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The kingdom’s demographics have also been reshaped by the oil industry, attracting millions of foreign workers from the Middle East, South Asia, South East Asia and other regions of the world. The first oil discovery site near Dharan is now connected to a vast pipeline network that transports petroleum across the region.

Petrodollar System

Petrodollars refer to the revenues generated from oil exports, denominated in US dollars, and are not a separate currency but rather US dollars accepted by oil-exporting countries in exchange for their oil. In 2020, the global average for daily crude oil exports was around 88.4 million barrels. With an average price of $100 per barrel, this would translate into an annual global supply of petrodollars exceeding $3.2 trillion.

For many members of the Organization of Petroleum Exporting Countries (OPEC) and non-OPEC oil and gas exporters like Russia, Qatar, and Norway, petrodollars are a primary source of income and wealth. The term “petrodollar” reflects the common practice of these nations accepting US dollars for crude oil transactions rather than a global trading system or a distinct currency. The US dollar is favored by oil exporters because of its global value in international investments, making it a practical store of value for oil revenues that need to generate returns.

A significant example of petrodollar recycling is the 1974 agreement between the United States and Saudi Arabia, where Saudi petrodollars were invested in U.S. Treasuries. The profits from these investments were later used to finance American arms sales to Saudi Arabia, as well as various development and assistance programs in the country. Today, many oil-exporting nations channel their petrodollars through sovereign wealth funds, investing in stocks, bonds, and other financial products. For example, one such fund holds nearly 1.5% of all publicly traded shares worldwide, with 72% of its investments in equities.

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The petrodollar system has been crucial in facilitating smoother international trade by standardizing oil pricing, simplifying transactions, and reducing exchange rate risks for oil-importing nations. This system underpinned the strategic alliance between the United States, Saudi Arabia, and other oil-producing countries—a partnership that has significantly influenced global politics for decades. For oil-exporting nations, petrodollars have provided essential income, enabling reinvestment in infrastructure, drilling, and exploration projects, which in turn boosts oil production and drives technological advancements in the energy sector.

The petrodollar system has reinforced the US dollar’s status as the world’s primary reserve currency, driving global demand for it. Oil-exporting countries typically hold large reserves of US dollars, which they often invest in US government securities, thereby strengthening the US economy. This high demand for US dollars, fueled by oil trade, helps maintain a favorable US trade balance and ensures ample liquidity, making the dollar the most traded currency in the forex market.

However, the future of the petrodollar system is increasingly uncertain due to shifting geopolitical dynamics. On June 9, 2024, Saudi Arabia ended its 50-year petrodollar agreement with the United States, an event widely regarded as the “end of the petrodollar.” This agreement had been the cornerstone of the petrodollar system, and its termination marks a significant shift in the global economic landscape. With the end of this agreement, oil transactions may now be conducted in various currencies, including the yuan, euro, yen, and possibly even virtual currencies like Bitcoin.

These developments reflect a growing desire among nations to diversify economic risks and reduce their reliance on the US dollar. By diminishing the dollar’s dominance, these changes could lead to a more multipolar monetary system, granting countries greater financial independence and potentially creating a more balanced global economic environment. The rise of new economic alliances and the global shift towards sustainable energy alternatives further challenge the traditional oil-US dollar system. The transition to renewable energy could reduce global reliance on oil, thereby diminishing the significance of the US dollar and prompting a reevaluation of the current system.

As global energy and financial systems evolve, the role of the petrodollar is increasingly being questioned. The recent end of the US-Saudi agreement is a clear example of the shifting geopolitical and economic landscape. These changes may result in market volatility and the revaluation of various currencies, presenting both challenges and opportunities for the global economy. 

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Diversification Efforts

Saudi Vision 2030 

“Given the nation’s climatic advantages, the Vision 2030 statement stresses the growth of renewable energy sources, such as solar and wind. Opportunities for Western businesses specializing in solar and wind technology, energy storage solutions, and green construction technologies arise from the target of producing 9.5 gigawatts of renewable energy by 2030. The country is a rich ground for renewable energy projects because of its large, sunny deserts and substantial investment in green energy.” (Rana Maristani) 

Saudi Arabia’s Vision 2030 is a comprehensive plan launched on April 25, 2016, aimed at reducing the nation’s dependency on oil and diversifying its economy. Centered around three main themes, the framework outlines specific objectives to be achieved by 2030, including the development of ports, cultural assets, and tourism destinations to leverage Saudi Arabia’s strategic position at the crossroads of the Arab and Islamic worlds. A key element of the plan involves partially privatizing the national oil company, Aramco, and enhancing the resources and influence of the Saudi Public Investment Fund.

For decades, Saudi Arabia’s economic growth has been driven by oil, but this reliance has exposed the nation to the volatility of global crude prices. In the 1990s, while oil prices remained stagnant, government policies encouraging larger families led to a population boom. This growth, combined with a young, highly educated workforce, resulted in rising underemployment and unemployment rates, particularly among the youth.

Vision 2030 seeks to address these challenges by transforming Saudi Arabia’s economy over 15 years. The plan aims to improve the quality of life for citizens through world-class healthcare and education, equipping young people with the skills needed for future jobs. It also focuses on creating a diversified economy, emphasizing trade, tourism, high-tech industries, and a business-friendly environment to attract foreign direct investment and entrepreneurs. Key areas of diversification include cryptocurrency, artificial intelligence, and environmental sustainability.

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In a significant milestone, Saudi Arabia’s non-oil sector contributed 50% of the GDP for the first time last year, signaling the success of the ongoing economic transformation. With Vision 2030, the Kingdom plans to inject $3 trillion in foreign investment into its economy, driving further growth and offering new opportunities for multinational companies. As the nation continues its economic revolution, it is well-positioned for a promising future.

“Saudi Arabia is becoming more welcoming to foreign investment as it works to advance living standards, build non-oil sectors, and upgrade infrastructure. The Kingdom has taken the initiative in recent years to improve the investment climate by enacting policies that improve business regulations, providing incentives, and establishing special economic zones that offer advantages like tax breaks and business support services.” (Rana Maristani)

Difficulties and Vulnerabilities 

The Kingdom of Saudi Arabia is confronted with various obstacles and weaknesses, chiefly arising from the vagaries of international markets and oil prices. The country urgently has to diversify its economy and lessen its reliance on oil revenue, as this instability in the economy highlights. The country also needs to deal with environmental issues and the global shift to renewable energy sources, which puts further strain on its established economic structure. Given that oil exports account for a sizeable amount of Saudi Arabia’s national income, the country’s economy is greatly impacted by the volatility of oil prices. It is challenging for the nation to keep a solid economic outlook due to the unpredictability of the world oil market. As a result, the kingdom has been actively pursuing measures for economic diversification through its Vision 2030 project, with the goal of fostering the growth of non-oil industries including technology, entertainment, and tourism. The world’s need for oil is predicted to decrease as it moves toward renewable and sustainable energy sources. The adoption of greener technologies and investments in renewable energy projects are imperative in light of this worldwide trend. Saudi Arabia, seeing the need to change with the energy environment, has begun to investigate and invest in solar and wind energy. The main issues facing Saudi Arabia are its dependency on oil for its economy, the instability of the market, and the necessity of embracing environmental sustainability. For the country to have long-term economic stability and growth, these problems must be resolved.

Financial Resilience  

After a year of minimal growth in 2023, the Saudi economy is expected to start recovering in 2024, though its success will largely hinge on the government’s oil production policies. The economic downturn in 2023 was exacerbated by the monarchy’s unilateral decision to cut oil output by one million barrels per day from July 2023 through the end of the year to support oil prices. This move led to a self-inflicted economic slump. However, with an anticipated increase in oil production and exports, along with continued expansion in the non-oil sector, real GDP growth is projected to rise by approximately 2% in the latter half of 2024, aligning with historical averages since 2014.

A significant budget deficit is likely to persist, potentially dampening energy and construction projects, particularly with the resurgence of regional conflicts. Despite these challenges, Saudi Arabia is expected to continue investing heavily in large-scale projects.

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Saudi Arabia’s reliance on agri-food imports, particularly grain, remains substantial, but the kingdom has managed to find alternatives due to its purchasing power. Inflation is projected to remain around 2%, supported by substantial export earnings, significant reserves that maintain the currency peg with the US dollar, and a rigorous monetary tightening cycle that began in March 2022 alongside the US Federal Reserve.

Oil prices will continue to be a key driver of the economy, providing essential funding for Vision 2030’s long-term objectives. Decisions made by OPEC and its partners, including Russia, Kazakhstan, Azerbaijan, Mexico, and Oman (OPEC+), have struggled to maintain crude oil prices above USD 80 per barrel, a level deemed necessary for most OPEC+ countries to balance their trade and fiscal needs. Attempts to increase production limits have been hindered by renewed geopolitical tensions in the Middle East, benefiting countries not constrained by output limits. 

Non-Oil Prospects

In 2022, Saudi Arabia’s economy grew faster than any other G20 nation, with overall growth reaching 8.7% and non-oil GDP expanding by 4.8%. The non-oil sector saw its most robust growth since Q3 2021, increasing by 6.2% in Q4 2022. For 2023, the non-oil sector is expected to grow by 4.7%, driven primarily by strong private consumption and significant private sector investments, particularly in construction, retail, wholesale, and transportation. This shift highlights the growing role of the private sector in Saudi Arabia’s evolving economy.

Vision 2030 aims to increase the non-oil GDP share to 50% by 2030 and diversify non-oil exports. Key sectors for focus include finance, insurance, transportation, communication, non-oil manufacturing, and agriculture. In 2023, non-oil revenues surged by 9%, while oil revenues fell by 3% due to declining crude prices. To reduce reliance on oil, the Saudi government has implemented significant budgetary reforms including revenue enhancement, spending rationalization, Treasury Single Account implementation, energy price reforms, fiscal risk assessments, improved budget transparency, and strengthened debt management.

The non-oil sector is seen as a crucial component for managing the increasing number of Saudi nationals entering the labor market each year. It offers greater stability, sustainability, and job creation compared to the volatile oil sector.

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Geographical Consequences 

The stability of the region and worldwide alliances are greatly impacted by Saudi Arabia’s strategic position in the world oil markets. Being one of the world’s top oil producers, the Kingdom has significant influence over the availability and cost of energy worldwide. Saudi Arabia is able to shape alliances and regional dynamics thanks to its advantageous geopolitical position. The potential of the Kingdom to influence or destabilize the oil markets can have significant ramifications for countries that import and export petroleum products. Global markets closely follow Saudi Arabia’s decisions about the amount of oil produced, as these decisions have the potential to affect global economic conditions. Its position in the Organization of the Petroleum Exporting Countries (OPEC), where it frequently takes the lead in coordinating member states’ production policies, is another example of this power. Saudi Arabia’s energy policy and geopolitical ambitions are closely related on a regional level. Part of the reason for its partnerships with major world powers, especially the US, is shared energy interests. Additionally, the Kingdom can support or oppose different regional actors due to its money and influence, which has an impact on regional stability. Saudi Arabia’s oil interests and the need to preserve its dominant position in the region play a major role in its engagement in crises and diplomatic attempts throughout the Middle East, particularly its attitude on Iran.

Inference 

When one considers Saudi Arabia’s transition from an oil-dependent economy to one that is more diverse, one can see that the Kingdom is at a turning point. Although there is uncertainty about the future during this shift, it emphasizes how important it is to be resilient and adaptable. By adopting strategic planning, encouraging innovation, and making a commitment to sustainable development, Saudi Arabia is managing this transition. Even though there are still obstacles to overcome, the Kingdom’s initiatives to lessen its reliance on oil earnings and investigate new business opportunities represent a substantial step in the direction of a more diverse and sustainable future. In essence, Saudi Arabia’s long-term economic growth and stability will depend greatly on its capacity to adjust to these changes. Although the road ahead is difficult, the Kingdom’s proactive strategy presents a viable way forward.

Analysis

How will US Elections impact Philippines?

How will US Elections impact Philippines?

The U.S.-Philippines relationship, spanning over a century, remains a cornerstone of both countries’ strategic and economic interests in Southeast Asia. The alliance, rooted in historical ties dating back to the American colonization of the Philippines in 1898, has evolved through different geopolitical eras, from the Cold War to the rise of China. Under former President Donald Trump, U.S.-Philippines relations saw continuity in defense and security cooperation, but new complexities emerged in areas like trade and climate change. With President Ferdinand Marcos Jr. now leading the Philippines, the relationship continues to adapt to changing global dynamics, setting the stage for future shifts, particularly if Trump were to return to the presidency in 2024.

Historical Foundations and the Evolution of Defense Cooperation

The U.S.-Philippines alliance has historically been anchored in defense agreements, starting with the Mutual Defense Treaty (MDT) of 1951, which cemented the commitment of both nations to come to each other’s aid in case of an armed attack. This treaty has been the backbone of U.S. military presence in the region, alongside other agreements like the Visiting Forces Agreement (VFA) and the Enhanced Defense Cooperation Agreement (EDCA) of 2014.

During the Cold War, the Philippines served as a critical ally for the U.S., hosting major military installations like Clark Air Base and Subic Bay Naval Station, which were vital to projecting U.S. power across the Pacific. Although these bases were closed in the early 1990s, the U.S. continued to engage with the Philippines through joint military exercises, arms sales, and rotational troop deployments. The signing of EDCA revitalized this relationship by allowing U.S. forces access to Philippine military bases, further deepening defense cooperation.

Trump’s Approach: Pragmatic Assertiveness and Unilateralism

Under Donald Trump, U.S. foreign policy was defined by a shift toward unilateralism, framed by the “America First” doctrine. While the broader policy landscape changed, the Trump administration’s approach to the Philippines maintained a strong defense partnership, particularly concerning China’s growing influence in the South China Sea. Freedom of Navigation Operations (FONOPs) continued to challenge China’s territorial claims, and the U.S. reaffirmed its commitment to the MDT. In 2019, Secretary of State Mike Pompeo assured Philippine President Rodrigo Duterte that any armed attack on Philippine forces in the South China Sea would trigger U.S. obligations under the defense treaty.

However, Trump’s diplomacy was often transactional, using economic and military assistance as leverage for political concessions. Despite this, the military alliance between the two countries remained robust, largely driven by shared concerns over China’s aggressive posturing in the South China Sea. Trump’s administration made it clear that maintaining regional stability was a priority, even as he recalibrated U.S. alliances globally.

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Economic Ties: Trade Surplus and Potential for Future Tariffs

Beyond security cooperation, economic relations between the U.S. and the Philippines are significant. The U.S. is one of the Philippines’ largest trading partners, and the Philippines enjoys a trade surplus with the U.S., exporting goods such as electronics, garments, and agricultural products. In 2022, Philippine exports to the U.S. amounted to over $11 billion, while imports stood at around $9 billion, resulting in a favorable trade balance for Manila.

A key concern for the Philippines under a potential second Trump administration would be the return of protectionist trade policies. Trump’s first term was marked by the imposition of tariffs on several countries, which affected global supply chains and created new trade dynamics. Another Trump tenure could potentially trigger a new wave of tariffs, though the Philippines might benefit in certain sectors, particularly if the U.S. seeks to diversify supply chains away from China. This could create opportunities for Philippine exporters, particularly in electronics and manufacturing, as the U.S. looks to strengthen economic ties with Southeast Asian nations that are not directly involved in the U.S.-China trade war.

Climate Change and Divergent Policies

One of the areas where Trump’s policy diverged significantly from the Philippines’ interests was on climate change. The Philippines, as one of the most climate-vulnerable countries in the world, has consistently advocated for stronger international cooperation on environmental issues. Trump’s skepticism toward climate science, epitomized by his withdrawal from the Paris Agreement, strained this aspect of the U.S.-Philippines relationship.

Under Duterte, the Philippines remained committed to global climate action, though his administration often sought to balance environmental priorities with economic development. The lack of U.S. leadership on climate issues during Trump’s presidency was a missed opportunity for deeper cooperation. As the Philippines faces more frequent and severe natural disasters, collaboration on climate resilience and green energy initiatives is crucial for future bilateral relations.

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The Marcos Administration: Navigating Old Alliances and New Realities

Since taking office in 2022, President Ferdinand Marcos Jr. has sought to strike a balance between maintaining strong ties with the U.S. and expanding relations with China. While Duterte had pursued a “pivot to China” policy, Marcos has recalibrated Manila’s approach, emphasizing the importance of the U.S. as a security partner while continuing to engage economically with Beijing.

Under Marcos, U.S.-Philippines defense cooperation has deepened further, particularly with the 2024 conclusion of new defense agreements that expand U.S. access to Philippine military facilities under the EDCA. These agreements were factored into the U.S. defense budget for 2024, underscoring the strategic importance Washington places on its alliance with Manila in countering Chinese influence in the Indo-Pacific. The EDCA not only enhances military readiness but also provides infrastructure improvements to Philippine bases, contributing to economic development in the host regions.

The Biden administration has reinforced these defense ties, but questions remain about how a potential second Trump term might alter the course of the relationship. While Trump previously upheld strong military relations, his unpredictable foreign policy style could introduce uncertainties. For instance, Trump might attempt to renegotiate existing agreements, as he did with other U.S. alliances, seeking to reduce U.S. financial contributions or increase demands for Philippine support in countering China.

The Future of U.S.-Philippines Relations

Looking ahead, U.S.-Philippines relations are likely to be shaped by both geopolitical competition and economic considerations. The strategic alliance will continue to focus on the South China Sea, where both nations share concerns about Chinese territorial ambitions. The U.S. will also remain a crucial economic partner for the Philippines, given the ongoing trade surplus and potential opportunities arising from supply chain diversification. Additionally, new defense agreements in 2024 have solidified the Philippines’ role in the U.S. Indo-Pacific strategy, which will likely remain a priority regardless of changes in U.S. leadership.

However, the return of Donald Trump to the White House could bring significant changes. A second Trump administration might pursue a more transactional approach to defense and trade agreements, potentially seeking new tariffs or renegotiating military commitments. While the U.S. would likely maintain its focus on countering China’s influence in the region, the nature of its engagement with the Philippines could shift, with increased pressure on Manila to take a more active role in regional security.

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Moreover, Trump’s skepticism toward multilateral agreements and climate change could complicate efforts to strengthen cooperation in these areas. The Philippines, which faces severe environmental challenges, might find itself at odds with a Trump administration unwilling to prioritize climate resilience initiatives. In this scenario, the Philippines could look to other international partners, such as the European Union or Japan, for collaboration on green energy and environmental sustainability.

Strategic Responses of the Philippines

In response to potential changes in U.S. leadership and its implications, the Philippines is likely to diversify its alliances. In order to balance its strategic objectives, it may increase its interaction with other major international powers, such as China, Japan, and the European Union (EU). Reducing over-reliance on the United States also means bolstering ASEAN ties. While keeping a strategic presence in international forums like ASEAN, the UN, and the Asia-Pacific Economic Cooperation (APEC), the Philippines will concentrate on regional cooperation to secure economic stability and security.

To navigate changing relations with a potentially repositioning U.S. leadership, the Philippines will have to employ a diplomatic strategy that is subtle. This entails maintaining national security and fostering economic expansion while striking a balance with other great powers. China’s increasing influence in the region is being countered by the Philippines through a trilateral approach that includes actively strengthening its strategic ties with Japan and the US. The focus will be on keeping a diplomatic balance that advances both security and economic goals.

It is anticipated that the Philippine government will reevaluate its domestic policies in light of prospective changes in U.S. leadership. This include adjustments to economic planning, defense plans, and foreign policy. The goal of domestic changes will be to strengthen the nation’s ability to withstand and adjust to changes in the world economy. In order to maintain the nation’s security and economic viability in the face of shifting global dynamics, the Philippine National Security Policy emphasizes the necessity of a strong plan to handle both internal and external threats.

Conclusion

U.S.-Philippines relations, built on a shared history and strategic interests, continue to evolve in response to shifting global dynamics. Under Trump, the military alliance was strengthened, particularly in light of growing Chinese assertiveness in the South China Sea. However, divergences over trade and climate change introduced new complexities into the relationship. As the Marcos administration navigates its ties with both the U.S. and China, the future of U.S.-Philippines relations will hinge on balancing security, economic, and environmental priorities in an increasingly multipolar world.

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With new defense agreements in place and trade opportunities on the horizon, the partnership remains critical for both nations. However, the potential for significant policy shifts under a second Trump administration underscores the uncertainty that lies ahead. The ability of both nations to adapt to these changes will determine the resilience and success of one of the oldest alliances in the Asia-Pacific.

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Analysis

South China Sea: Philippines and Vietnam Deepen Defense Ties Amid Rising Tensions with China

South China Sea Philippines and Vietnam Deepen Defense Ties Amid Rising Tensions with China

The South China Sea (SCS) has long been a focal point of international geopolitical tension. A region that holds vast economic and strategic importance, it has seen competing claims from various nations. At the heart of this dispute lies China’s expansive territorial claims, which have been a source of friction with its neighbors, including Vietnam and the Philippines. As of late August 2024, both countries have taken significant steps to deepen their defense ties, signaling a potential shift in the regional dynamics surrounding the SCS. However, this recent development raises questions about its broader implications, given the complexity of the disputes and the strategic interests of the involved nations.

Historical Background: The South China Sea Dispute

The South China Sea, a body of water stretching from the southeastern coast of China to the northern shores of Borneo, holds immense strategic value. It is not only a critical maritime route through which an estimated $3 trillion worth of trade passes annually but also a region believed to be rich in oil, natural gas, and fish stocks. The territorial disputes in the region primarily revolve around a set of islands, reefs, and shoals, with China making sweeping claims over most of the South China Sea, marked by its controversial “nine-dash line.”

China’s claims overlap with those of several Southeast Asian nations, including the Philippines, Vietnam, Malaysia, Brunei, and Taiwan. Despite international legal rulings, particularly the 2016 Permanent Court of Arbitration decision that invalidated China’s claims, Beijing has continued to assert its presence through aggressive maritime actions and the militarization of artificial islands. This has, in turn, led to growing tensions with countries like Vietnam and the Philippines, both of whom have found themselves at the forefront of the dispute.

Recent Developments: Strengthening Defense Ties

In late August 2024, Vietnam’s Defense Minister Phan Van Giang visited Manila to meet his Philippine counterpart, Gilberto Teodoro. This meeting culminated in the signing of “letters of intent” aimed at enhancing bilateral defense cooperation between the two nations, particularly in maritime security and disaster response. The agreement is seen as an effort to solidify ties amid growing Chinese assertiveness in the SCS. An official security agreement between the two nations is expected to be signed later in the year, marking a significant development in the evolving security architecture of Southeast Asia.

However, experts suggest that, at this stage, the deepening defense ties are more symbolic than substantive. According to Nguyen Khac Giang, a visiting fellow at the Vietnam Studies Program at the ISEAS–Yusof Ishak Institute in Singapore, the move is largely diplomatic and reflects a long-term strategy rather than an immediate shift in military cooperation. While both nations share a common interest in resisting China’s maritime ambitions, their approaches to the South China Sea dispute differ significantly.

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Symbolic Diplomacy or Strategic Shift?

The decision to boost defense ties between Vietnam and the Philippines may be a symbolic gesture for now, but it reflects a deeper undercurrent of change in Southeast Asia’s security landscape. For both countries, the territorial dispute with China is a critical issue that could shape their future foreign policy and defense strategies.

Vietnam, which has a long-standing dispute with China, has traditionally sought to manage its differences with Beijing diplomatically. Since a 2011 agreement, both nations have made efforts to prevent further escalation in the South China Sea. Vietnam’s approach has been characterized by a careful balance: bolstering its claims through land reclamation and fortification while maintaining a functional relationship with China.

The Philippines, on the other hand, has had a more confrontational stance towards China, especially in recent years. The territorial dispute between Manila and Beijing has escalated, with both sides accusing the other of aggressive actions in disputed waters. For the Philippines, closer ties with Vietnam signal an attempt to build regional partnerships as a counterbalance to China’s maritime assertiveness.

According to Zachary Abuza, a professor at the National War College in Washington, this deepening relationship between the Philippines and Vietnam is a positive diplomatic step, though it may not immediately translate into significant military collaboration. The Philippines’ limited maritime capabilities, combined with Vietnam’s cautious approach to deploying its naval forces, means that both nations are still navigating how to turn diplomatic rhetoric into practical military cooperation. Nevertheless, Abuza notes that such engagements could encourage Vietnam to engage more actively in regional security dynamics, particularly in military exercises and deployments.

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The Geopolitical Context: China’s Influence and ASEAN’s Division

The growing defense ties between the Philippines and Vietnam must be viewed within the broader context of China’s influence in Southeast Asia. Beijing’s strategy has long been to engage with claimant states on a bilateral basis, thereby preventing a unified regional response to its claims in the South China Sea. This approach has been largely successful, as the Association of Southeast Asian Nations (ASEAN), a regional bloc comprising 10 nations, has struggled to form a common stance on the issue.

China has been adept at exploiting divisions within ASEAN, often leveraging economic and political influence to ensure that member states with close economic ties to Beijing, such as Cambodia and Laos, do not support a unified position on the South China Sea. This fragmentation has allowed China to deal with each claimant state individually, avoiding multilateral negotiations that could put it at a disadvantage.

In this context, the recent Vietnam-Philippines defense agreement can be seen as a response to China’s divide-and-conquer tactics. By strengthening their bilateral ties, both nations are signaling their intent to resist Chinese pressure and assert their claims more forcefully. As Abuza notes, the move towards “minilateralism”—small groups of nations cooperating on shared interests—may be the only viable way for Southeast Asian claimant states to push back against China’s dominance.

The Role of the United States

The United States has been a key player in the South China Sea dispute, particularly in its support for the Philippines. Under the Mutual Defense Treaty signed in 1951, Washington has pledged to defend the Philippines in the event of an armed attack, including in the South China Sea. This commitment has been reiterated multiple times, especially as tensions between the Philippines and China have escalated.

For the Philippines, its defense relationship with the U.S. remains a cornerstone of its security strategy. However, the deepening ties with Vietnam reflect a broader strategy of diversifying its defense partnerships. This is partly a recognition that the U.S. alone may not be able to fully counter China’s influence in the region and that regional cooperation is essential.

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Vietnam, too, has been seeking to strengthen its international partnerships. While maintaining a cautious approach to its relationship with China, Vietnam has been working to build stronger ties with nations both within and outside of ASEAN. Its defense ties with countries like the U.S., India, and Japan have grown in recent years, as Hanoi seeks to enhance its military capabilities and secure its position in the South China Sea.

Future Prospects: Toward Greater Regional Cooperation?

While the recent agreement between Vietnam and the Philippines is an important step, the question remains whether this will lead to broader regional cooperation among Southeast Asian claimant states. As of now, ASEAN has been unable to present a unified front on the South China Sea, largely due to China’s influence and the differing interests of its member states.

However, there is potential for greater cooperation among like-minded nations within ASEAN. The South China Sea remains a critical issue for countries like Vietnam, the Philippines, and Malaysia, all of whom have seen their territorial claims challenged by China. Strengthening bilateral and multilateral defense ties, as Vietnam and the Philippines are now doing, could pave the way for a more coordinated regional response to China’s maritime ambitions.

In the long term, such cooperation may also extend beyond Southeast Asia. Japan, Australia, and India have all expressed concerns about China’s actions in the South China Sea and have sought to build stronger security ties with Southeast Asian nations. The Quadrilateral Security Dialogue (Quad), which includes the U.S., Japan, India, and Australia, has also become more vocal on issues related to freedom of navigation and the rule of law in the South China Sea.

Conclusion

The deepening defense ties between Vietnam and the Philippines represent a significant development in the ongoing geopolitical struggle over the South China Sea. While still largely symbolic, this move reflects the growing recognition among Southeast Asian nations that they must work together to counter China’s assertiveness in the region. Whether this will lead to more substantive military cooperation remains to be seen, but it is clear that both nations are seeking to strengthen their positions amid rising tensions.

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China’s strategy of dividing ASEAN and dealing with claimant states on a bilateral basis has been effective thus far, but the increasing cooperation between Vietnam and the Philippines could signal the emergence of new regional dynamics. With the U.S. continuing to back the Philippines and Vietnam seeking to build stronger defense partnerships, the future of the South China Sea dispute remains uncertain. However, what is clear is that the stakes are higher than ever, and the actions of regional powers in the coming years will shape the geopolitical landscape of Southeast Asia for decades to come.

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Analysis

How Lumbia Air Base in Cagayan de Oro is Important for the Philippines?

How Lumbia Air Base in Cagayan de Oro is Important for the Philippines?

In the heart of Northern Mindanao, where strategic interests and regional security converge, lies a key installation often overshadowed by its more famous counterparts—Lumbia Air Base. This seemingly unremarkable airstrip has quietly evolved from its modest beginnings into a crucial hub for military operations in Mindanao. As tensions and conflicts shape the landscape of the region, the significance of Lumbia Air Base becomes increasingly apparent. What makes this base so essential, and how does its history and strategic location contribute to its current role? Let us dive into the story of Lumbia Air Base to uncover its vital role in the ever-changing dynamics of regional security.

A Brief

Even though Lumbia Air Base was first built as a civilian airfield, it has changed significantly over time. It was repurposed to fit military purposes. This change was a component of a larger initiative to expand the Philippine military’s operational reach and capabilities in the area.
Strategically situated in Northern Mindanao, Lumbia Air Base is situated near Cagayan de Oro, Misamis Oriental. This facility’s central location within the Mindanao area makes it essential for coordinating military activities throughout the region. The facility is a vital tool for the Philippine military in preserving regional peace and stability because of its strategic location, which enables it to efficiently support both defensive and logistical operations.

Historical Background

Lumbia Air Base, originally established during the American occupation of the Philippines in the early 1940s, has a storied history. The airfield, initially known as Lumbia Airfield, was constructed to support regional aviation needs. During World War II, it played a significant role in various military operations, and provided crucial logistical support in the region.

After the war, Lumbia underwent extensive reconstruction and modernization. These efforts were aimed at upgrading its facilities and expanding its capabilities. By the late 1950s and early 1960s, the airfield transitioned from its initial civilian role to become a dedicated military air base.

Strategic Importance

As the operational headquarters for the 15th Strike Wing of the Philippine Air Force, Lumbia Air Base plays a crucial role in the military landscape of the Philippines. In order to sustain both regional stability and national security, this wing is responsible for providing tactical and ground air support throughout the nation. The presence of the 15th Strike Wing in Lumbia, which is based at the Danilo Atienza Air Base at Sangley Point, Cavite, greatly expands the Philippine Air Force’s operational reach and efficacy.

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The significance of the site is further highlighted by the April 28, 2014, signing of the Enhanced Defense Cooperation Agreement (EDCA). By permitting the rotational presence of American troops in “agreed locations” around the Philippines, this agreement was intended to strengthen security cooperation between the United States and the Philippines. Lumbia Air Base was named as one of the principal locations for US military operations under EDCA. This partnership has been strengthened by recent advances, despite some implementation delays and difficulties. The Philippines and the United States expanded the EDCA to encompass more sites in 2023, which is noteworthy since it improved their combined military capability and strategic placement.

Recent cooperative efforts and joint exercises under EDCA have brought the base’s strategic importance to light. For example, the 2024 Balikatan military exercises featured over 16,000 participants from the United States, the Philippines, and allies, demonstrating cutting edge interoperability and training.

Current Operations and Facilities

Lumbia Air Base, a crucial component of the Philippine Air Force (PAF) network, boasts an exceptional runway and airfield capable of supporting a wide array of military activities. Once serving civilian flights until 2013, it now operates solely for military purposes, signifying its strategic significance. Ongoing renovations and expansions of the runway are set to accommodate more aircraft and boost operational capabilities. These improvements align with broader modernization efforts under the Enhanced Defense Cooperation Agreement (EDCA) with the United States, addressing growing regional security demands, particularly in the Indo-Pacific region.

The 15th Strike Wing, stationed at Lumbia Air Base, plays a pivotal role in both regional security and national defense. On May 17, 2024, the Philippine Air Force welcomed the final two of six Turkish Aerospace Industries (TAI) T-129 ‘Atak’ helicopters, tail numbers 1505 and 1506, at Major Danilo Atienza Air Base in Cavite. This acquisition, part of the Horizon 2 phase of the AFP Modernization Program, stems from a $269 million government-to-government agreement with Turkey.

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Renowned for their versatility in various operational conditions, the T-129 ‘Atak’ helicopters are expected to significantly enhance the air force’s capabilities in urban warfare, aerial reconnaissance, and counter-insurgency operations. These twin-engine helicopters come equipped with advanced fire support technologies, precise weaponry, and state-of-the-art observation and targeting systems. Following technical checks completed upon their arrival in the Philippines on November 29, 2023, the helicopters were officially commissioned in May 2024.

These developments underscore the Philippines’ commitment to bolstering national defense and enhancing interoperability with allied forces. The ongoing infrastructure upgrades at Lumbia Air Base reflect a strategic focus on defending territorial claims and improving defense readiness, particularly in response to rising tensions in the South China Sea and surrounding regions.

Geopolitical Context

The security issues in Mindanao are critical given the geopolitical setting of the Philippines. Insurgency and terrorism continue to pose serious risks to the region. The Marawi Siege in 2017, which witnessed fierce urban combat between militants connected with the Islamic State (IS) and Philippine government troops, is one of the noteworthy instances involving the IS’s increased activity.

As of 2024, the Philippine government continues to place a high priority on counterterrorism and counterinsurgency efforts. The Philippine Armed Forces (AFP) are still carrying out massive operations to break up terrorist networks and put an end to insurgency.

The Philippines has increased its collaboration with both regional and international partners in response to these threats. The country’s counterterrorism and counterinsurgency capabilities have been strengthened thanks in large part to the Enhanced Defense Cooperation Agreement (EDCA) with the United States. The United States offers training, intelligence sharing, and logistical support, all of which greatly improve the AFP’s operational efficacy.

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The Philippines’ connections and alliances are vital in determining security dynamics in the region. In order to handle cross-border security challenges and improve regional stability, cooperation with ASEAN has been essential. By giving member states a forum to exchange intelligence and coordinate responses to extremist threats, the ASEAN regional framework promotes cooperation on counterterrorism initiatives and disaster relief efforts.

Beyond ASEAN, the Philippines interact with other international allies. The nation’s strategic alliances with countries like the United States, Australia, and Japan reinforce a wider security net that upholds peace and stability in the area.

Future Prospects

The strategic aims and regional aspirations of the Philippines position it for notable gains in both military prowess and infrastructure.

The nation is concentrating on significant infrastructure expansions and upgrades in 2024 as part of a larger economic and security plan. The construction of military facilities and transportation networks are important initiatives that will improve both the defense and civilian infrastructure. It is anticipated that the new $6 billion infrastructure investment plan will improve connectivity and update vital transportation linkages, promoting economic expansion and strategic mobility.

Through the Enhanced Defense Cooperation Agreement (EDCA), the Philippines is looking into possibilities for a larger U.S. military deployment. This entails increasing the number of cooperative training and exercise sessions as well as possibly enhancing the infrastructure to accommodate a greater number of US soldiers. Notably, the expanding strategic alliance between the United States and the Philippines is reflected in the joint drills, which have been expanded to incorporate more difficult scenarios near contentious locations like the South China Sea. Training sessions like the Balikatan drills, which assessed tactical integration and endurance, demonstrate the continuous dedication to enhancing defense capabilities.

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The Philippines’ developing strategic posture is intimately linked to its long-term objectives for maintaining regional stability. The nation seeks to manage its complex relationships with its neighbors, especially China, while enhancing its defense capabilities and regional influence. The Philippines is attempting to strike a balance between its security requirements and diplomatic commitments while tensions in the South China Sea continue. Enhancing defense readiness and taking part in regional security frameworks are part of the strategic aim to guarantee a stable and secure marine environment.

Furthermore, the Philippines is dedicated to maintaining a balance in its relations with its neighbors by participating in multilateral agreements and strategic alliances. The necessity of regional cooperation in accomplishing sustainable development goals and upholding peace is emphasized in the UN Sustainable Development Cooperation Framework for 2024–2028. The strategic perspective of the Philippines involves utilizing these global alliances to advance stability and proficiently handle crises within the region.

End Point

Lumbia Air Base exemplifies the Philippines’ strategic approach to increase its defense infrastructure and regional security, with its sophisticated runway and airfield playing a critical role in military operations. The ongoing modernization initiatives, driven by the Enhanced Defense Cooperation Agreement with the United States, reflect the nation’s commitment to strengthening its defense posture and operational readiness. Looking ahead, the future of Lumbia Air Base and the Philippines’ broader defense strategy will be shaped by evolving regional dynamics and strategic alliances, with a continued emphasis on infrastructure development and enhanced military cooperation with international partners, solidifying the Philippines’ position in the Indo-Pacific region.

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