Dependence of Middle East on Oil Sector - Essay Example

Should the Middle East countries depend on the oil for their economy? Arguments against heavy dependence of Middle East on oil sector Introduction The Middle East is a region that mainly comprises a major part of western Asia and Egypt. The region by definition include states or territories such as Turkey, Syria, Bahrain, Cyprus, Egypt, Iraq, Iran, Israel, Jordan, Lebanon, Qatar, Saudi Arabia, Yemen, Kuwait and the United Arab Emirates. Presently, the Middle East is the centre of gravity of the global oil industry from geographical perspective. However, the scenario was not the same until the early 20th century, when the Middle Eastern economy faced lowest level of economic, socio-cultural and political development. As the vast oil reserves were discovered, the economy or group of economies experienced significant changes in various macro-economic aspects (Tétreault). From business point of view, oil is not only a fuel but also an object for trade. Many authors and academicians agreed that it a very important source of foreign exchange and contributor to economic development. Middle East’s aggregate oil reserves are accountable for approximately 66% of total oil supply in the world. Monopoly in oil industry has resulted in wealth creation at a rapid pace in majority of countries in the region. Apart from the vast reserves, another reason behind oil monopoly of Middle Eastern (ME) countries is that these countries have been a great support to the world economy during major oil and energy crisis in 1979-81 and 1985-86. However, the oil industry is also a reason of economic misery in the ME region, it has resulted in power intervention, political corruption and militarization (Tétreault; Toft 7265-7274). Author’s opinion Oil is considered as a resource of paramount importance in domestic as well as international economic and political environment from importers’ as well as exporters’ point of view. While oil is the main source of economic development and global recognition for ME countries, the ME economy does suffer from various disturbances as a cost of owning the largest reserve of the lucrative resource. It was observed during the study that the oil wealth has created national economic distortion and imbalance in power and wealth distribution. Keeping in view the disadvantages of oil as a source of economic development, the paper presents arguments against the heavy dependence of ME economy on oil as a source of economic sustenance. Why oil is important in Middle East? The primary reason behind tremendous importance of oil in the Middle East is its role in the world economy. Oil is a source of national importance not only to small developing economies but also to major developed economies such as United States of America and Europe. Majority of the ME countries are oil rich and the situation is such in these countries that whoever owns a land therein, control the oil under it. The discovery of hydrocarbon reservoirs and further utilisation of the same has significantly changes economic dynamics of the ME countries, especially, that of the oil-rich ones (Hilborn, Walters and Ludwig 45-67). The Middle Eastern region has been economically as well as ecologically deprived prior to oil discovery with extreme poverty and little scope of being a part of international trade. However, the situation changed dramatically as revenue and royalties started flowing steadily in the economy from exploration as well sale of oil. Oil significantly improved gross domestic product (GDP) of various countries such as Oman, Qatar, Saudi Arabia, Bahrain and Kuwait. The countries also witnessed exceptional improvement in their foreign exchange reserves. Apart from monetary achievement, employment generation rate of these countries also increased rapidly as exploration of oil field involved creation of sizeable amount of jobs. In this context, it is also important to note that the Middle East attracted to work force from other countries as well. Development of oil industry invited economic modernisation in terms of rapid development of infrastructure, construction of offices, hospitals, schools and universities, development of tourism sector, inflow o foreign investment and improvement in the living condition of the local citizens (Salim, Hassan and Shafiei 350-360). When the financial crisis spurred in 2008, the most affected economies were the developed countries such as the United States and Europe. The crisis could have had worst impact on the gulf countries given non-existence of oil industry. However, the accumulated revenue from oil boom till 2008 acted as a cushion for these countries to combat the crisis, though significant decline in demand and price of oil was observed. In addition to that, oil being a resource of international importance structured the business sector in an organised manner (ICEAW). Author’s opinion It was observed in the study that the value of oil in world economy is equivalent to that of any hard currency. Prior to oil discovery, the condition of ME countries was equivalent to most of poverty ridden underdeveloped countries worldwide. Post financial crisis, the GDP of the ME countries declined but not to any extreme extent, especially for the oil exporters. Additionally, various policies and strategies were introduced for monitoring sectors that are directly and indirectly related to the oil industry. Thus, oil is of paramount importance to ME economy and is also known as liquid gold in these countries. Disadvantage of heavy dependence of ME countries on oil Oil boom has benefited ME economy in a number of ways but several challenges are associated with increasing development of the oil industry in various ME countries. In general, oil is a non-renewable resource, which means that it would not last forever and additionally, being a fossil fuel, its extraction, processing and transportation has significantly adverse impact on the environment (Bahel 267–280). In this section, the adversity of Middle East’s heavy oil dependence from environmental and political perspective will be discussed in a detailed manner. Environmental impact It has already been discussed that oil is a resource of global significant and every country needs it. As a result, any country or organisation would go to any length to have guaranteed access to free flow of the same. Going by the situation that is unfolding in ME countries, it can be expected that the torture on natural environment will not stop until the oil wells run dry. Production of oil in Middle East has improved its economic position significantly but at the same time, has caused severe damage to its natural environment. The major by-product of oil production is the oil wastes which are highly toxic in nature. In addition, drilling in oil fields also generate sufficient amount air pollution. In a number of areas, underground oil and water sources are closely located and excessive drilling during extraction result in seeping of crude oil in water sources. The other consequences of excessive dependence on oil sector are oil spill, toxic dump in water and land areas and destruction of marine lives. Author’s opinion It is ironical that oil is found in abundance in Middle East but not water. The water sources are limited in the region and therefore, polluted underground water can be a cause of havoc in the economy as national health is a major concern. It has been observed that oil extraction wreaks heavily surrounding areas and habitats therein. Moreover, oil spill during transportation is highly dangerous for sea species such as endangered plants and sea animals. Furthermore, crude oil processing involves a variety of toxic chemicals and the wastes are even more toxic which are generally dumped either in water sources or in landfills, consequently polluting both. Thus from extraction to transportation, the risk of damaging environmental components is very high. Political and economic impact If the environmental adversity is not adequate, there are sufficient political and economic evidences that justify that Middle East should discontinue its heavy dependence on oil industry. In the past as well as in recent years, it has been observed that aspiration to control the oil sector has resulted in rise of several conflicts as well as war-like situations in Middle Eastern countries. In this context, it is noteworthy that not every economy in the ME region is an oil-rich countries and the condition of the non-oil producing countries such as, Jordan, Libya, Tunisia and Yemen, is similar to that of various underdeveloped countries worldwide. Most of these countries have high level of unemployment, poor infrastructure, limited access to resources of basic needs and increased level of illegal activities. In addition, intrastate conflicts in oil exporting countries have adverse impact on oil importing countries in the form of serious risk to their energy security. In a study, World Bank economists Paul Collier and Anke Hoeffler pointed out that the risk on intrastate wars increases as natural resources such as oil and diamond are traded at a larger scale. Some researchers also warned that as these resources gain importance in the business world as commodity, the illegal activities of national concern such as terrorism and insurgency also heightens in a progressive manner. It is a major challenge for oil-rich countries to minimise their reliance on the oil export but it is important for minimising economic vulnerability. Studies show that as oil earnings enter an economy through various public finance channels, significant volatility is stimulated in the fiscal position of the economy. Another reason that supports that Middle East should reduce its reliance on oil reserves is Dutch disease. The Dutch disease is defined as an economic phenomenon where a country depends heavily on trading its natural resources for economic development. The phenomenon explains that extreme exploration of natural resources ultimately results in decline in growth of other sectors and relevant competitiveness (Tétreault; Toft 7265-7274). Author’s opinion Oil dependence has not only affected the natural environment of ME region but also its political and economic environment. The countries such as Egypt, Syria, Libya and others are constantly becoming prey of war-like situations due to collision over exercising control on oil fields. Furthermore, it was observed that the economies are not stable either due to excessive dependence on oil, which is causing weakening of other sectors such as manufacturing, textile and agriculture. Author’s Recommendations: Alternative sources of energy in the Middle East region Given the facts and arguments that have been presented in the previous section, it can be ascertained that oil is a global necessity but it is inappropriate for any country to depend entirely on it for its economic development. In recent years, intrastate conflicts and wars over controlling oil sector has been witnessed to grow at a rapid rate in Middle East region, resulting in economic, social and political imbalance. Therefore, it is strongly recommended that the economies in the region adopt other measures to support their global standing in the international market. The economy can select from other renewable sources of energy such as water, solar, wind and electric energy. These sources of energy are considered as clean sources as they have minimum impact on the environment during processing and distribution. Apart from oil, another ample source of energy to the gulf countries is the solar energy. The strength of solar energy in desert region of the gulf is comparatively high to other countries across the world. Generally tapping the solar energy and converting it to electricity require investment lesser than that by the oil sector. Moreover, solar panels and other equipments that are necessary in solar power plants is equally environment friendly. Apart from solar energy, other sources of economic development in Middle East can be tourism industry and agro industry. If the ME countries develop strong agricultural sector, it can minimise its import cost on agricultural produces. In addition, it is important to note that Middle East has rich cultural heritage in the form of historical monuments and places in various locations, namely, Abu Dhabi, Dubai, Jerusalem, Cairo, Kuwait, Muscat and others. The ME economy should develop its tourism industry by promoting these places, which again can be another source of revenue for the respective countries. Conclusion The oil sector has provided Middle East the requisite economic boost when it needed. Alongside, the discovery of oil reserves has improved living standard of citizens in many oil-rich countries but oil like other fossil fuels is a non-renewable resource and has certain adverse impact on the environment. Moreover, it was perceived that one of the major sources of economic and political instability in the Middle East zone is the oil industry. It was observed that controlling the oil sector present the controller with monopolistic power and economic control which are anything but long term in nature. It was also witnessed that the greater exploitation of oil sector reduces competitiveness of the industrial sectors and create economic imbalance. Therefore, it is very important that the ME economy seeks other alternative sources of sustainable economic development. In that context, development of agricultural sector, tourism industry and solar energy sector has been recommended in the paper. Overall, it was observed that despite the significant opportunities presented by the oil sector, excess exploitation of the same has high political, economical and social cost. Works cited Bahel, Eric. “Optimal management of strategic reserves of nonrenewable natural resources.” Journal of Environmental Economics and Management 61 (2011): 267–280. Print. Hilborn, Ray, Carl J. Walters and Donald Ludwig. "Sustainable exploitation of renewable resources." Annual Review of Ecology and Systematics (1995): 45-67. Print. ICEAW. “Middle East economic insight: quarterly briefing.” Institute of Chartered Accountants in England and Wales (2011): 3-7. PDF file. Misiti, Teresa, Ulas Tezel, and Spyros G. Pavlostathis. "Fate and effect of naphthenic acids on oil refinery activated sludge wastewater treatment systems." Water research 47.1 (2013): 449-460. Print. Salim, R. A., Kamrul Hassan and Sahar Shafiei. "Renewable and non-renewable energy consumption and economic activities: Further evidence from OECD countries." Energy Economics 44 (2014): 350-360. Print. Tétreault, Mary Ann. "The Political Economy of Middle Eastern Oil."Understanding the Contemporary Middle East/Boulder, CO: Lynne Rienner (2008): 255-279. PDF file. Toft, Peter. "Intrastate conflict in oil producing states: A threat to global oil supply?." Energy Policy 39.11 (2011): 7265-7274. Print. Bibliography Militaru, Mirela, et al. "Solar Energy Use in Dryers as an Alternative Energy Source in Agriculture." Bulletin of University of Agricultural Sciences and Veterinary Medicine Cluj-Napoca. Agriculture 67.1 (2010): 187-193. Print. Mekhilef, S., R. Saidur, and A. Safari. "A review on solar energy use in industries." Renewable and Sustainable Energy Reviews 15.4 (2011): 1777-1790. Print. World Travel & Tourism Council. “Travel & tourism economic impact 2014 on Middle East.” World Travel & Tourism Council (2014): 1-17. PDF file. 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