The Political Economy of Oil in the Middle East - Case Study Example

Middle East Oil and its political and economic impact By Business of The Political Economy of Oil in Middle East Introduction The Middle East is the geographic midpoint of attractiveness for the world’s oil industry. Oil is of fundamental significance in both the international and domestic politics of almost each nation in the region. This includes both the oil importers and exporters. Oil is the most precious resource a country posses. It can be used directly as fuel and the surplus for exports and this earns a country foreign exchange. However, the treasured blessing oil has turned to a curse to numerous producing developing nations (LONGRIGG, 1967). This has continually invited primary power intervention, political corruption and even foreign debts. The oil wealth has distorted national economies in some nations. The oil curse is associated to a colonial past; however, its social and economic influence differs from other forms of colonial mistreatment. Oil production is locally restricted. Its technology and capital power also isolate it from the rest of the world’s economy. This makes it less devastating to the local life. The relative ease with which foreigners were able to control oil utilization in their own interests made it less essential for them to suppress the local populace. On the other hand, the oil money immensely changed the balance of power between the state and society in oil exporting nations and this gave numerous rulers the potential to repress popular institutions and thwart traditional checks on their authority. In essence, oil has diminished legal political participation in the expanse as a whole (STEVENS, 1976). The paper examines the political economy of oil in the Middle East’s lucrative resource-oil and proposes a fresh relative perspective that centres on a question of wider interest: how does oil shape the economic and political development? This paper argues that the oil curse form a wider curse, which can be caused by international aid and government manipulation of pricing .This paper represents a rigorous narrative of the political and economic status of the Middle East. As appoint of departure, the Middle East s’ fundamental role in the global oil stems partially from the richness of its petroleum resources. This is partially attributed to the long-established model of proficient exploitation of these resources and partially from its central geographic position. The Middle East reserves from almost 70% of the world total oil production (TEMPEST, 1992). The productivity is high consequently, low cost are low. It is imperative to note that heavy investments in pipeline construction and tankers have immensely increased the production of oil in the Middle East and consequent low carrying cost. For instance, the concessions areas have been extensively large and respective terms similar. In addition, the concessions have been owned and managed by big companies from US, Germany, and Europe. Oil industry in the Middle East This is an area whose other natural resources are trivial, the discovery and exploitation of petroleum had massive significance on the economic, social and political statuses. To the oil, producing nations the revenues from oil production are the fundamental economic reality. Oil is one indigenous revenue source, which pay for programs development, purchase of arms, and acquire the myriad of technological luxuries of the 21st century. For instance, the oil revenue comprises of 66% of the Iraq government revenues, 80% and 50% in Saudi (OREN, 2007) .The oil attributed products that are imported and the international exchange received from the oil local expenditures trading companies from another percentage of the government revenues in the oil producing nations. Other benefits for the UAR include revenues from the tanker tolls along the Suez Canal and pipelines from Syria. It is notable that all the nations in the Middle East are heavily dependent on revenues from oil sales. In case of losing the oil production, then these nations would loose a lot in terms of economic growth, if they will not find an alternative source of revenue. This means that if these nations are derived of the oil revenues, they could run into economic turmoil and most likely political chaos. Let us consider Kuwait, a nation with the largest proven oil in the world (OREN, 2007). The ruler has immensely invested in the UK government and in the event the present revenues cease, the nation can run using the invested revenues, however, if the British government freezes the intended revenues the nation will crack down. On equal measure, the Saudi Arabia counterpart would face serious economic ruin and most likely political turmoil because the nation has not built up any capital reserves and it would be extremely difficult and probably impossible to run the government operations, hence reducing the effectiveness to be able to attain its mandate for its people (OREN, 2007). Similarly, Iran and Iraq possess other alternative sources of revenue; however, in case of cut in the supply, they could face comic dislocation and drastic reductions in their development, particularly the government projects. This study finds out that, in all these nations, considerable and prolonged dispossession of oil revenue would generate dislocation and unrest. The economy would be affected significantly, however not to an extent to which political stability can be threatened. For the case of agreements with other partnering companies for exploration and trading matters, the Middle East nations could scramble for oil company investments. However, the Oil company joint ventures and concession patterns narrowed the advantage of governments in the Middle East. Joint ventures are widespread in the oil industry because of the extent of the capital intensity and the high level of riskiness. For example, the Kuwait Oil Company (KOC) is jointly owned and it conducts business in Kuwait as a single company (OREN, 2007). This system of controlling Oil industry resulted to the creation of a privilege for multinational corporations to control over the total global oil supplies because information of exploration and production is shared amongst themselves. This trend has discouraged competition among the partners to develop new concessions. On the same point, this study realizes that Kuwait had a staid problem of getting its own concession since the British government limited it due to the treaties signed with Kuwait indicating that it should determine the companies to carry out explorations in the country. This treaty never allowed any exploration agreement with a non-British company (OREN, 2007). This concession limited Kuwait and required the Kuwait government to adhere to the terms of the KOC, which gave it a contract of 90 years to explore, find and produce oil over the whole land of the nation. The implications of this concession included the government to face legal challenges from such companies as BP and Gulf. Even more reaction from the company home governments- the UK and US. Similarly, for the case, of the Iranian government, it nationalized oil in 1951, with only one parent company-BP characterizing its concession. It is imperative to note that, the one-company-one nation organization of concessions throughout almost all of the Middle East propelled the region to the marginal supplier of oil to the global market. However, Libya which discovered its oil much later in 1970s, did not practice this kind of concessions and this contributed to the spearheading of the assault on the oil companies that aggravated the oil revolution of the 1970s. This source of oil helped in balancing the global supply and demand oil curves (OREN, 2007). International Oil Politics before Oil Revolution The global oil cartel had ability to repress production and decrease the competition in the oil markets in 1930s. This was a self-centred move, which affected the oil consumers due to increased prices. Around this time, the world demand for oil went down considerably dues to the economic depression. The great depression caused immense impacts on their oil companies, which compelled most of them to move out of the oil trading market and this reduced the oil supplies. This followed a reduced level of exports from the two primary exporters- Mexico and the Soviet. This situation of reduced oil supply from the two primary suppliers caused an ease in the level of competition. One of the primary reasons that made Joseph Stalin, the leader of the Soviet Union to reduce oil supply was the need to embrace the other fuels. On the other hand, governments and companies in the developed nations worked jointly to regulate production with the intent of protecting their local factories and foreign investments (LENCZOWSKI, 1976). Guidelines were evenly applied in the US, which experienced anti-trust custom. The military needs during the Second World War made oil to be at the premium enhancing the oil companies to make money despite local price controls and losses of production from the war theatres. Expansive usage of oil oriented machines and vehicles saw immense exploration and oil development during this war. This led to the increased world production potential. However, there were issues of harder to solve when the competing companies were located at diverse nations. There was rivalry between the UK based and US based companies over which one is allowed to supply oil and its products to the British Empire and the Commonwealth (LENCZOWSKI, 1976). This rivalry contributed to immense financial conflicts during the immediate post war period. This resulted to the agreement of the sterling –dollar problem settled in support of companies of stronger US. There was vast lobbying of the US local oil producers to open a sterling-dollar oil market to avoid competition from the US multinationals which would import oil and sell it cheaply in the US markets thus depressing prices and consequent profit margin reduction. This study reveals that, by the end of the Second World War, overseas oil was regarded as a fundamental component of national power. This belief saw the US allow the government to join hands with the Chevron and Texaco to from Aramco in buying the Saudi Arabian concessions, which created a leeway of accessing strategic foreign oil supplies. These activities saw expansive control of foreign oil supplies embraced by these states, as they believed that foreign oil formed an integral part of international power and prestige. The US and UK activities in the Middle East helped bringing down the old oil system. Breaking the old oil system According to the economic theory, an industry where companies make massive profits quickly attracts new companies whose competitive trend brings down the profits for all. This is precisely what occurred in the global oil industry. The accomplishment of even imperfect cartel organizations made oil enormously profitable and oil firms amid the world’s largest and richest firms. This led to the seven oil primary players increasingly facing stiff competition from the petite private companies such as the Occidental and Getty. The primary players were ready to do anything at their disposal to sustain their inserts. For instance, a group of the US companies claimed and received a portion of the lucrative Iranian concession. In addition, the state-owned corporation caused taut competition. The French oil company, CFP, aggravated its efforts to discover and develop oil in the French colonies, which included Algeria. This study reveals that, the Algerian oil added superior image to the France as a great power and to the country’s autonomy. This made France resist the struggle for the Algerian independence so fiercely and for a long time. Similarly, the Italian national oil company was a further belligerent competitor for concessions. It challenged the old oil system dominated by the primary players by offering liberal terms for concessions. This was a contrast from the norm. However, the company did not make its threat good because of its unsuccessful exploration efforts. On equal measure, the Japanese company – the Arabian Oil Company (AOC), succeeded in purchasing the Neutral Zone concession. This Zone was jointly controlled by Kuwait and Saudi Arabia. AOC was successful because of the favourable terms it offered. The enthusiasm of the Japanese and other primary players in the industry cheered the Middle Eastern governments to direct all their operating firms to loosen contract terms. This contributed to the increased rate of breaking from the old oil system. The sweetening of contract terms saw numerous companies compete for concessions and this contributed to good relations with the host governments. Another competitive force came from the less expected Soviet Union. Nikita loosened the Stalin policy of reducing emphasis on oil and this led to double production of oil, which was sold to the western market. This made the Soviet Union to increase its market share from 2 percent to 6 percent. Formation of OPEC The primary players in the oil industry developed the posted price system in the early 1960s to aid the host governments approximate their expected oil revenues in an easy way. The oil corporations set these prices for host governments to apply in calculating the amount of taxes to be paid. This study finds out that, a little amount of oil was sold under these posted prices, because the prices represented the accounting instruments rather than real prices or cost. The introduction of posted prices, the company gains on foreign activities were lofty. Steady posted prices quickly became a conventional industry culture. This encouraged the hoist governments to lobby for proceeds sharing and enhanced concession terms rather than claiming increase in posted prices relative to their shares. The cooperating trend amongst companies saw the companies agree to lower the posted prices in 1959. This had effect on low taxes remittances to the host governments. There was on outcry from all the affected nations. Coordination amongst the oil exporting nations was not an easy task since each nation had diverse cultural and structural pattern exhibited in the national industries. For instance, the Venezuelan industry was structured in a multiple operating firm concession model instead of the one firm-one nation pattern widespread in the Middle East. This follows that, the first effort to gain this coordination failed after upon the initiation of the Oil Consultation Commission. The commission failed because of the intensive competition and conflict existed among the Middle Eastern nations. OPEC’s Early Years The primary aim of OPEC from its inception time included assisting the host government to gain more self-sufficiency and control over their oil. The first OPEC resolution had set these objectives, which called for stabilization of crude oil prices, restitution of the posted prices to their pre-February 1959 echelon- an obligation, which oil firms consult with host government before they altered posted prices and the progression of program to certify stable oil prices by, amid other means, the guideline of production. OPEC aided its members economically by making incremental gains for proceeds they earned on their oil. The members benefited by the increased contest in the industry as a whole. Due to the difficulties in consolidating the diverse cultures and systems, the members agreed to obey the OPEC decision rule, which evolved to one that members could agree on with at least a universal denominator (KING, 2006). This decision rule enabled the members to fit in every circumstance and potential with the understanding that if any nation could gain an advantage on its own, which is an improvement on the universal objective. This leapfrogging model dictated by OPEC’s political position. Despite OPEC’s international image, the US refused to recognize it endeavours and forbade US oil companies to make negotiations with it. In addition, the US sidelined the OPEC members in oil trade. This move enhanced the US’s habituated practice of handling the host governments one at a time. Despite the US’s practice, OPEC’s membership continued to expand to the inclusion of the African and South Eastern nations (HOSKINS, 1976). However, rapid growth of the political and cultural differences and interests became evident. In addition, the divisional between the conservative and radical Arabs states increased the competition. The Oil Weapon The exploitation of the oil weapon goes back to 1948, when the saboteurs blew up oil systems, which included the sections of the Iraq Petroleum Company pipeline, during the scramble for Palestine control. This study evidences that the Arab nations applied the oil weapon during the Suez Canal conflict, which aggravated the oil companies and governments to create procedures to deal with oil supply interruptions. On similar occasion, in 1967, the Arab governments tried to apply the oil weapon, again by compelling an embargo against nations that supported Israel. However, this move was not successive. The inadequateness of the oil weapon was attributed to numerous reasons, which included the unwillingness of some oil reducing nations and governments to enhance embargoes. Another reason for the ineffectiveness of the oil weapon was the careful oil companies ‘supply management, which diluted the embargoes. On a similar note, the oil weapon became ineffective because of the dissention of the Arab governments (HAMILTON, 1962). All the Arab nations contested Israel; however, the cost of aggressing Israel with the oil weapon cut down on the Arab oil producers and exporters. For instance, the conservative oil exporting governments depended profoundly on the oil revenues and hence, they were not ready to lose their revenues on aggressive moves, which they believed were expensive to sustain. The Libyan Squeeze The revolution in Libya in 1969 replaced a pro-western king with a militantly anti- American colonel. Mum mar Gaddafi was in an excellent position to get Libya in of agreement into a strong economy using its oil resources. It is notable that Libya was sun-divided into over 40 concessions. Each concession had its own company undertaking the operations. The Libyan location to the Mediterranean and its fine oil resources characterised by high quality, light in weight and low sulphur content made Lybia’s oil marketable and attractive. This ensured increased and expansion market niche of Libyan oil. This situation made the Libyan authorities to isolate two companies from the group of concessions. Gaddafi policies and control of the oil reserves and the overall oil market in Libya caused numerous companies to seek ways of surviving. These ways included companies seeking joint negotiations to avoid picking off one at time. The split in negotiations’ due to diversity of interests speeded up the oil revolution. For instance, a section of the oil producing nations had sought for high prices for their oil and this was happening. The 1973 oil embargo The position of oil firms had deteriorated long before the oil revolution. The setting of procedural and substantive precedents, which reduced their power with respect with the host government, the Tehran- Iran agreements weakened them made any of them available. The USA oil companies were even in trouble at home. Domestic oil workers area was well paid despite going with the three theories. The most influential effect of embargo was to consolidate the oil price revolution. There were more bids for less spot or individual charges of crude oil during the crisis and this reduced their prestige and power considerably. The Price Bust The most staid impact of the First Gulf War for the Middle Eastern oil exporters was that it averted accommodation in the OPEC members, which might have permitted it to withstand the mugging on its price system from external forces. For example during 1979, when oil prices skyrocketed, the oil companies tried to increase the oil supply, while the consumers stopped to buy. This move brought a balanced equilibrium in the market prices. The other reason for the prolonged oil crisis in 1979 was the inadequate strategic stocks (CONGRESSIONAL QUARTERLY, INC, 2000). This situation pushed the importers and oil firms to acquire stocks and this contributed to the upward trend of oil prices. OPEC’s fear of losing customers, proceeds and market control compelled it to lower oil prices to $5 per barrel in 1985. In addition, OPEC made a decision to make compulsory production guideline scheme, which it had assumed as a voluntary standard to retrain production the year before. The intent was to penalize the price cutters internal and external of OPEC. Until 1989, OPEC members overproduced oil the prices remained relatively high. However, the overproduction move enabled the relaxation of the owned oil prices. Consider the following graph indicating the oil prices from 1970 up to October 2011. Courtesy of the OREN, M. B. (2007). Power, faith, and fantasy: America in the Middle East, 1776 to the present. New York, W.W. Norton & Co. Oil and politics in the Middle East Skyrocketed prices and the increased national independence and oil control did not miss a place in the Middle East politics. There was increased international power of OPEC in appealing for pursuit for political objectives. There existed numerous conflicts between Iran and other Arab nations over oil prices (ABIR, 1976). The oil prices disagreements were often imagined to arise from the fundamental differences in the economic interests and standing the Arab world. For instance, Iran’s aggressive nationalism in marketing oil was corresponding with its nationalism in the regional politics. Iran imagined that it would develop a potential of exporting it revolution to other Arab states, however, with OPEC’s leadership and regulation it never succeeded. Conclusion Oil has made numerous Arab world nations to be economically independent and able to enhance development strategies, which have seen numerous Arab nations form political bond, aimed at peaceful coexistence. Oil has served as an alternative for conformist attributes of power such as military coups. However, oil has installed a false sense of long-term economic safety in the minds of numerous policy makers and inventors from the oil exporting nations. List of References ABIR, M. (1976). Persian Gulf oil in Middle East and international conflicts. Jerusalem, Hebrew University of Jerusalem, the Leonard Davis Institute for International Relations. CONGRESSIONAL QUARTERLY, INC. (2000). 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