Why Is Oil Such an Important Resource in the Middle East - Essay Example

Introduction: No product in the modern history of mankind has evoked so much violence, greed or passion as oil, known to the technical world as crude oil or petroleum. The first part of its name is adapted form Greek for rack and the word is ‘petra’. The second part is adapted from the Latin for oil and the word is ‘oleuml. So put together, the word will be read as rock oil, which is an apt reference. This paper will focus on the importance of oil in the Middle East. The oil industry is by far the biggest industry in the world. So it is clear that oil is a precious commodity and those countries who have been blessed with it will value it highly. The first step is to explore an area for the existence of oil. Once oil has been located, the commercial viability of the well, as it is commonly referred to, has to be ascertained. This depends on the quantity of oil that is available for extraction. Another factor is the quality of oil. Quality is determined by the percentage of sulphur and asphalt found in oil. On the basis of this content, oil is classified into three types. The best quality is known as light crude. This type of oil will be a golden brown in colour it will flow more easily and has low sulphur and asphalt content. Heavy crude, on the other hand will be thicker and dark in colour and its sulphur and asphalt content will be high. The third category, known as medium crude, has characteristics that fall between light and heavy crude. So the best quality oil is light crude, followed by medium, with heavy crude having the poorest quality. “Crude oil is a mixture of many substances, mainly compounds of carbon and hydrogen, together with varying proportions of sulphur.” 1 The awareness of oil and its use has been in vogue even 2000 years ago. Its uses were limited mainly to cooking and lighting since technology was primitive in those days. Since drilling methods were not in existence at that time, only that oil which naturally came up to the surface due to pressure could be used. Commercial drilling using crude techniques started in the United States about 200 years ago. The pressure of oil was such that the pioneers in this field often found it difficult to stop the oil gushing out form the wells. But as time passed and modern drilling methods came into to being, exploration has become more efficient and less wasteful. From the beginning of the 20th century, oil was explored and extracted from many regions of the worlds. A majority of the oil companies operating were privately owned. These companies were able to get lease agreements that were skewed in their favour, from the governments of the oil producing countries. Lease periods ran for up to 99 years and the company was required to pay only a small royalty that lay between 10 to 12% of profit. These companies also decided to assign quotas to different oil producing regions to keep the price of oil high. The producer countries had no say in fixing the price of their won oil. By the 19740’s through the 1970’s and beyond oil producers began to nationalise the privately owned oil companies. They also formed the Organisation of Oil Exporting Countries (OPEC) in 1960 to have better control of oil prices. This organisation is now the most powerful body in the field of petroleum and wields considerable influence in fixing of prices and control on the production of oil of member countries. All producers who have a substantial amount of oil to export can be members of OPEC. Oil like many other natural resources in a non-renewable commodity. This indicates that, sometime in the future, the supply of oil will run out. There are differences of opinion as to when this will happen. Opinions differ from the next fifty years to 400 years. This situation makes the commodity all the more valuable. Why oil is valuable resource in the Middle East? Before specifically answering this issue, it would be appropriate to see why oil itself is considered to be of value. There are three reasons why oil is valuable. The first one is that oil is needed to produce energy. The second is that like most natural resources, oil is not distributed evenly on Earth. The third reason is that the quantity of oil is limited and it is not renewable. Uses of Oil: Oil that is extracted from the ground cannot used as it is. It has to be refined and from that refining process, petroleum is made. Petroleum comprises of many products, the most well known being petrol and diesel. Other products include liquefied petroleum gas or LPG, kerosene, gas oil, naphtha, gas oil and fuel oil. Many related products can be made out of this refining process and they include lubricating oils and asphalt. Fertilisers, perfumes and insecticides are also made with the help of petroleum. Petrochemicals are another series of products that can be made with the help of petroleum. More than 4000 types of petrochemical products have been invented. Plastic and synthetic fibres are made using these petrochemicals. Many of the products we use today and take for granted would not in existence if crude oil did not exist in this world. “Burning crude oil itself is of limited use. To extract the maximum value from crude, it first needs to be refined into petroleum products.” 2 The different types of petroleum products had been discussed above. The versatility of uses or applications of oil will also give a picture of its value these products touch almost every aspect of our daily lives. Transportation: One of the major areas of application of oil is the transportation industry. Apart from diesel, petrol, aviation fuel and kerosene used to power engines, many other products also need petroleum for its production. They include brake fluid, tyres, the asphalt used in paving roads, paint, lubrication oil and all plastic materials used in manufacture of the different modes of transport. The private transportation industry, the commercial transportation, the aviation industry are the major consumers of oil in the world. Military: The defence industry of all the countries in the world is one of the biggest consumers of oil in the world. Countries with large military forces need more for their use than others. In this area too, the US is the largest consumer of oil. Other major military powers include UK, Germany, Russia and India. Home: Liquefied petroleum gas, a product that is extracted along with oil is extensively used for cooking in many homes. Apart from this, some of the common products mentioned above, like paint and plastics also need oil for its manufacture. Power generation: Coal is the number one source for power generation in the world. Oil is used for power generation though not extensively. This is through fuel used by generators to produce commercial power. A small percentage is used for powering generators of homes and offices. Many large companies also have captive power to offset for any power failures. Other areas: The fertilizer, paint and pesticide industry need oil for the manufacture of their products. From this brief appraisal, it can be seen how valuable this product is. The main use of petroleum is for energy production. The massive demand for energy has increased the value and price of petroleum in the world. Almost 38% of the world’s energy needs is obtained from oil with nuclear power supplying just 9%. Even though this is expected to fall by 4% due to preference for other renewable sources of energy like nuclear power, the increase in demand will offset this fall by a huge margin. An estimate of increase in energy demand is given below. The primary component of liquids in the chart below is oil. Energy Consumption: By the end of 2030 the increase in energy consumption is estimated to increase by 57%. The world consumption of oil was 83 million barrels of oil per day. By 2015 this consumption will rise to 97 million barrels of oil. By 2030 this consumption is expected to touch 115 million barrels per day. “World marketed energy consumption is projected to increase by 57 percent from 2004 to 2030.” 3 These figures prove that oil is an extremely valuable natural resource for any country in the world. With these facts in mind an analysis of the countries in the Middle East can be done. The increase in price of oil: The price of oil has shown a roller coaster ride, but the rise in price has been more than its fall resulting in a steady average increase in price.. This can be seen from the chart below. Fall in prices is mainly due to increased oil production, either by existing producers or new entrants into the field. A rise is, in most cases, is due to a purposeful cut in oil production by general consensus by organisations like OPEC, man made conflicts like invasion of Iraq, sanctions against export of oil, natural disasters, individual country wise price hikes and production (usually in defiance of organisations like OPEC) etc. To cite a few instances, a rise in price in 1992 was caused by Saudi Arabia increasing its oil price to USD 34. A fall in world wide demand for oil cased a fall in prices in 2001. A rise in prices happened because OPEC members decided to cut oil production by 1.2 million dollars per day in 2006 followed by a further cut in 2007. “This chronology was originally published by the Department of Energys Office of the Strategic Petroleum Reserve, Analysis Division. Updates for 1995-2006 are from the Energy Information Administration.” 4 The important countries in the Middle East are Bahrain, Cyprus, Egypt, Iran, Iraq, Jordan, Kuwait, Lebanon, Oman, Morocco, Palestine, Qatar, Saudi Arabia, Syria, Turkey, UAE, UAE, Algeria, Tunisia, Dijbouti, Yemen and Israel. A comparison with the above chart shows that 5 of the major producers out of the 14 countries are from the Middle East. They are Saudi Arabia, Iran, UAE, Kuwait and Iraq. Distribution of oil reserves: Estimation of oil reserves is not very accurate. This is because finding the exact quantity of underground oil is difficult. An estimate is easy if it was stored in containers above ground, since an valuation can be done by measuring the volume in the tanks. This is not possible when the product is underground. The top five producers in the Middle East, along with rest of the countries in that region accounts for more than 57% of oil reserves in the world. By comparison, North America’s share is 17% and Western Europe accounts for just 1% of the reserves. 5 In contrast to availability, the major consumers are the US, Japan, China, Russia, Germany and India. This imbalance between reserves and demand will make oil extremely valuable to those who own it. 6 The balance of distribution of reserves may change as new wells and areas of reserves are being discovered. Russia is expected to have huge reserves and India is also actively trying to find oil on land and its territorial waters. The importance of oil for Middle East countries: Now that the value has been of oil has been established, its value with respect to the Middle East countries. The region is experiencing very good economic growth with the price of oil touching an all time high. It is also to their credit that they have learned a lot from their past mistakes. The first oil boom was in the 1970’s and flush with money, they threw economic caution to the winds, spending money on wasteful and unproductive expenditure. Saudi Arabia which had a domestic debt of 97% six years back have managed to bring it down to a more realistic 41%. The general growth rate in the region also improved from 5.6% in 2004 to 6% last year. This rate was only 3.5% in the latter half of the 1980’s. But this boom did not affect those countries who were poor in oil resources. Countries like Egypt, Jordan, Djibouti, Lebanon and Morocco could only attain a growth of 4% and Lebanon’s growth rate went down by 1% to 5% growth. But the steps taken by the oil poor economies are in the right direction. They have begun to ease trade and business regulations to attract investments in other areas. “The Middle East is in the midst of an oil boom reminiscent of the 1970s and ‘80s, but this time, instead of spending most of their profits, oil producing countries are managing the windfall with restraint, according to a new World Bank report on the Middle East and North Africa region.” 7 Conclusion: It is true that the oil rich countries in the area are having a healthy growth rate. But over dependency on oil has negative repercussions in the long run. This is the case with all countries rich in any resource. What happens in such a situation is that these economies concentrate on its exploitation, ignoring other areas essential fro growth. Oil exploration needs a lot of unskilled labour that can be provided by these countries without difficulty. But in other areas of the economy, they have to be dependent on an expatriate labour force. The situation will lead to a situation whereby the economy will be unable to enter into areas that need technical knowledge. Countries like India, China and Indonesia have been able to exploit their technical expertise with the advent of globalisation and have begun to reap the benefits of outsourcing. “Within four years China will have overtaken Germany; Japan by 2015 and crossed the S by 2039 to become the worlds largest economy (All in US dollar terms). Within thirty years India should have become the third largest economy in the world.” 8 The Middle East economies, at present are not in a position to do so. What they have to focus on is to build an infrastructure that will enable them to compete globally with other developing countries. Opening up of markets and easing of trade regulations have to be looked into very seriously. Building institutions for primary and higher education should be open for a larger majority of the population. The citizens should be educated as to the benefits of technical education. This is a long term process, but it has to be done on a war footing. There should be cooperation between those economies regarding all areas of growth. Sincere efforts should be made to reduce conflicts and tensions existing in the region. Conflicts appear to be inevitable because of the nature and value of the commodity they have with them, but it efforts should be made to bring them down. The best thing they could do is to emulate Dubai, which has managed to attain splendid growth rate in spite of having no oil. Opening up trade zones and other activities that encourage foreign investment should be considered. What they should seriously take into account is that oil resources are not renewable. Bibliography Annual Oil Market Chronology. (2007). [online]. Energy Information Administration. 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