This evening I want to raise two issues. Firstly I want to make some remarks about the enormous increase in oil revenues going to the countries of MENA. Secondly I will point to an emerging geo-strategic issue that will ensure the region remains firmly in the focus of US strategists.
The Middle East and North Africa will account for 44 percent of world oil production in 2030, up from 35 percent in 2004. At the same time, the region’s importance as a gas producer and exporter will increase. Revenues from the oil and gas business in the region will soar from $313bn to $635bn and its share of global oil exports will edge up to 64 percent from 62 percent now.
According to the IEA the dependence of Japan and of the US on Middle East oil will deepen. OECD Asia will receive 90 percent of its oil imports from the region while North America will become the biggest importing region for Middle East oil at 11m b/d. At the same time, the Middle East is building more than twice as much refining capacity as Europe, Russia and North America and most of it will be export capacity meaning that the dependence will deepen downstream as well as upstream.
(As an aside: In his state of the union address a few weeks ago, President Bush vowed to reduce the US imports of MENA oil by 75 percent by 2025. I would just note that in a global market that is not how things work and that the US has a long history of grandiose energy saving schemes when prices are high but little long term success in quelling its greed for oil).
But the prominent arrival is China, which only became a net importer of oil in 1993 but will be importing over 8m b/d from the region by 2030, three-quarters of its needs.
For gas, the build up of the LNG industry facilitates increasing European and US imports and the IEA forecasts radical changes in trade patterns by 2010. Gas export to Europe are seen at 35bcm in 2010, rising to 117bcm by 2030, overtaking Asia as a main market.
On the face of it this is good news from the Middle East and North Africa. For the next quarter of a century its primary natural resources will remain not only in demand but – despite all the talk of alternative fuel – more in demand than previously. Better prices have apparently reached a new plateau well above even the top of the target range set by OPECas producers recovered from the crash at the end of the 1990s. Prices are seen dipping from current levels for a few years but then resuming their rise. A $40 a barrel average is likely in the next few years, analysts say.
As I mentioned, oil and gas export revenues will well more than double. But is this good news? Well, to start with population growth means that while revenues may be doubling, oil revenues per capita will only increase from an average of $900 to $1,100 in the period, compared with over $2,500 at the end of the 1980 peak.
At the economic level, dependence on oil has created enclaves of employment and income generation. By and large, windfall oil revenues from periods of high prices have not successfully transformed producer countries into more diverse economies.
Indeed quite the opposite has tended to happen. An effect known as the Dutch Disease has set in, whereby windfall earnings in one sector drive up the exchange rate, worsen terms of trade for other economic sectors and drive capital towards non-tradable areas of activity, primarily servicing the booming sector.
Where attempts have been made to invest oil revenues in the past, the results have been unimpressive. Throughout the Gulf the rhetoric of economic integration has been opposed by the reality of competing shipyards, aluminum production, airlines and financial service centers. Investment in education has not been matched by employment opportunities for graduates as the bulk of work has been carried out by expatriate workers.
Even in Algeria where consciousness that oil reserves were declining and the population growing fast did dictate an industrialization strategy. The non-oil sector became more and more inefficient, weighed down by the burden of oil.
An IMF study in 2003 reported: "In the last 30 years, per capital income in the oil producing countries [of MENA] declined at a rate of 1.3 percent per annum compared with an increase of 2 percent per annum in the non-oil countries. Even during the booming 1970s, oil producing countries grew, in real per capita terms, at about half the rate of non-oil producing countries in the region". [p33].
In a well known study by Sach and Warner it was seen that there is negative correlation between growth rates and resource export dependence and that the relationship holds through boom and bust.
And boom and bust is what characterizes oil income. The volatility of oil prices created enormous swings in the revenues of producer countries and these swings are generally unpredictable. The soaring prices brought about by the Iranian revolution were not foreseen nor was the plunge in prices in the late 1990s nor indeed the boom of the last two or three years.
That makes economic planning difficult even when governments have established funds to invest windfall profits. Recently, there has been a spate of newspaper articles arguing that some of the Gulf producers have learned the lessons of the past and begun systematic domestic investment and diversification – the development of Dubai as a tourist resort is given as an example.
Time will tell whether today’s oil wealth is being better managed than yesterday’s but I am skeptical whether the rulers of Gulf countries are able to overcome the structural problems created by oil dependence.
Studies of social and economic relations within oil producing countries throughout the world indicate a correlation between oil dependence and a host of ills from poor income distribution, high military expenditure, lack of democracy, and civil strife. To that we can also add, frequent tension with neighboring states over ownership of reserves.
Some of the findings of studies on the impact of commodity dependence are staggering, particularly for poorer countries. There is strong evidence to show that shifting from low oil or metals dependence to high mineral export dependence produces falling life expectancy, higher infant mortality, more malnutrition and more widespread poverty.
Indeed, for poorer developing countries it seems that major resource development projects bring more hardship than benefit while for relatively more affluent countries like Saudi Arabia the effect is more or less neutral.
In a famous study in 2000, Paul Collier produced statistical evidence linking oil in particular but other minerals to a lesser extent to civil war. He found the chances of a civil war taking place in a five-year period in a country with no commodity export dependence to be just 0.5 percent while for country deriving 32 percent of GDP from such exports, the likelihood rose to an amazing 22 percent.
In a few days time Mauritania on the far west of the Arab world will become an oil exporter. On the fact of it this will transform the economy of one of the poorest countries in the world, doubling export revenues almost immediately with the likelihood of much more money coming in later.
However, look at Mauritania – already ethnically divided and prone to coups, in the light of work by people like Collier and Ross and the country looks set for economic and social disaster.
Since the discovery of oil five years ago, there have been at least three coup attempts, one of them successful. The former oil minister who signed the contracts with the companies has been accused of selling the country short and lining his own pocket.
We can expect Mauritania to become a hotbed of different interest groups each seeking to control oil revenues. The group that succeeds will only maintain its success by repressing the rest of society. Meanwhile the economy will deteriorate and the bulk of the population will suffer. That is unless there is substantial political change towards accountable government.
Of course, it is a waste of time to wish oil away and the wealth it generates can surely be put to good use. The question that faces the people of oil producing regions is how to do that. The answer lies in the development of political institutions that prevent oil revenues from becoming a trophy held by a family, a party, a clan or a section of the army. For the Middle East and North Africa and for that matter for Russia or Nigeria or Indonesia or Venezuela putting oil and gas wealth to good use is a question of politics rather than economics.
Ever since the Royal Navy switched from coal to oil fuel its vessels, control of the Middle East’s oil has been a direct geo-strategic priority for Europe. The US was self-sufficient in oil until after the Second World War. Since then its dependence on imports increased. Historically most of this has not been sourced from the Middle East but because the oil market has become increasingly global because of the geo-strategic need to ensure allies receive oil, and because of commercial interests, Washington has been deeply involved in Middle Eastern oil issues.
As we have seen, the US will actually source more and more crude and gas from MENA as time goes on, so Washington’s direct interest will increase rather than diminish. Indeed, even before the invasion of Iraq, the US was the biggest importer of Iraqi oil.
Maintaining control of Middle Eastern oil has been a constant priority for a century but its justification has changed along with the wars – military or political – that the West has been waging at different times.
So, early in the 20th century the war was between competing European imperial powers each seeking to secure military fuel supplies and deprive the competition. After the Second World War came the Cold War when the concern was that the soviet Union would extend its influence into the oil producing regions.
However by the 1970s it appears that direct Soviet intervention was less of a concern. In 1973 the British cabinet discussed intelligence information suggesting Washington had a plan to occupy large swathes of the Gulf if oil sanctions were pressed home – now it was Arab nationalism that was perceived as the threat.
Indeed it was suggested that Moscow would be tipped off before a US invasion and that its response would likely be limited to the level of propaganda (although Iraq might be persuaded to move against Kuwait).
Since the fall of the Berlin Wall and the decline of Arab nationalism, the war against terror has taken the place of the Cold War From the Caucasus, through Central Asia down the Gulf and across North Africa and the Sahel to the oil reserves of West Africa, the US military command sees what it calls an ‘arc of instability’. In that arc, Washington sees insurgency and the unrest which although diverse can often be simplistically characterized as Islamist. Where there is no insurgency the suspicion it might arise is enough to bring in military training and support for local regimes. This vast sweep of land coincides with the location of current and future oil and gas fields vital to the West’s economy and to the pipeline and shipping infrastructure that enables its transportation.
As an aside I would note that the tools used to secure Middle east oil have varied over time, ranging from military to the contractual, sometimes involving direct intervention and sometimes contracting out the tasks. So we have had the thievery of the pre-Opec concessions system, then the reliance on a mutuality of interests between the West and the Shah of Iran and then the Saudi royal family.
Now we are seeing the introduction into Iraq of the production sharing agreement as a contractual model and one which – and I refer you to a recent report – will cost the Iraqi people billions upon billions of dollars of lost revenue and reduce their sovereign power over their oil for generations to come. Sometimes state intervention has been the preferred method of exerting control while at other times oil companies have been the preferred tool. The point is control, not profit.
Washington has a new rationale – China- for maintaining its grip on the Middle East. That was the conclusion of Toby Shelly, author of "Oil – Politics, Poverty and The Planet" who delivered a lecture at London’s Gulf Cultural Club on February 22nd.
China has now outstripped Japan as an importer of oil. Although its consumption is not on trend to reach that of the US for many, many years, the rate of growth of Chinese demand is one of the major causes of the price rise of the last few years. Chinese demand growth for oil has been double in recent years.
That has led to increased Chinese activity in oil producing regions as a buyer of crude and as a would-be producer. So, Chinese oil companies now dominate the Sudanese oil industry after Western companies pulled out. A Chinese company has just brought PetroKazakhstan in Central Asia while another has bought a big stake in a Nigerian offshore field.
In the Gulf, Saudi Arabia sent a signal to Washington with the award of gas production contracts to European and Chinese, not US companies in 2004. The message was that Gulf producers now had a choice of partners and would not suffer the abuse heaped on the kingdom by US politicians in the wake of September 11.
China is increasingly regarded as a threat to US interests. Beijing’s inroads into West Africa are prompting louder and louder calls for assistance to US companies and stronger US diplomatic and even military presence in those countries to secure African oil for the US rather than China, whatever the Africans think about it.
In Central Asia too the US and Europe has been active in attempts to prevent Caspian oil flowing south or east. In Russia the decision whether to pipe Far Eastern gas to Japan or China remains an important and unresolved political and diplomatic question.
When CNOOC, one of China’s biggest state oil companies tried last summer to buy Unocal, a large US company producing oil and gas in the US and in a number of Asian countries, its bid was blocked by Congress, which promptly commissioned a 12-department report on China and US energy security. That report came out early this month.
We can expect to see competition between Beijing and Washington for influence in oil producing regions grow and with it will grow anti-Chinese rhetoric. In the Middle East, increasing demand from both the US and China for oil (and indeed gas) may present an opportunity to local regimes to exert better financial terms and also strengthen their political hands in international relations.
If adequate investment ensures that oil production from the region grows at a fast enough rate to avoid tightness of supply and excessive price volatility, the competition between the two powers may be muted and the degree of overt interference in region limited. However, the history of the region suggests that it is never very far away from the next externally inspired coup or military intervention.
Toby Shelley is a journalist and writer with a strong interest in the Middle East and North Africa region and has spent a number of years covering the oil industry. In the mid-1980s he worked for the Palestine Liberation Organisation before becoming a full time journalist. In addition to covering the oil industry for Lloyd’s List, Dow Jones Newswires and the Financial Times, he has followed political developments in much of the Middle East and North Africa, including Bahrain, Yemen, and the Western Sahara. His book, ‘Endgame in the Western Sahara’ was published two years ago. ‘Oil – politics, poverty and the planet’ was published last year.
