Oil stunts Middle East economies

Oil may have brought untold riches to the Middle East but on its own it is a tenuous and ineffective base for regional development

The Middle East, which sits on 64 percent of the world’s oil resources, has ridden an oil wave for at least the last three decades in the belief that it will bring in much-needed cash for the region’s economies.


Burning issue: Abundant oil has impeded diversification
Burning issue: Abundant oil has impeded diversification

Burning issue: Abundant oil
has impeded diversification

However, the abundance of black gold seems to have diverted attention from other sectors of the Middle East economy. Analysts point out that the easy money oil has brought in appears to have sidelined other important priorities in the region.


Non-oil-related industries have been ignored and there was little effort to encourage sectors of the economy that would have boosted the all-round development of the countries. 


Money flowing in as abundantly as oil was pumped out gave a false sense of economic well-being to the oil-producers.


While identified reserves in the Middle East amount to 545.4 billion barrels, cumulative production so far has been 166.9 billion barrels, according to the US-based Eastern Energy Resources Team.


Of this Saudi Arabia  has identified reserves of 258.6 billion barrels, Iraq 90.8, Kuwait 85.7, Iran 69.2 and the UAE 61.1.


Although oil-producing countries have taken steps to diversify their  economies, most of them are still dependent on oil for their income. Which means that oil prices in the world market are crucial for their well-being. 


According to available statistics, Saudi Arabia suffers from a huge internal debt estimated at $168 billion, accounting for 95  percent of GDP. Among the better-off countries are Bahrain, Oman, Lebanon and the United Arab Emirates which have had the vision to develop non-oil sectors such as tourism. It may not be a coincidence that oil resources are not present in such large quantities in these countries compared to Saudi Arabia or Iraq.


That oil has diverted attention from all-round development can be seen by the fact that the region grew at only half the rate of other developing countries during the 1990s. According to the Middle East Forum, the share of world exports from the region fell from 3.1 percent in 1990 to 1.9 percent in 1998.


Analysts point out that individuals and businesses in the Middle East  prefer to park their wealth abroad (currently estimated at $350 billion) rather  than in local financial institutions.


Oil wealth tends to mask the real picture. OPEC’s oil export revenue has risen steadily from $99 billion in 1998 to $211 billion in 2000. But experts warn that this boom cannot be sustained and the bubble may burst without warning.


In addition, there is the constant danger of military conflict over oil, The cost of guarding against wars makes national economies lopsided. According to an Oxfam report,  each five percent increase in dependency on oil causes an additional 1.6 percent increase in military expenditure.


Oil is skewing regional economies
Oil is skewing regional economies

Oil is skewing regional economies

The Middle East is burdened by the highest military spending in the world. In 1997, it spent seven percent of its GNP on weapons, as opposed to the 2.5 percent world average. Armed forces in the region constitute 2.8 percent of the labour force, as compared to the 0.8 percent world average. And finally, arms constituted 14.5 percent of all Middle East imports, versus a one percent average worldwide.


An inherent feature of oil-based economies is the lack of control over their produce. The price of oil is dependent on the vicissitudes of the international economic and political climate. Armed conflicts and levels of availability could drastically alter prices, for instance. 


Another tendency is for governments to invest heavily in oil-related sectors of the economy since oil is seen as a cash cow. But this is done to the exclusion of other key areas that may not pay immediate dividends but are better long-term investments.


Another effect is that imports are cheaper than locally produced goods making it cheaper to import and discouraging investment in other sectors. If for some reason demand for oil falls, this can lead to disastrous consequences for those countries lacking a wide industrial base


According to the United Nations, oil-dependent countries have the lowest Human Development Index – an international quality of life measure – since they suffer from low economic growth, poor schooling, corruption, authoritarianism, high military expenditure and low governmental efficiency.


Controls are weak since in many cases multinational oil companies are more powerful than national governments. This not only detracts from the power of governments but also impinges on overall policy planning and economic development.