Role of Natural Resources in the Politics and Economy of the Middle East Essay Example for Free

Role of Natural Resources in the Politics and Economy of the Middle East Essay For the last 60 years oil has been of major importance for the economies of the Middle East. The region has about one-half of the world’s oil reserves and approximately one-quarter of global supplies of natural gas. Middle East oil has been an intermittent preoccupation for western governments and business, particularly throughout the dramatic 1973-4 and 1979 oil price rises, as these had a most important impact on the world economy. Within the region itself, oil production has accounted for a considerable proportion of national product and been the main source of government finance. The earnings produced from oil have not merely contributed to development funding in the oil-exporting states however have as well flowed into the non-oil economies through inter-government assistance, remittances and, to a lesser extent, private investment flows. (Marc J OReilly, 1999). Oil and gas exports are likely to stay vital for the economies of the Middle East for the predictable future, regardless of the price reductions since the mid-1980s. The price of oil has had a major impact on past development trends, as well as the region’s economic prospects cannot be assessed without some predictions of future price changes. The determinants of oil prices are as a result of very important interest as far as Middle East development is concerned. NATURAL RESOURCES The Middle East holds considerable quantities of natural wealth in forms other than oil reserves—for instance, the phosphate deposits of the Maghreb, which contain nearly half of the worlds known reserves of that mineral. In the area at large, extensive mineral surveying has taken place in the past decade, as firms and governments have searched for new sources of prosperity and for the means to greater economic diversification. Despite these efforts, petroleum remains of such overwhelming economic and geopolitical importance that other mineral resources are relatively insignificant. The development of the Middle Eastern oil industry began in 1901 with the granting of a concession by the Persian government to William Knox DArcy, a British engineer. In exchange for the rights to search for and exploit petroleum resources in Persia, excluding the northern provinces where Russian influence was strong, the terms of the concession required the operating company or companies to pay the Persian government ? 20, 000 in cash and ? 20, 000 in stock. In addition, the Persian government was to receive 16 percent of annual net profits, plus a small annual payment of about ? 4,000. (R. K. Ramazani, 1998). The British government took an interest in the search for oil from the beginning. At that time, it was determined to convert the Royal Navy from coal to oil, but the British Empire lacked a secure and adequate source of petroleum. In 1907, Great Britain reached an agreement with Russia whereby the latter was awarded a zone of influence in northern Persia and Great Britain was recognized as the dominant foreign power in the south. A neutral zone was left in the center. The Admiralty arranged for financial support of DArcys search activities, and oil was struck in 1902. In 1909, the Anglo-Persian Oil Company (APOC) was formed, and a refinery was built in the Gulf on the island of Abadan. In 1914, the British government moved to acquire 51 percent of the APOC stock (outstanding). These events established the precedents of petroleum exploitation through concessions granted by host countries to foreign enterprise, equity participation and profit sharing by host countries, and the participation by the concessionaires home government in Middle Eastern enterprise. (Sheikh R. Ali, 1986). During the interwar years, oil operations spread around the northern end of the Gulf into Iraq, Kuwait, and Saudi Arabia. In this period, the industry was controlled by the major international companies, often referred to as the â€Å"seven sisters. † By 1976, more than 104 billion barrels of crude oil had been lifted in the area since the inception of the modern industry. The enormity of Middle Eastern reserves can be gauged from the estimation that more than three times this amount remained to be lifted. At the 1976 annual rate of production of 9 billion barrels, the Middle Eastern proved reserves/output ratio shows that production could last another 39 years. (Sheikh R. Ali, 1986). Although it is a commonly used indication of production potential, the proved reserves/output ratio is not an accurate indicator of how long oil production actually will continue. For one thing, prospective or probable reserves are not included in the numerator, and new additions will continue to be made in the proved reserves category for years to come. Furthermore, variations in worldwide economic activity cause shifts in demand and current output. A short-term decline in output can cause a temporary rise in the reserves/ output ratio, as happened in 1975. Other things being the same, the assessment of reserve life made during a recession year could give a different impression from one made during a boom year. Finally, states sometimes revise their reported proved reserves because of research findings or for political reasons. Saudi Arabia, for example, abruptly cut its estimated reserves for January 1976 from 148. 6 billion barrels to 107. 8 billion barrels only to restore the estimate to 151. 4 billion barrels in 1977. This resulted in substantial variations in the reserves/output ratio for the whole Middle East. For these reasons, the reserves/production ratio should not be used in forecasting without suitable qualifications. Although the ultimate size of reserves and the duration of production in the Middle East are imponderables, there is greater certainty now about relative costs of production. The incremental unit cost of Middle Eastern crude, including finding, developing, and operating costs, are the lowest in the world. In the 1980s, per barrel necessary costs in 1972 dollars are expected to range from 15 to 20 on the Arabian Gulf. In contrast, North Sea oil is expected to cost $1. 50 to $2. 00 per barrel, and in the United States, medium-cost oil is forecast at $3. 30 to $6. 70 per barrel. Since per barrel prices for Gulf oil have risen to 60 to 80 times operating costs, economic profits at the lifting stage of the production process are exceptionally large for oil from this source. (Nora Bensahel, Daniel L. Byman, 2003). Oil reserves are providing the exporting countries with levels of income far in excess of those that otherwise would have been achieved. Petroleum resources thus are serving to compensate for deficiencies in agricultural resources and human skills. The relationship among resources, income growth, and economic development is complex, however, so that, in certain cases, growth based on the exploitation of natural resources can occur without commensurate economic development.