Oil: blessing or curse?

oil-blessing-or-curse

Of the 22 states in the Greater Middle East, the six with the tiniest oil reserves happen to be Turkey, Tunisia, Israel, Palestine, Jordan and Morocco.

Respectively, these are the first secular Muslim democracy, the only success of the Arab Spring, an OECD democracy, the democracy it occupies, and the two most liberal monarchies in MENA. Ignoring 2016’s Turkey and skipping Palestine (as Western tourists oddly do), it suggests the usual choice of student-friendly, liberal, stable and nightlife-loving travel hotspots in the region. Of course if you were an oil magnate looking for new drilling locations, these are the last places you’d choose for business.

Strange as it seems, this has never been a coincidence.

The modern Middle East is an outlier in several respects. In 2015, regional oil production amounted to 28 million barrels per day (65% of OPEC’s total), while it held roughly 50% of the world’s proven oil reserves. Just a handful of its 22 countries are functioning democracies. Some of the world’s wealthiest and poorest nations share borders, while the three deadliest conflicts of 2015 were hosted by Syria, Iraq and Afghanistan. A large body of research has examined the relationship between these abnormalities, the most prominent of which holds that the latter three – autocracy, fragile economies and political instability – are significantly bolstered by the abundance of petroleum.

How?

Basically, the accountability of Middle-Eastern regimes to their citizens, particularly in the Gulf, is profoundly influenced by their ability to influence public sentiment using the wealth from oil trade.

Oil is a valuable source of economic rent – simply, it can be successfully marketed for a price that far outweighs the cost of its production. We consequently see the emergence of “rentier states”: regimes that use this rent to lower taxes and increase welfare for civilians, diminishing their willingness to revolt.

We live in Australia, a democratized state without great resource dependence, where taxation is a relatively larger source of government revenue. In return for this taxation, citizens expect the government to be representative of their interests and rights. Meanwhile, such families as the House of Saud are able to provide public goods for their citizens for little taxation, essentially trading oil profits for a prolonged democratization.

There is plenty of data supporting the label of rentier states from 1970s Iran to modern-day UAE, and plenty of criticism of its methodology – but for brevity, two important things should be remembered. Firstly, natural resource “windfalls” have little effect on either established democracies or deeply entrenched autocracies – it is on moderately-entrenched autocracies (which nearly every MENA country has been) that abundant resources are highly likely to prolong democratization. Secondly, in most data sets, oil’s impeding effect on Mid-Eastern democratization only becomes clear from around 1970. If anything, this strengthens the theory of the rentier state-civilian dynamic. The decade when democratization prospects slowed in such states as Saudi Arabia is the same decade that OPEC states shook off foreign oil firms, to capture the rent from their resources for themselves.

Returning to Jordan and Morocco, the oil-poor monarchies suggest that its abundance is not a necessary cause for autocracy. But in fact, their relative inability to spoil citizens with welfare explains why their rulers implement much more progressive reform than the Gulf states, especially in the face of civil unrest. In addition to parliaments and a separation of powers, Jordanians and Moroccans enjoy substantive freedoms to religion, gender, lifestyle, and to an extent, sexuality. During the Arab Spring, King Abdullah dismissed two prime ministers and dissolved the Jordanian parliament, while King Mohammed VI conceded some political power and held a referendum on Moroccan constitutional reforms.

For Jordan, regime stability is also explained by a chronic fear of instability held by both the throne and the street, given the proximity to unstable Lebanon, failed Syria and Iraq, and Israel and Saudi Arabia, who would surely become tangled in the aftermath. Israel would be concerned about the political mobilization of refugees and pro-Palestinian sentiment, while the collapse of a monarchy in its North would be anathema to the House of Saud. Thus, at least directly, oil is not the only factor in King Abdullah’s safety.

Autocracy aside, why would oil spur fragile economies? For one, resource abundance spurs the “Dutch Disease”. The incentive to manufacture products is muffled, while imports pile in, enabled by the unending supply of oil revenue. This “one-dimensional economy” leaves regimes in a particular state of precariousness when oil prices drop; their revenues decrease and they are forced to pass on losses through lower welfare payments and higher taxes. Little to no contribution has been made to the productivity of states that trade large quantities of oil. Of course, the revenue generated can then be invested into other sectors that boost productivity, something which the Gulf States are in the process of doing successfully. But this is not a necessary outcome when authoritarian rulers can pocket the lion’s share of revenue for themselves.

Many will object to such a pessimistic angle on the world’s most valuable energy source. We’ve seen the glistening buildings of Kuwait, the billions in humanitarian aid from Riyadh, the metro system of Dubai, the journalistic depth of Al-Jazeera. Obviously oil wealth is not automatically a curse; it is simply wealth and carries with it the power to alter outcomes – how would these skylines have looked otherwise? But who shares that power, what is done with it, and how quickly it is used up means everything for everyday Arab citizens and their neighbours.

To them, oil found itself in pre-existing autocracies with internal fractures, poor economic planning until 2000, and predatory foreign interests such as the Bush Administration. It profoundly slowed democratization, spurred the economic Dutch Disease and deadweight losses, and sparked turmoil from either petro-aggression or aggression for petrol. Although autocracies have diversified their economies from their fragile state in the 1970s, for oil to be a true “blessing” would entail that its inhabitants have full autonomy over how its profits are allocated. It is a prospect which the 2011 uprisings suggest is possible, but distant.