By Najib Saab

November 2005

Income from oil exports increased in the countries of the Middle East and Central Asia by 465 billion USD during the last three years. While additional revenues reached 50 billions in 2003, it skyrocketed to 126 billions in 2004 and exceeded 289 billions in 2005. Arab oil exporting countries gained about 85% of that additional income while the rest was distributed among Iran, Kazakhstan and Azerbaijan. These figures were documented in the annual regional economic review of the International Monetary Fund (IMF) that was launched in Beirut by IMF's regional manager for the Middle East and Central Asia Mohsen Khan.

The report emphasized in language that is unprecedented in its clarity from an international financial institution the mistake of the assumption that the price of oil has reached its all time peak this year. The real comparison should take into consideration the purchasing power and inflation rates. The report shows that if we use the 2003 prices as a reference, the real price was 80 USD in 1980 compared to its actual market price of 56 USD in 2005. The report also identifies that the price of 40 USD of an oil barrel in the late 70s and early 80s is equivalent to 100 USD in today's prices. Accordingly, the price of oil even at this year's peak of 70 USD is less than the real market price. This analysis is based on pure economic principles that do not take into consideration environmental factors. Had the environmental impacts of oil consumption as a depletable resource been calculated, the prices would have doubled.

The importance of this approach stems from the fact that it is published by the most notable international financial authority. It reiterates what we had said time and again that low and unrealistic oil prices in the past decades were imposed by industrial countries outside the objective considerations of the market. If oil reserves were found in industrialized countries , they would have been treated as strategic national resources and high export prices would have been imposed, that are many times more than current prices. It would not be peculiar in this case to have the price of oil barrel at over 200 USD.

Renewable energy sources were always portrayed as an ploy to strike fear into the exporting countries not to raise oil prices. The argument is that as oil prices increase the renewable energy sources become more economically feasible, which means getting rid of oil supremacy as main energy source. This is nonsense, as it is almost certain that oil will remain at least for the next 50 years the cheapest and easiest energy source. Oil has many other industrial uses, including many chemical products, proteins and textiles. A report published last month emphasized the potentials of the carbon capture and storage (CCS) technology. This opens up a wide range of opportunities for the use of "environmentally friendly petroleum".

Excessive production of oil, as a depletable resource, should be the real concern. It is more reasonable to sell one million barrels with the price of 100 USD each instead of selling two million barrels with the price of 50 USD. By this formula, producers get the same income and still keep the remaining half as a reserve.

The IMF report reveals that 71% of the proven oil reserves are in the Middle East, Central Asia and North Africa. Saudi Arabia is on top, followed by Iraq, Iran, Kuwait and the UAE. The same region embraces half the world's reserve of natural gas, mostly in Qatar and Iran. However, only 41% of global oil and gas exports are from the region, which obviously indicates that its share will increase with the depletion of stocks in other regions.

Indicators point to the fact that the net income of oil exporting countries will increase in the coming decades, despite possible fluctuations. How can this revenue be used in the most suitable way to have its benefits spread all over the people of the oil countries and their communities? The IMF report indicates that the patterns of utilization of increased oil revenue will determine whether this economic bonanza is a blessing or a curse. The IMF provides pure economic recommendations that demand investments in productive projects resulting in diversification of income and the creation of new jobs. It warns from focusing the expenditure of additional income in rapid real estate and commercial projects that lead to a fast increase in consumption rates, resulting in higher inflation and losing the chance of developing a sound production base.

At this point we can recall that one Arabian government abandoned a project to produce compressed hydrogen and export it to Europe, as feasibility studies showed that the return on investment will require 20 years. In a pure financial perspective, this return is not feasible enough compared to the real estate development project and financial markets. This government missed the fact that producing hydrogen would have helped the country to become a partner in technology that is considered the energy for the future, thus qualifying the country to reproduce its current wealth rather than consuming it.

Could the extra income from oil act as a driver for a new perspective towards investment in programmes that can guarantee developmental sustainability, instead of consumption projects that resemble fast food meals?

As the IMF report warns that the reserves of some smaller oil producing countries in the region might be depleted within few years, it calls for the immediate development of alternatives that are based on productive activities other than oil. If a country like Oman will require economic alternatives to oil in the medium term, all countries in the region will need those alternative in the long term.

What the report did not mention is that oil producing countries have now a unique opportunity to use the accumulative income to develop the base of science and technology and establish environmental protection funds as the only means for achieving sustainable development. If the environment stayed away from the interests of the oil boom in the 70s due to the prevailing needs for social and economic development, green investments should have a main allocation from the revenues of the current oil boom.

What the report missed also was the necessity to develop effective frameworks for regional cooperation, to make the benefits of development spread all over the region, whether oil producers or consumers. Balanced development is the path to stability and the shortest route to combating terrorism.