Has Oil Wealth Given the Rich Oil Producing States of the Middle East more Power in the International Area?

Essay, 1997

17 Pages, Grade: 56/100 Punkte



The vast oil reserves[1] of the oil-producing countries in the Middle East region such as exist in Saudi Arabia[2], Iran, Iraq Kuwait, Qatar or Bahrain, and its meaning for the international economy dominated by the industrial states, should not be underestimated. Oil as a weapon to compete with the international economic market has given the oil- exporting states in the Middle East wealth, strength, and power on the domestic and the international level. However, it has, at the same time, created and increased a greater dependency between the OPEC states and the West, which has created disadvantages for the oil-exporting countries in the Middle East region.

This essay intends not only to show whether oil wealth has given the Arab countries a greater say within the framework of the international economy but also to explore the increased dependency of the Middle East region on the oil-importing industrialised countries and its impact on the national economy of the Arab states. For this purpose, section I is concerned with the meaning of oil about the wealth and prosperity of the oil-producing countries and its creation of economic, technical, and financial dependency upon the West. Section II aims to explore the role of the OPEC, the pricing policies it has carried out and the impact of the declining power of the OPEC on the level of the international economy. Section III presents some concluding remarks.

I. The meaning of oil for wealth and its creation of dependency upon the West

Oil in the Gulf region seems to be an attractive source of energy for both the industrial countries and the oil-producing countries. On the one hand, these huge oil reserves[3] play an important role for the Western oil-importing countries. As these countries, such as Europe, the United States and Japan[4], need oil for their own domestic industries as well as their private households, this implies a continuous growth of oil consumption in the West. Also in the future, oil is still viewed as one of the cheapest sources of energy in the world[5] which, in fact, makes oil, despite several attempts of the industrial countries to search for cheaper sources of energy, an economically favourable good to be imported in the Western markets. On the other hand, due to the greater demand for oil[6] in most of the Western states, the prices for fuel have grown since the early 1970s, which has led to a growth in capital for most of the Gulf states[7]. The increase of the oil price is not only the prime source of foreign exchange, but, in addition, it has become the sole and most essential sector for the domestic national economic markets of the oil- exporting countries[8]. The financial growth in oil revenues can also be seen through the increase of the foreign exchange income of the OPEC countries, where they have doubled their "OPEC's shares of the world's total foreign exchange reserves" as well as their "per capita income" in the period between 1974 and 1979[9]. Moreover, at the same time, OPEC members such as Saudi Arabia have expanded their import rates fourfold which shows that the trading development with the Western industrialised states has become much more tight[10]. In addition, vast oil reserves have enriched the oil-exporting countries with the development of a tremendously expanding oil sector that provided these states with the growth in oil production, increased revenues, and the labour market[11]. The growing economic process is further influenced by the fact that since the 1960s Gulf states have increasingly undertaken to partly nationalise the assets of Western oil firms or to create joint ventures with these oil enterprises[12]. In summary, the world's increased demand for oil has decisively transformed the economic markets in the Middle East as far as the increase of the production and exportation of oil has contributed to their wealth and prosperity which is strongly linked with the international economy.

Given these brief implications, one can observe a greater interdependence in the aftermath of the Arab-Israeli War in 1967 between oil-producing Arab countries and the industrialised states[13]. As mentioned above, while exports of most of the OPEC countries, such as Saudi Arabia, have only doubled after 1973 until 1978, the import rate of these countries has grown four times. The quadrupling of imports[14], indeed, implies a greater dependency of the Arab states upon Western countries. This dependency of the oil- exporting states can be observed on the economic, technical, and financial level. On the economic level, Saudi Arabia became more dependent on Western exporting goods mainly for two reasons. Firstly, as Saudi Arabia is geographically seen a desert that provides no possibility for the establishment of sufficient agriculture, it wholly needs to import basic foodstuffs[15]. Secondly, Saudi Arabia as well as the other Gulf states are very much dependent upon the export of their oil reserves. This can be concluded from their high export proportion which represented in 1977 96.2 percent of the total value of all Saudis exporting goods[16]. On the financial level, another feature of trade dependency of the Gulf region can be seen in the declining increase of revenues coming from the exportation of oil after the oil price shock in 1973. For example, OPEC members only held 24.9 percent (of which Saudi Arabia had 41.2 percent) of the world's foreign exchange reserves, whereas Western states had a share of 53.7 percent[17]. However, OPEC's share continually decreased after 1970s, and by 1979, OPEC countries only held shares worth of 15.7 percent of the total world's foreign exchange reserves[18]. In addition, the oil-exporting states' decision to place their surplus revenues and funds, which obviously result from the purchase of oil, in foreign banks of industrial countries, and thus outside the Gulf region, means that they cannot exercise appropriate control over their investments made in these financial institutions[19]. On the level of technological dependency, the wealth of financial capital has induced the oil-exporting countries to focus on the transfer of expensive knowledge, services and high technology imported from the industrialised countries which are viewed as not really corresponding to their social and economic Situation because international financial enterprises have certain interest in financing or selling technology equipment’s at overcharged prices[20]. But transfer was not only made by the industrial countries alone. To establish their development projects and to enlarge their public employment sector to stabilise their economic market, oil-exporting Gulf states were forced to import foreign workers from other Middle Eastern and Asian countries such as, for example, from Pakistan, India, or South Korea[21]. These workers transferred their earnings to their home countries which again created an important source for the Stabilisation of the economies of the labour-exporting countries[22]. Moreover, the workers' earnings provided an additional source for Capital formation within the labour- exporting countries which not only reduced their own domestic balance-of-payments deficits but far more reduced the huge foreign indebtedness of these states[23]. However, the rise of oil money made it possible for the oil-exporting Gulf states to increase the imports of consumer goods and capital which also has expanded the public employment sector by importing foreign labour from Third World countries. These changes in the economies of the oil-producing countries, which led to the wealth and prosperity of these states, were, however, presumed on the premise that the demand[24] for oil for the industrial countries could be expanded which would then result in a higher charge of oil prices dictated by the Gulf states[25]. Unfortunately, this was not the case. Contrary to the expectations and hopes of the Gulf states, the demand for Arab oil in the Western states continuously decreased by the end of 1979 which resulted in the enormous reduction of oil production, while the imports of Western capital goods and services unprecedentedly continued to rise during the early 1980s[26].


[1] For instance, in 1967 the Middle East region possessed 300 billion barrels, followed by the United States (about 130 billion) and the former Soviet Union (about 70 billion barrels) of the world's total discovered oil, cf. Ismael (1970), p. 20.

[2] It is estimated that, for example, Saudi Arabia has about 20% of the world's total oil reserves, see Sharabi (1962), p. 236.

[3] See, for instance, Abir (1974), p. 1, who provides recent statistics indicating that the Gulf region has almost 60% of the world's proven oil reserves.

[4] Compare Richards/Waterbury (1990), p. 62: while during the 1950s and 1960s, the price of oil was low, the major Western countries switched from coal as the major energy source to oil. As oil in the 1950s oil only represented in amount 40% (US), 14% (Europe), and 5% (Japan) of industrial nations’ energy use; those shares had grown to 47% (US), 60% (Western Europe) and 76% (Japan) by the end of 1973.

[5] Abir (1974), ibid, p. 1. See also Richards/ Waterbury (1990), p. 61, emphasising that in 1985 it was estimated that the cost production of a barrel of Gulf oil was below $1 per barrel, whereas oil from Alaska costed approximately $7 per barrel followed by oil from the North Sea with about $8 per barrel expensive.

[6] Richards, in: Tschirgi (1994), p. 70, calling the demand for oil a "derived demand" as "it helps us to move around, heat our homes, generate electricity".

[7] Compare Abir (1974), p. 2. However, it should also be mentioned that the export of oil has enormously expanded the education sector, and has improved the living conditions in the Middle East, compare, Bill/Springborg (1994), pp. 401-404.

[8] Alnasrawi, in: Alnasrawi (1984), p. 8.

[9] Quotation and figures taken from Ayubi, in: Marsot/Sabagh, p. 16.

[10] Ayubi, in: Marsot/Sabagh, p. 17.

[11] Abir (1974), p. 2.

[12] Abir (1974), p. 3, speaking in this context of “participation agreements” carried out by the Gulf states. In Saudi Arabia, for example, concession agreements as a result of negotiations with Ibn Sa’ud in the early 1930s were strongly pursued by the Saudi government to attract oil-companies and supplies, see Werner, in: Tachau (1975), p. 169 and Sharabi (1962), p. 236.

[13] Ayubi, in: Marsot/Sabagh, p. 1, emphasising that the "concept of interdependence" implies not only the inclusion of various economic and political Connections between the Gulf region and the Western countries but also a potential danger which lies in the fact that each "single party [may] manipulate a crisis for its own domestic or foreign political ends".

[14] See, for example, Dorraj, in: Dorraj (1995), p. 126.

[15] Ayubi, in: Marsot/Sabagh, p. 18, States that Saudi Arabia imported basic Commodities 35.5 percent in 1970 which had been increased in 1976 up to 65.1 percent.

[16] See Ayubi, in: Marsot/Sabagh, p. 18. This figure approximately applies to the smaller Gulf countries such as Qatar where 98 percent of the total value of all exports came from export of oil.

[17] See Ayubi, in: Marsot/Sabagh, p. 20.

[18] Example taken from Ayubi, in: Marsot/Sabagh, pp. 20-21, pointing out that Saudi Arabia alone held 31.2 percent of these shares.

[19] The political risks involved in such a Situation were recalled when the United States decided to freeze Iranian assets in its banks only ten days after the seizure of the US embassy in Teheran in 1979 which, in fact, led to confusion within the OPEC countries, see further Ayubi, in Marsot/Sabagh, pp. 21-22.

[20] Ayubi, in: Marsot/Sabagh, p. 22, mentions that in terms of technology transfer one can rather speak of a "pseudo-transfer" of technology because these transfers were often a result of a "want creation rather than need satisfaction".

[21] US oil firms employed thousands of non-Arab national’s workers in the management sector, support (medical, housing) or administration who represented 26.6% in 1949 and 18.7% in 1967 of the total skilled and unskilled employees, cf. Werner, in: Tachau (1975), pp. 170-171.

[22] See Alnasrawi (1991), p. 19.

[23] Alnasrawi, in: Alnasrawi (1984), p. 9.

[24] See Richards/Waterbury (1990), p. 62, points out that supply and demand determines the price of crude oil. Demand forces played a significant role not only in the increase of prices during the 1970s but also is responsible for the sudden crash of oil prices in 1986.

[25] Alnasrawi, in: Alnasrawi (1984), p. 8.

[26] See, for example, Alnasrawi, ibid, p. 8, who States that the reduction of oil demand led to the fall of the oil output from 21 million barrels/day in 1979 to 9.1 million barrels per day by the first half of 1983. Contrary to these figures in oil exportation, oil-producing countries became much more dependent on the imports of Western goods and Services. This can be reconstructed by the fact that these countries spent in 1974 (only) $14 billion on the importation of foreign Services and goods, whereas by the end of 1982 their imports had achieved about $189 billion, see Alnasrawi, in: Alnasrawi (1984), p. 8.

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Has Oil Wealth Given the Rich Oil Producing States of the Middle East more Power in the International Area?
Lancaster University  (Department of Politics and International Relations)
MA16: Politics and International Relations of the Middle East
56/100 Punkte
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Oil Producing States, Middle East, Power, Gulf region, Oil Wealth
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Andreas-Michael Blum (Author), 1997, Has Oil Wealth Given the Rich Oil Producing States of the Middle East more Power in the International Area?, Munich, GRIN Verlag, https://www.grin.com/document/353373


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