THE POST-WAR MIDDLE EAST: SEEKING ORDER IN THE TURMOIL

Paul Tempest
International Consultant
London

The Middle East remains today the global energy fulcrum. One year after the Persian Gulf war, the region is in greater turmoil and political uncertainty than it has known in modern times. The Iraqi invasion of Kuwait and subsequent external military intervention forced neighboring states to question the need for a foreign military presence in the future.

The rift between the secular revolutionary states in the region-led by Iraq, Libya, Yemen, Algeria, and Syria-and the traditional monarchy of Saudi Arabia and the emirates of the gulf has widened. Egypt provides, at present, an uncomfortable bridge. The balance of political forces may be shifting.

Where will we see the new leadership in the Middle East? Will it again play a role through the Organization of Petroleum Exporting Countries and determination of the oil price in shaping the structure of global energy supply and demand?

Two points are basic:

The world cannot afford to be held to ransom by the Middle East.
Two thirds of the proven global oil reserves he in the gulf states. One quarter of the global total lies in Saudi Arabia.
That oil has for the health of the global economy and, as the West sees it, for the welfare of the whole developing world including the Middle East region to be readily available to be produced and traded on open markets at prices broadly acceptable to both producers and consumers.
The Middle East is a longstanding source of immense human vitality-a complex mix of peoples, religious sects, styles of government, and external interests and loyalties. This applies not only to each state but to each province, each town, and, given population densities, much smaller subdivisions of each town and region.

A RICH SOUP

It is wrong to describe the Middle East as a melting pot in the sense of the late 19th Century or early 20th Century North America. All the various ethnic, political, and other ingredients cling stubbornly to their history and identity which transcend national boundaries.

Indeed, many national boundaries are quite widely regarded as an imposition by the former colonial powers, a device to divide the area into many small, weak units.

This rich Middle East soup rarely comes to the boil. Calls for regional unity-whether these days in the form of Islamic fundamentalism or Arab nationalism-are a powerful, emotional rallying cry.

Yet in terms of practical political compromise and merging of interest, regional unity sometimes has a very hard struggle to make a case. In addition to everyone reserving the right to interfere in his neighbor's business, and defending vigorously his own "patch," local politics are complicated by constant multiple interference from further afield.

Whether motivated by trade, access to natural resources such as oil, or other causes, this interference greatly frustrates the region's ability to resolve its own problems.

This painful instability and turbulence in the Middle East still attaches prime loyalties to the family and tribe and to broader aspirations to regional identity, pan-Arabism, and Islamic unity. Such loyalties provide paradigms which may in the long run prove more,durable than the Western concept of a multiplicity of nation states, where new industrial and urban development tends to isolate the individual and weaken social bonding.

The leadership bids made in 1980-88 by the Ayatollah Khomeini to export Iranian fundamentalism to the rest of the region failed. President Saddam Hussein, in trying to stir up pan-Arab nationalism, was on stronger ground in 1990.

Members of the Saudi royal family identify their legitimacy as regional leaders through their custodianship of the two most holy cities of Islam. Further secular challenges to that leadership appear almost inevitable in the 1990s.

THE OIL FACTOR

Adding to these political uncertainties are the economic forces represented by vagaries in the oil market.

We are not sure about the degree of rising demand for oil, given uncertainties about global economic activity and the momentum imparted by temporarily high oil prices to energy conservation and efficiency. We are, however, fairly sure that non-OPEC oil will continue to be produced as fast as is technically possible.

There thus will be a rough balance between loss from depleting areas, such as the U.S. and U.K., and gain from new developments, such as in Norway, resulting in a flat production profile. This points to a gradual expansion of market share for OPEC (Fig. 1). The worst is behind them.

Yet OPEC leverage has always been related to OPEC excess capacity. Having seen spare capacitor briefly vanish to almost nil in August 1990, we now have the possibility of increases in OPEC spare capacity outstripping the gradually increasing call on OPEC, indicating a steady depressant on oil prices for a limited period at least.

Recently, consumer tolerance, with an upper limit dictated by the need to keep the global economic moving and a lower constraint turning on the cost of developing new non-OPEC sources, has tended to coincide with what producers can tolerate (Fig. 2). In the longer term, pressure on OPEC to reach agreement on production constraint may increase.

The global energy system is much more robust today than it was in the 1970s. Dual firing of boilers and other fuel substitution systems can give more subtle responses to price changes.

It is now hard to postulate a long energy supply crisis. At one end of the spectrum there is fresh hope for renewable energy and small scale nuclear, at the other, virtually unlimited supplies of heavy oils, shales, and an abundance of coal.

We also expect swift advances in technology, in particular in the supply and use of natural gas, to reinforce this much more diverse and flexible use of energy. Technological progress will also provide answers to the many environmental problems facing global energy.

REGIONAL LEADERSHIP

The protectionist challenge to free trade is a fundamental uncertainty and a key branching point. We do not know which way the balance of forces will swing. As far as Middle East oil and gas are concerned, there are some obvious points to be made.

Under the mercantilist, protectionist scenario, energy policy would be an important factor (Fig. 3).

The U.S. would continue to hunt for hemispheric solutions-free trade areas with Canada and now Mexico being extended into a special relationship with Venezuela and other South American states. West Europe would place increasing emphasis on Norway and the North African littoral. Japan would strengthen its sources of hydrocarbons in Southeast Asia and possibly make overtures to Russia and other members of the Commonwealth of Independent States, leaving the Persian Gulf isolated.

A variant popular with the strategic studies community would have the U.S. trying to establish a durable long term relationship with the whole Middle East area with strong points in Turkey, Israel, Saudi Arabia, and the gulf states.

Under the sustainable world scenario, the gulf trades freely in a market where it has the lowest costs; it spreads its risk evenly and retains leverage (Fig. 4).

But under a sustainable world, also expect a swift rise in the supply and use of natural gas, which, with accelerating technological change, must gradually place a price cap on oil.

Of course much turns on the leadership in the gulf. If allowed a free rein, Iraq and Iran will exert pressure on Saudi Arabia as we have witnessed since 1980. If Iraq is weakened, some sort of balance between Saudi Arabia and Iran is likely to emerge (Fig. 5).

THE HUMAN FACTOR

The greatest challenge of all facing members of the Organization for Economic Cooperation and Development in the Middle East in the 1990s will be whether mutual trust and understanding can be restored between the West and the Middle East in the aftermath of the gulf war.

Following the shedding of so much blood, the strain of so much family anxiety, and the whipping up of so much hysteria and hatred, the wounds will heal slowly. There is bitterness and prejudice in both the Arab world and the OECD countries.

Yet the effort must be made not only at a personal level but also at the level of governments, private commerce and industry, and in the activities of international agencies. I call the effort international bonding.

The United Nations has emerged from the conflict between Iraq and Kuwait with enhanced status and leverage. There is an opportunity now to lay the foundations for a much stronger UN mechanism to act quickly to redress any specific government actions which put global welfare or regional security in jeopardy.

Deliberate environmental pollution, abuse of human rights, and unprovoked attacks on other states demand fast responses. The establishment of a new world order as envisaged by U.S. President Bush might, under the mandate of the UN, cover arms control, particularly the proliferation of nuclear, chemical, and biochemical weapons as well as adherence to an agreed global code of conduct concerning the environment.

CORPORATE INITIATIVES

Through the 1980s, the gulf and other OPEC producers have sought to provide long-term outlets for their crude and also to add value by investing downstream in consumer countries by the purchase of refineries and marketing outlets. Kuwait's downstream investments have undoubtedly helped its oil sector to continue to function outside Kuwait.

Meanwhile, a need to introduce competition and to stimulate higher efficiency in national oil companies may lead to the reopening of some OPEC countries to equity investment by the international oil industry in new exploration and production. Already joint ventures between the multinationals and national oil companies are beginning to cover a much wider field.

Such commercial integration in both directions with producers committed to investments in consumer countries and -vice versa may turn out to a useful market stabilizer and, for a small oil or gas producer, a major political deterrent against the interference of a stronger neighbor.

INSTITUTIONAL BONDING

Through the 1980s, the OPEC countries became increasingly alarmed that consumer reactions to rising oil import dependence and high crude import prices might take the form of import levies, rationing, taxation of oil products, and similar measures.

While free market mechanisms remain the preferred vehicle for international trade in oil and gas, and all proposals for a negotiated consumer-producer agreement have fallen on stony ground, the process of consumer-producer consultation, dialogue, and exchange of data is taking root.

The pressing longer-term problems of high population growth, diversion of water supply, and failing agriculture in the Middle East cry out for the sort of coordinated international approach used elsewhere in the world. The major international development agencies have been slow to respond in the Middle East region, partly because the gulf states include some of the highest per capita gross national product income in the world and partly because Middle East rivalries are seen as a political minefield.

Elsewhere, such major challenges have led to the establishment of major regional development banks, run along the lines of the World Bank. The Caribbean Development Bank, the Asian Development Bank, and the new European Bank for Reconstruction & Development are good examples. They have been able to focus on regional needs and objectives as well as providing nonpolitical aid.

There is now a strong case to be made for a Middle East Bank for Reconstruction & Development, with headquarters in the Middle East. Priority objectives of the new Middle East bank would be:

Reconstruction finance for Kuwait and Iraq.
Development projects throughout the Middle East.
Balanced assessments of the needs and problems of the area as a whole.
Tying the Middle East region to global finance and world commodity markets.
A mechanism for recycling future OPEC surpluses.

CHANGING LEADERSHIP

Last year's success of the joint UN force in expelling Iraq from Kuwait leaves for the moment a political vacuum in Iraq and a changing balance of political power in the gulf area.

Leaders in Syria, Yemen, Egypt, and Iran will wish to consolidate their positions and to seize new opportunities. New leaders may emerge in Iraq, Iran, and Gulf Cooperation Council countries.

If nothing else, the creation of a Middle East Bank might be one of a number of institutional stabilizers to emerge from the crisis in the Middle East, where otherwise the risks of further conflict still seem to outweigh the opportunities for a lasting peace.