CHAPTER 16

Oil

During the 1950s and 1960s, promises of economic and social development became the linchpins of government policy throughout the Middle East, just as they did in other areas on the periphery of the modern world system at the same time. Middle Eastern states supported the expansion of their activities with revenues they acquired from a variety of sources. Governments acquired revenues from the nationalization of properties of foreigners and “enemies of the state.” They acquired revenues from foreign aid. And they acquired revenues, directly or indirectly, from the exploitation of oil.

Economists call the type of revenue generated from these sources “rent.” They define rent as income acquired by states from sources other than taxation. Some economists call states that are dependent on rent for a certain proportion of their income “rentier states.” Other economists call them “allocation states” because the states distribute the rent they receive to favored clients and projects. In no other area of the world have so many states been so reliant on income derived from rent as in the Middle East. Every state in the region depends on income from rent to a greater or lesser extent. Saudi Arabia, Kuwait, and the tiny Persian Gulf city-state of Abu Dhabi might be placed in the “greater extent” category. As of 2010, oil exports accounted for 90 percent of Saudi Arabia's revenue, 94 percent of Kuwait's, and 95 percent of Abu Dhabi's. The same year, oil exports accounted for 85 percent of Iraq's revenue. That was down from 2003, the year of the American invasion, when oil exports accounted for 100 hundred percent of its revenue. Even those countries not usually associated with oil production, such as Egypt and Syria, have an inordinate dependence on rent. In 2010, rent provided 40 percent of Egypt's revenue and 50 percent of Syria's. In the case of the former, oil provided $11 billion to the national treasury, but there were other sources of rent as well. These included U.S. aid (about $1.6 billion) and Suez Canal tolls (about $5 billion). Syria has had to be more creative, combining lackluster revenues from oil sales with protection money paid by other states in the region seeking peace and quiet from their often troublesome neighbor. For the sake of comparison, it is worth noting that in 2010, China derived 5.4 percent of its income from rent.

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“And up through the ground came a bubblin' crude”: oil seeping to the surface in Iraq, 1909. (From: The Gertrude Bell Collection, University of Newcastle.)

At the present time, oil constitutes the largest source of rent in the region. Nevertheless, oil was not an important commodity for the Middle East until the twentieth century. In fact, oil was not a particularly important commodity anywhere until the last decades of the nineteenth century. What economic historians call the “first industrial revolution” began during the last decades of the eighteenth century. The “dark satanic mills” most of us identify with the first industrial revolution were fueled first by water power, then by coal. During most of the nineteenth century, coal generated heat for homes and fueled the great navies of the world. People even derived the kerosene used in lamps from coal. The importance of coal to modern life began to decrease during the second half of the nineteenth century with the onset of the “second industrial revolution.” If textile mills and the primitive factory system have come to symbolize the first industrial revolution, the internal combustion engine, oil-burning naval ships, and the petrochemical industry might be used to symbolize the second. The second industrial revolution thus established petroleum-based economies.

Even after the uses for oil expanded in the late nineteenth century, however, there were other sources closer to Europe and North America than the Middle East. In 1900, Russia was the world's largest producer of oil — just as it often is today. About 50 percent of the world s supply of oil came from Russia. Among the other sources for oil at that time were the United States, Mexico, and Romania. Oil was not even discovered in Saudi Arabia until 1931. Production there did not begin for another seven years.

Most historians trace the history of the exploitation of oil in the Middle East from the d'Arcy concession of 1901, discussed in Chapter 5. The d'Arcy concession underscored the importance of sharing risk when it came to the oil business. Because the business requires a huge outlay of capital to begin operations, d'Arcy ran out of money before he was able to draw a profit. He was thus forced to sell the rights he had been granted to the British government, which established the Anglo-Persian Oil Company. This lesson was not lost on investors when the Ottoman government granted a similar concession several years later. The Turkish Petroleum Company (later the Iraq Petroleum Company), which received the right to exploit all the oil in the imperial domains, was a joint effort bringing together the Anglo-Persian Oil Company, Royal Dutch Shell (which, as its name suggests, traces its history to a trading company that dealt in abalone shells for cameo jewelry), and various German interests. The Anglo-Persian Oil Company owned 50 percent of the shares of the venture, while the others held 25 percent each. This sort of arrangement is known as a consortium (pl.: consortia). A consortium is a group of companies that band together to undertake a project that would be beyond the means of any single company. For the first few decades after the d'Arcy concession, all concessions were granted to consortia.

The concessions granted in the first thirty years of the twentieth century resembled one another in other ways as well. Like the d'Arcy concession, all subsequent concessions were of long duration, usually from sixty to seventy-five years (the d'Arcy concession was granted for sixty years). They covered huge areas, such as most of Persia or all of Kuwait. The consortia had the right to pursue all operations connected with the industry, including exploration, production, refining, transport, and marketing. In return for the concession, the consortia paid the state that granted it royalties and fees. Only later, in the 1950s, did the consortia begin to pay the governments of oil-producing states a share of their profits. Finally, the consortia, not the governments of the oil-producing countries, had a free hand in determining the quantity and price of the output. Thus, beginning in the twentieth century and continuing for more than half a century, the West was able to exploit the oil resources of the Middle East with little interference from, and few benefits for, the states from which that oil was extracted.

The so-called oil revolution that culminated in the 1970s was nothing more than a step-by-step whittling down of these privileges by the countries under whose territory oil lay. For example, in 1961 the Iraqi government asserted its right to drill for oil in areas of Iraq not being exploited by the Iraq Petroleum Company. The oil-producing countries won the right to haggle with the major oil companies about prices only in 1971, and it took until 1973 for them to win the right to set prices unilaterally. They also had to wait until the early-to-mid-1970s — the highpoint of economic nationalism and Third World assertion — to take full control over the consortia operating in their countries. Algeria and Iraq led the way, nationalizing their oil industries in 1971 and 1972, respectively. Libya, too, began its nationalization campaign in 1971. In 1973, Iran negotiated what was, in effect, a takeover of the Anglo-Iranian Oil Company. With an ironic tip of the linguistic hat to the d'Arcy concession, the agreement read that Iran was to assume responsibility for “the administration and control of all activities pertaining to the oil industry in the area of agreement, including exploration, development, investment, production, refining, and transportation of crude, gas, and oil products.” Persian Gulf countries, beginning with Kuwait and Dubai, joined the bandwagon in 1975. Rather than using the term “nationalization,” which would have set off red flags in the minds of Western diplomats, they called their takeovers ”100 percent participation" in the consortia working in their territories. Most did not attempt to acquire 100 percent participation overnight. For example, in 1973 the government of Saudi Arabia acquired 25 percent of the shares of ARAMCO (Arabian-American Oil Company), the consortium that controlled the oil business in the kingdom. A year later, it acquired 60 percent. It was not until 1980 that it acquired 100 percent participation. One hundred percent participation is, in effect, nationalization.

Oil-producing states were able to assume greater control over their most important resource in part because they acted in concert. Cooperative action among producers began at the instigation of Venezuela after World War II. In 1947, the Venezuelan government demanded that oil companies drilling in Venezuela pay for the privilege by splitting their profits with the government 50-50. To make sure the oil companies did not simply substitute more profitable Middle Eastern oil for theirs, the Venezuelans sent emissaries to the Middle East to spread the word about 50-50 profit-sharing there. It proved popular, not in the least because it promised to increase the revenue of producing countries dramatically. In 1960, Venezuelan emissaries returned to the region with the idea for an association to represent the common needs of producers. Historians disagree about the reasons for this sudden interest in institution-building. Many believe it was triggered by the deep cuts in the price of oil made by the oil companies in response to excess supply. The companies did not consult the producers about the price cuts, as was the norm at the time. Under the 50-50 formula, price cuts meant revenue cuts for the producing country. Outraged by this turn of events, the Venezuelan government initiated talks with four other affected governments — Kuwait, Saudi Arabia, Iran, and Iraq. The result was the Organization of Petroleum Exporting Countries (OPEC), founded to ensure “the unification of the petroleum policies of member countries and the determination of the best means for safeguarding their interests.”

OPEC came into its own during the late 1960s and early 1970s when oil producers began flexing their muscles. They forced the major oil companies to accept price increase after price increase. They made the companies accept their right to collective bargaining and their participation in consortia operating in their territory. They introduced a pricing system that would automatically adjust for inflation. And they were able to do all this because of increased competition for their product in uncertain economic times. When the 1973 October War broke out, what turned out to be the last round of negotiations about prices between OPEC and the major oil companies had just collapsed. OPEC seized the moment. For the first time in history, OPEC set the price of oil without any input from the companies. Then OPEC members made sure that price stuck. Proclaiming their solidarity with the two Arab belligerents, Egypt and Syria, Arab members of OPEC temporarily decreased production. This limited supplies and thereby raised prices. The price of oil jumped 380 percent and wealth flowed back into the region from the industrialized, petroleum-importing world.

The final transformation of OPEC took place in 1982 when the organization became a cartel. Economists define cartels as groups of businesses, or, in this case, states, that coordinate policies to limit competition. This enables them to ensure a high price for their product. By 1982, the price of oil had leveled off, despite the spectacular price rise of 1973 and another price spurt in the wake of the Iranian Revolution of 1978-1979. To keep prices high, the OPEC countries decided to assign themselves shares of the international market.

OPEC ministers meet regularly to decide how much oil each producer should pump. The meetings are usually contentious. Saudi Arabia, with an estimated population about one-third that of Iran, will never become an industrial powerhouse and will never overcome its dependence on revenues from oil. Saudi Arabian ministers have traditionally fought to keep prices down to prevent new sources of oil from becoming economical. After the price hike of 1973, for example, the exploitation of North Sea and Alaskan oil fields became profitable. In a way, Saudi fears have already been realized. Whereas OPEC nations once accounted for about three-quarters of the worlds supply of oil, they currently produce only about 40 percent. The Saudis also fear that high oil prices would encourage the West to turn to alternative sources of energy, such as nuclear or solar power. Iran, on the other hand, has a large population and an industrial infrastructure that Saudi Arabia can only envy. Since the 1950s, it has sought to end its dependence on oil revenues by becoming an industrial power. Iranian ministers therefore argue for higher prices so that they might reap immediate profits to invest in their industrial economy of the future. Then there is Iraq. Before the 1991 Gulf War, Iraq demanded an equivalent market share with its neighbor to the east. Although Iraq has a population one-third the size of Iran's, it has had a history of contentious relations with that neighbor. After a great deal of back-and-forth, OPEC ministers return home with production quotas in hand for their governments. Then governments cheat on those quotas anyway.

In spite of attempts at price-fixing, complaints by Western politicians and consumers that they are being held hostage by a greedy cartel is a little like Claude Rains in Casablanca discovering there is gambling going on in Humphrey Bogart's nightclub. Before 1973, a cartel of Western oil companies known as the “seven sisters”—Exxon (Standard Oil of New Jersey), Mobil (Standard Oil of New York), Chevron (Standard Oil of California), Gulf, Texaco, and British Petroleum (Anglo-Iranian Oil Company)—controlled all aspects of the oil industry. Because of the importance of oil for national economies, the cartel could count on the support of Western governments in their negotiations or confrontations with their hosts. Thus, in 1951, when the Iranian government had the temerity to nationalize the holdings of the Anglo-Iranian Oil Company, the British and American governments imposed sanctions on Iran, arranged for an international boycott of Iranian oil, and organized a coup d'état that brought the Iranian government down. The oil revolution merely replaced one cartel with another — and a not particularly effective one at that.

The decade of the 1970s thus seemed to mark the beginning of a new era for both the Middle East and the rest of the world. Fernand Braudel, the great French historian, speculated at that time that the oil revolution might be epoch-making because it would reverse the flow of wealth from the East to the West that had been ongoing for two centuries. From the Middle Ages through the eighteenth century, he wrote, wealth flowed from west to east as the value of goods Europeans bought from the East — spices, silks, etc.—exceeded the value of goods bought by the peoples of the East from Europeans. Beginning in the eighteenth century and continuing through the first three-quarters of the twentieth, the value of goods the peoples of the East bought from the West — mostly finished products — exceeded the value of goods the peoples of the West bought from the East. It was entirely feasible, Braudel surmised, that the oil revolution would herald the beginning of an epoch in which the flow of riches would be reversed once again.

Three decades later, it is clear that the effects of the oil revolution have not been as epoch-making as, for example, the European discovery of the Americas or the onset of the industrial revolution. Middle Eastern oil producers and Western oil consumers are not two adversaries locked in combat. They are more akin to co-dependents locked in an uneasy embrace. The Middle Eastern oil producers must sell their oil. The West must buy it. Hence, in spite of the continued animosity between the United States and Iraq in the aftermath of the 1991 Gulf War, and in spite of the fact that the United States continued to enforce sanctions on the regime in Baghdad, the United States was the biggest consumer of the oil that the Iraqi government was permitted to sell. Large sums of money from the West did go to the Middle East, but much of it returned to the West as investments or was deposited in Western banks, where it was “recycled.” In other words, no dramatic change took place in the relative positions of the West and the Middle East as a result of the oil revolution. In fact, oil has had much the same effect on the twentieth-century Middle East as had cotton on nineteenth-century Egypt. Both reinforced a pattern of trade that has been favorable to the West.

This is not to say that the oil revolution brought no changes to the region. Rather, it is to say that the changes brought about by the oil revolution have mainly affected economic, political, and social life within the Middle East itself. For example, as discussed in Chapter 15, access to rent has sustained governments in the region and has given them an unprecedented ability to control and direct their states. What this means for the future of the region is, however, controversial. Some political scientists argue that an overdependence upon rent is actually the

Achilles heel of Middle Eastern governments. They assert that governments in the region have been dangerously dependent on the international market or on the goodwill of foreign governments. If those sources of revenues dry up — if, for example, the price of oil plummets or foreign governments cut off aid — states have no safety net to make up the shortfall. Because citizens of rent-dependent states are bound to their governments in the same way that clients are bound to patrons, they maintain, once the subsidies or jobs or welfare benefits dry up, the bond connecting them may very well break. And because governments have gone out of their way to let the citizenry know just who is responsible for their good fortune when times are flush, when the pickings are slim that same citizenry knows just whom to blame.

Evidence for this theory is slim. The one case to which a drop in oil revenue might be linked to civil unrest took place in Iran, but the linkage is more complex than the theory allows. Oil prices leveled off from 1975-1977, but the shah kept on spending, banking on a future rise. When oil field workers went out on strike in 1978, the government was both starved of new revenue and unable to draw on old. This, of course, limited the regimes ability to respond to the ongoing revolutionary upsurge. It might also have limited the regime's ability to maintain the loyalty of those dependent on it. The result was Ayatollah Khomeini. Perhaps. As for linking drops in oil prices directly to revolutionary activity in the Middle East, however, here's the scorecard: oil price spikes turning into price declines: 2 (1973-1974, 1979-1980); resulting revolutions: 0.

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Wealth from oil revenues financed this housing project in Baghdad. (From: Fondation Arabe pour l'image, Beirut.)

In addition to affecting individual states in the Middle East, there is a regional dimension to the oil revolution as well. In the wake of the revolution, the lines dividing rich from poor states in the region became more tightly drawn. The former states export oil. The latter export labor to the oil-producing nations. This division between rich and poor has had a number of repercussions. The Gulf region, considered a social and cultural backwater by many in the more populous and cosmopolitan regions of the Middle East, assumed a new and important role in the inter-Arab balance of power. For example, after the 1967 Arab-Israeli War, Saudi Arabia, Kuwait, and Libya (at that time a conservative monarchy) began paying subsidies to the so-called frontline states bordering on Israel to enable them to restock their arsenals. Because the payments were made in quarterly installments, the oil states maintained constant leverage over the foreign policies of Egypt, Jordan, and Syria.

At the same time, the labor-exporting states have become increasingly dependent on remittances — money sent home by expatriate laborers employed abroad — to ease their financial burdens. Remittances are a peculiar form of rent. They go to individuals and families, not to governments. For this reason, some political scientists argue that remittances actually weaken the governments of labor-exporting states by lessening the dependence of the citizenry on them for economic favors. Again, this view is not undisputed. Skeptics maintain that the export of labor may act as a safety valve in states where population growth and the spread of education have far outpaced economic opportunities. Furthermore, remittances add to states' coffers. They increase the revenue from import duties (not all the money sent home, after all, is spent on domestically produced goods). They also provide states with foreign exchange. Whatever the case, the oil revolution sparked a migration of labor that has affected all states within the region. In 1968, for example, no more than ten thousand Egyptians worked abroad. Within ten years that number increased to over half a million. Between 1973 and 1985, one-third of all rural Egyptian men worked at some time during their lives in the Gulf. During the same time, 40 percent of the Jordanian workforce was abroad.

Like the uneven distribution of oil, the export of labor has had political effects on the region. Remittances have become an important source of supplementary income for the states that export labor. As a result, the threat that labor importers will expel guest workers can be a potent tool in their hands to exact concessions from their labor-exporting neighbors. During recent years, labor-importing nations have moved beyond merely making threats. On the eve of the 1991 Gulf War, Iraq expelled one million Egyptian workers. Egypt was a member of the Gulf War coalition. After the war, Kuwait expelled upward of seventy thousand Palestinians whom they accused of acting as a fifth-column for the Iraqis. Not to be outdone by their, smaller neighbor, Saudi Arabia expelled one million Yemeni guest workers the same year to protest Yemen's support for Iraq. Labor migration has thus further strengthened the hand of labor importers in the regional balance of power.

Labor migration has also affected social life throughout the region. For example, the employment of male workers in the Persian Gulf has led to what one Egyptian sociologist has called the “feminization of the Egyptian family” and a shift in women's roles there. In the absence of men, lower- and middle-class Egyptian women have become temporary heads of households, play a greater role in domestic decision making, and have built broad, community-based networks outside the home and family upon which they have come to depend. But if labor migration has created new forms of community bonds in Egypt, it has had an opposite effect in many states that import labor. There, labor migration has created cleavages between citizens who are entitled to government benefits and non-citizens who are not. As of 2004, noncitizens (from within and without the region) made up between one-quarter and one-third of the inhabitants of Saudi Arabia and Libya, two-thirds of the inhabitants of Kuwait and Qatar, and four-fifths of the inhabitants of the United Arab Emirates. While the Pakistanis and Bangladeshis who live in the impoverished Kuwaiti towns of Fuhayhil, Jahrah, Hawalli, or Kaifan, for example, provide unskilled labor for the oil-rich principality, they are shunned by the privileged minority of native-born citizens.

The divide separating guest workers from citizens is not the only cleavage opened up by the oil revolution. Another has emerged as the oil-producing countries of the Gulf have had to balance the aspirations of their more Westernized citizens with the social norms of societies that had been little more than frontier territories before the contemporary period. The split between “traditionalists” and “Westernizers” often takes place within a context of a struggle pitting former elites against royal households. Tribal leaders, merchants, landowners, and ulama, claiming to represent the “traditional” values of society, often resist the policies and practices of the Westernizers. Those policies and practices, not coincidentally, would further reduce their already diminished power. On the other hand, many of the so-called Westernizing policies and practices in the smaller Gulf states are imposed from the top by kings and shaykhs. Not coincidentally, those policies and practices would increase the popularity of the central government among the more cosmopolitan elements of the population and strengthen its power.

What makes the squabble between old and new elites so intriguing is the fact that on closer inspection the “tradition” of kingdoms and shaykhdoms in the Gulf turns out not to be so traditional after all. Although royal households appear to be sanctioned by timeless custom, they are, in fact, novel to the region. It was the British who transformed influential families in Kuwait, Oman, Bahrain, Qatar, and the United Arab Emirates into royal dynasties by signing agreements with them during the nineteenth and early twentieth centuries. The British supported their dynastic ambitions. The newly anointed “rulers” recognized special British rights in their territories. All this provides the context for the bizarre confrontation that pit Kuwaiti “traditionalists” against Kuwaiti “Westernizers” in 1999. After the “traditional-but-progressive” amir of Kuwait decreed that women would have the right to vote, his decree was overturned by a majority of the members of that most Western of all institutions — a parliament. Women had to wait another six years before parliament reversed itself.

Oil has had one further effect on the Middle East that merits mention here. Oil has made the region strategically important to outside powers, particularly the United States. Think of it this way: The United States has a historic connection to the West African country of Liberia. Liberia was founded by freed American slaves in 1822 and over the course of the nineteenth and twentieth centuries Liberia resembled an American colony, in deed if not in word. Between 1989 and 1996, Liberia experienced a bloody civil war in which a quarter of a million of its citizens died (another civil war broke out in 1999). On the other hand, the United States has no historic connection to Kuwait, which was a British protectorate until its independence in 1962. According to Amnesty International, during the Iraqi occupation of Kuwait (1990-1991), far fewer Kuwaitis — several hundred — were killed than the numbers of Liberians who perished in that country's civil wars. Yet the United States put together an international coalition and sent five hundred thousand of its own troops to liberate Kuwait. The American response to events in Liberia was tepid at best. Even after the secretary general of the United Nations personally appealed to the American administration to send peacekeeping troops to Liberia in 2003, the United States sent only a token force of two hundred marines. Kuwait is one of the world's largest producers of oil (currently number thirteen) and is located in the midst of one of the biggest pools of oil in the world. Even the Liberian government classifies Liberia's oil reserves as “moderate.”

It would be simplistic to say the United States waged the 1991 Gulf War — or launched the 2003 invasion of Iraq — just for oil. It would also be simplistic to deny the importance of oil in the calculations of policy makers. Those calculations are a complex story, as are the interests they juggle and the policies they shape. It is for this reason they are the subject of the next chapter.

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