Middle East’s Reliance on Oil: Causes and Consequences of Oil Crisis

Oil has been around for over decades, dating well back to the late 1870s when the first oil well was ever drilled in Titusville, Pennsylvania. It has consistently been in high demand around the world ever since, and its price continues to rise to this day. The demand for oil began to rise after the automobile boom in the 20th century when it played an integral role for fuel used in machinery during WWII. With that being said, many Middle Eastern countries are home to some of the largest oil reserves in the world today, including Libya, Iran, Iraq, and Saudi Arabia to name a few. This essay will discuss how the Middle East has become largely dependent on this natural resource in order to maintain the economic success of the countries within, and also how sustainable the future of the oil-driven economy looks. This will be shown through an analysis of the Organization of Petroleum-Exporting Countries (OPEC), the United States' relationship with Saudi Arabia, the sustainability of government-funded programs in the Middle East, and the two major oil crises that occurred in the 1970s.

There are different components to break down when discussing the Middle East’s reliance on oil. They comprise of the Western’s control of oil, The United States’s dependence on oil, and the future of the oil reserves. The goal for Europeans in the 19th century was to dominate the land of the Middle East after they had heard that Englishman William D’Arcy had struck gold when discovering an enormous oil reserve in Persia. A big reason for the desire of oil at the time was because automobiles were at it’s beginning stages, and also the fact a majority of electric-power plants were made off of oil. The Europeans eventually got their wishes granted with the Sykes-Picot Agreement in 1916, and soon later the U.S. would come in as an important player as well. It is important to note that the U.S. was interested in forming a relationship with Saudi Arabia because they had come to the conclusion that there were would be no way to surpass them in the oil industry due to the high supply in that region of the world.

The U.S. eventually began to realize that their oil prices were being undercut by the Middle East, and they faced the fact that the oil industry in their region was slowly becoming obsolete. Relations between Saudi Arabia and the U.S. began after the conclusion of WWII when France and Britain both lost most of the control over the Middle East due to unsustainable political and economic strategies. As a rising world power at the time, America expanded its presence in the region exponentially by establishing a strong relationship with Saudi Arabia’s founder; King Abdulaziz Ibn Saud. From 1933 and onward, the two countries both maintain a warm connection between one another under President Donald J. Trump and Saudi leader Mohammed Bin Salman. According to Victor McFarland, a professor at Yale University, “Saudi elites chose to cooperate with the United States, but only within certain limits. They valued the United States as a strategic partner against threats from the Soviet Union or local actors like Iraq and Iran, but they strongly opposed U.S. policy on the Arab-Israeli conflict”.

Although there has been a long-term success in relation to oil reserves in the Middle East, there have been forecasts that predict this success may not be sustainable in the foreseeable future. A situation that many economists use as an example of the oil industry failing would be the 1973 oil crisis, where members of OPEC proclaimed an oil embargo in October of that year. “Six producer countries of the Middle East, led by Saudi Arabia, had announced a five percent cut in the supply of oil. They promised a further five percent reduction every month until the United States stopped obstructing a comprehensive settlement of the Israel- Palestine conflict”. The embargo was an attempt to remove the U.S. from any sort of oil-related activities in response to their involvement in the Yom Kippur war. This embargo raised the prices for a barrel of oil from $3.50 in 1973 to $14.40 in 1977.

Another catastrophic oil crisis occurred six years later in 1979, this one a result of the Iranian Revolution. Labeled as the “energy crisis”, this revolution lasted a year and ultimately ended with the collapse of grand ayatollah Shah Mohammad Reza Pahlavi. Due to the conjunction of the revolution, Iranian oil output decreased by 4.8 million barrels daily by the end of January 1979. Members of OPEC decided to rally around Iran with increased output of products hoping that it would equalize Iran’s downfall. These two occurrences have shown the global impact that the Middle East has on the oil economy.

Today, the oil-rich Middle East has begun to invest in alternative sources of income, preparing themselves for when the petroleum economy inevitably becomes unprofitable. As stated before, a bulk of the region’s oil comes from six countries; Iraq, Iran, Kuwait, Qatar, Saudi Arabia, and the United Arab Emirates. The combination of these six countries produced approximately 25 million barrels of oil daily in 2016. Saudi Arabia, which still sees around three-quarters of their revenue from oil has begun to diversify their output and worked to export minerals including aluminum and gold, aiming to eventually replace oil. Along with this, they are also trending towards developing renewable energy schemes across the region. “In the oil-producing heart of the Middle East we’re seeing investments in renewables at costs that are really game-changing,” says Adnan Amin, director-general of the Abu Dhabi-based International Renewable Energy Agency (IRENA).

With great changes also comes hefty challenges as well. Because the Middle East has spent the majority of the 20th century in the oil industry, there will be a major issue in the near future when changes do occur. Also, oil-funded programs such as Saudi Arabia’s free education and health care will be forced to get shut down. With the loss of jobs and a decrease in social benefits, changes will have to come at a cost.

The discovery of oil in the Middle East has forever changed the landscape of the world, both in terms of geography and economics. A majority of Middle Eastern countries became oil-driven after its discovery, with certain government programs strictly financed off of the revenue generated from the industry. “Since the discovery of oil in the 1930s, Saudi Arabia’s nomadic Bedouin tradition has been replaced by a modern lifestyle similar to that of other highly developed countries”. Along with Saudi Arabia’s free healthcare and education system, the country does not require any sort of tax collection or contributions from any of its citizens. With a combination of rising costs, changing disease patterns, an aging population, demographic changes, and an increase in sedentary lifestyles, the government currently faces a multitude of tasks that are at risk of straining these publicly funded systems. The government hopes to find a solution to this problem by trending towards a social or national insurance-based system.

Those that do not live in a petrostate are still affected by the changes that are met in the petroleum economy. The Middle East has been the centrality of fossil fuels to our world for hundreds of years as mentioned before, and some of the possible outcomes that ensue due to low oil prices and high supply in the near future can cause nightmares. OPEC currently controls over half of the world’s remaining conventional oil, and therefore will be heavily relied upon with the increasing supply of oil production in the future. As of 2019, there are fifteen nations and countries that are a part of this organization. These include Algeria, Angola, Ecuador, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, the Republic of Congo, Saudi Arabia, United Arab Emirates, and Venezuela. Of these 15 countries, nearly half of them are in the Middle Eastern region. This impact of the Middle East on the oil industry was exhibited during the annual OPEC talks in 2017 when stability issues within the Middle East dominated talks all throughout.

In conclusion, the Middle East has been at the top of the oil industry for an extraordinarily long time. Although they lost control of their land due to the Western Region in the early 1900s, they were ultimately able to regain authority. As one of the top powers in the oil industry, the changes that occur within the region’s economy can greatly affect the global economy, and this was shown by the two-oil crisis’ in the 1970s. Through the discovery of oil, countries in the region such as Saudi Arabia were able to implement universal health care and education, helping to provide an immense quality of life for their citizens. A dilemma that comes up for the Saudi Arabian government is that with such a heavy reliance on their oil-financed programs, a long-term level of sustainability is hard to withstand. The chances that the industry could become unsustainable at any given moment are quite high due to factors such as climate. Having said that, there has been a conservative effort on their end to invest in alternative sources, as shown by their recent two-hundred-billion-dollar investment in solar energy. All in all, the oil industry is still crucial to the Middle East’s economic success at this very moment.