Beyond the Middle Eastern turmoil: its effects on us and the global economy

(Toward Philippine Economic and Social Progress)

Global developments affect national economic and social progress. Turmoil in the Middle East – conflict among its nations, internal power struggles, and day-to-day violence – are not as distant to us as they may seem.

Beyond these short-term events, I look at the long term consequences of these regional conflicts from the point of view of energy – a product of extreme importance to our modern civilization.

“Energy demand and production after 1970.” The technological basis of modern life is fuelled by petroleum energy and its derivatives.

Before World War II and well into the 1970s, the world’s international trade in energy resources was mainly sourced from the Middle East. That was where large reserves and cheap discoveries continued to be found.

Of course, many countries had their own energy resources, but a lot more of them were dependent mainly on imports of energy to sustain their economies. For instance, until the mid-20th century, the United States was fully sufficient. But other countries were highly dependent on imported supplies: the case for much of industrial Europe and also Japan.

“Energy shock of the 1970s paves the way for new directions.” The energy shock of the 1970s undid the foundations of long term dependence on world energy supplies on the Middle East. Of course, the base of energy supplies continues to be located in this region.

The energy shocks of that period changed – translated as a large multiple rise of energy prices – the nature of power and wealth of many of the participants to the economic drama.

Recall, a barrel of crude in the mid-1960s was still below $2 per barrel. Today, energy from crude is above $120 per barrel.

We focus on how that drama has evolved beyond the messy political events that we observe today.

“Super rich Arab states emerge.” From the viewpoint of the supplier countries in the Middle East, the energy shock became the supreme income boons to their domestic economies. The energy producers became ultra-rich and powerful.

The absorption of new money was too much for these countries and they therefore accumulated huge reserves of currency earnings from exports. Such earnings found their way as deposits in the powerful money banks of the industrial world, thereby flushing the world with new liquidity that had to find uses.

Arab money had become part of the lifeblood of the world economy, financing development projects in other countries, including those of emerging nations. Arab resources also increased their financial power in the world’s financial and development institutions.

New Arab wealth also helped to finance oil and energy exploration projects not only in the Middle East, but also in many other countries. It became either a lender to the world’s capital markets or investors in major international corporations. It has become a source of financial wealth in acquiring commercial, industrial and property assets located in many countries.

The build-up of these large savings and financial wealth enabled other nations to finance their domestic fiscal deficits. Through their purchase of bonds of rich countries like the US and many European countries, the latter nations could continue to sustain their own economic imbalances.

“Domestic growth of the super-rich Arab nations.” In their domestic realms, the new riches opened vast opportunities for these countries to develop their economies. Because of their low population levels, their growth and development opened new opportunities for employment of workers from many other countries.

From the period of the late 1970s, the opportunities for work in the Middle East expanded. Countries badly affected by the energy shock – like us, the Philippines – found new ways of compensating and adjusting in view of our dependence on energy supplies from outside.

A large component of human skills – from the highest to the low – from the rest of the world saw their way into the economies of the Middle Eastern countries. At the very least, it attracted skilled workers from less developed countries. But it also had an inflow of human skills from the developed world.

Today, we observe how once barren desert lands have been transformed into new transportation and communication hubs. Also, we find new but large commercial and industrial urban communities sprouting in these countries. These new communities were also connected by networks of roads and other facilities, making them facilitate the growth of commerce and other economic activities.

At first, facilities and infrastructures were built. The construction phase provided the impetus for skills from different parts of the world, the Philippines included, to find employment there.

As the construction phase was done, the demand for foreign workers shifted to operation and maintenance of these facilities. Also, new and complementary economic activities induced further widening and deepening of domestic commerce and industry.

On our part as a country, the development of work opportunities in the Middle East paved the way for Filipino workers there to send home a large part of their incomes as remittances to sustain their families at home.

Remittances have given Philippine balance of payments cushion to strengthen the country’s macro-economy.

“Redistribution of energy wealth across the world.” When cheap energy from carbon deposits (petroleum, gas, and coal) became expensive as a result of the energy shock, new sources of supply of energy that compete with traditional carbon-based fuels also became economically viable. Other non-conventional sources emerged.

Also, it became possible to explore for oil and gas in deeper and harder to tap terrains – offshore and deeper offshore, the arctic, new lands previously untapped, and on substitute technologies.

Even as the incomes of oil producers increased many-fold, the opportunities to look for substitute sources of fuel multiplied. The biggest technological development based on carbon-based fuel is “fracking”, which is a new method of converting cruder forms of carbon into traditional sources of fuel, competing directly with petroleum and gas. Fracking has made the US economy now energy independent.

This is why, even with the turbulence we observe today in the Middle East, the price of crude energy will no longer be subject to the same turbulence that we once experienced during the 1970s and 1980s.

My email is: [email protected]. Visit this site for more information, feedback and commentary: http://econ.upd.edu.ph/gpsicat/