The Islamic World and Oil

The Islamic World and Oil

 

Introduction

Alhumdullilah- by the mercy of Allah (SWT) – the Islamic world has been endowed with one of the most valuable natural resources in the modern world – Oil. Of all proven oil reserves 65% are in the Middle East. If the known oil reserves of Muslim Africa are included – the proportion of the world's oil reserves that lie in Islamic lands rises to over 70% - i.e. 7 out of 10 barrels of all know oil reserves.

If we add to this the 44% reserves of natural gas in the Islamic world, of which 36% lie in the Middle East, there is an enormous abundance of energy resources in the Muslim lands.

Given that much of oil in the Middle East was discovered in the 1960s and that since then there has been almost uninterrupted production averaging several million barrels a day, the nations of the Arab world would be expected to be leaders in the region if not the world. As an example since 1965 Saudi Arabia alone has pumped a total of 941 billion barrels of oil. This is equivalent to Kuwait's current total oil reserves. At a conservative $15 a barrel this amounts to revenues of nearly $1.5 trillion. However, the generated wealth does not appear to have resulted in development and progress when one looks at the region's statistics:

• Despite being endowed with huge amounts of arable land, most Arab nations are not self-sufficient in food and many import large amounts of staple and basic foodstuff.
  
  
• Poverty - unheard of in some rich Arab countries a decade ago - is rising, with the proportions of people living on less than $2 a day growing.
  
  
• Regional underemployment is high despite high educational achievement in some countries. Actual unemployment is also growing.
  
  
• In the so called 'rich' Arab countries infrastructure built in the wake of the oil price boom in the 1970s and 1980s is in disrepair at a time when demand for public services such as health and education have never been as great.
  
  
• Nationalist and territorial disputes threaten water supplies in the Middle East - one of the most arid regions of the world.
  
  
• None of the countries can be considered among industrial nations.
  

The veneer of city-states like Dubai, with its high rise apartment blocks, 5 star international hotels and the new Internet-city conceal fundamental and major structural problems facing the Arab world.

This article will show how despite the abundance of oil the Islamic world at the most basic level is unable to independently cater for the basic needs its people. Despite still possessing huge oil reserves many of these economies have large public sector debt and all face huge challenges in the near term. Population growth rates in the Arab world are among the highest in the world and the demand for health care and education is expanding rapidly. The young who make up a significant, in some cases a majority, of the population will soon need jobs and homes.

Failed States

Due to short-termism on the part of the oil companies as well as the desire by the Western oil companies to control the refining of crude and through it their hold on oil production and oil producing countries, the Arab countries are starved of manufacturing industries even in the oil sector. 2002 production data shows that while the Middle East produced nearly 30% of the world's crude oil, a mere 8.7% was actually refined within the region. Without manufacturing there is no value added which means that there is no wealth creation, which is critical to build an industrial base and develop a modern self-sustaining economy.

Through Capitalist macroeconomic policy management – much of it inspired by the IMF – the Arab countries have neglected the agricultural sector and the fertile arable land over several decades. As a result where countries were once self sufficient in food, the same countries now import much of their basic stable food requirement. As an example Egypt imports over 50% of its 13m ton per annum wheat requirements when once it was able to supply its people from domestic production alone. Part of the reason for this is the desperate need to conserve water – by importing virtual water – through food imports.

The by-product of much of the macroeconomic management – principally the structural adjustment programmes - which have cut public expenditure, has been increased poverty. Poverty once unheard of in the region's rich nations has grown in the last decade or so. According the UN's Arab Human Development Report , one out of every five Arabs lives on less than $2 per day. According to the same report, open unemployment in the region was estimated to be no less than 15% of the labour force. Egypt – with one of the most educated workforces in Arab world – derives most of export revenue from oil (raw material), Suez cannel dues and tourism. Human talent is wasted on a huge scale with PhD students acting as tourist guides as opposed to being part of the wealth creating, dynamic economy.

In the 1970s and 1980s hundreds of billions of dollars were spent - via five-year plans in the case of Saudi Arabia – to build public infrastructure. Extravagant sums were spent building the Jeddah and Riyadh airports alone. However, much of this is now in disrepair.

The region's water supplies – particularly important due to the arid climate – are under threat. According to the UN Arab Human Development report fifteen Arab countries are below the water "poverty line" with less than 1,000 cubic metres per person per year. National leaders acting on short-term national interest have exacerbated the situation.

Motivated by pragmatism, nationalism and the desire to maintain the political status quo governments in the region without little exception:

• Subsidise industries that must be in the private sector;
  
• Nationalise companies that must be part of the public industries.
  
• Control capital flows but at the same time the political elite invest hundreds of billions of dollars of largely oil money in the economies and industries of America and Europe. It is estimated that between $400-800 billion of Arab funds are invested abroad.
  

Many of the Gulf countries are in reality large cities and are not modern states at all. Many do not have the capacity or capability – standing army, agriculture and industry – for self-sustaining growth. The makeup of the Gulf region reflects the design of the colonist powers to break-up the Muslim world. The make-up does not reflect any productive bond between the people. Indeed, were it not for the oil many of the states of the GCC would find it difficult to achieve self-sustaining growth.

Despite several decades of oil production including the hike in prices in 1973, which generated hundreds of billions of dollars of revenue for Gulf exporters, most of the economic activity remains dependent on the governments' spending of oil revenues. While government planers have developed infrastructure – roads, airports, hospitals and schools - particularly in the Gulf, there has not really been an imperative – until recently – to diversify economies away from oil. Consequently many of the economies remain precariously dependent for much of their economic growth – and much needed export earnings - on the international price of crude.

A number of reasons are presented for the current state of affairs including:

• Islam. Theocratic/Islamic regimes – which know little about economics, let alone modern day demands from globalisation, technological change and international money markets.
  
• Cradle to grave welfare systems particularly in the rich Gulf States, which produce unproductive labour and budgets deficits. This in turn leads to foreign borrowing.
  
• Lack of a free market. High tariffs, nationalised industry, food and fuel subsidies create inefficient protected industries.
  
• The Arab/ Israeli conflict. This creates political instability and deters foreign investment in the region, which is seen as a major contributor to economic growth.
  
• Over reliance on oil and a lack of industrial diversification exposes the economics to external shocks in oil prices.
  
• The freedom factor. Women lack 'rights and freedom' and so it is thought that half the economic potential of a nation is unused.
  
• No new/creative thoughts due to closed authoritarian societies. No free press.
  

These above reasons can be characterised as: Wholly incorrect; politically and ideologically motivated; and not going to the root of the matter.

Myth from Reality

Islam is not to blame because none of the countries in the region actually implementing it holistically and comprehensively. Indeed, if we look historically at what has been implemented in the region:

• 1970s: Nationalisation and state subsidies. After independence oil companies throughout the region were nationalised in some way or form- Iraq in the 1960s and Saudi in the 1970s as an example.
  
• 1980s: IMF restructuring policies. Many countries adopted advice from IMF economists of balanced budgets. The insistence by the IMF on Egypt to remove subsidies of stable foodstuffs led to food riots in Egypt in 1977 as an example.
  
• 1990s: Free-market policies. The IMF and World Bank prescription was: liberalise economies; which meant privatisation – particularly in the lucrative energy sector. Other initiatives included the removal of state subsidies, reform of banking including the charging a real interest rate to encourage savings and foreign direct investment. Saudi Arabia is an example here with deregulation and free market policies being pursued in order to encourage foreign direct investment.
  

Thus, the disastrous macroeconomic management of the economies has clearly been capitalist and most of the time the IMF and or World Bank or its agencies have directly prescribed the policies. Even when there has not been any need for IMF funds the Gulf and Arab country governments have sought the capitalist institutions' advice. When these governments have nationalised and given subsidies it has been inspired not on ideological grounds but based on pragmatism and to benefit the ruling elite who gained directly from state procurement programmes. Nationalisation has also been used to keep the most profitable business in control of the political elite. Privatisations will not remove the potential for political corruption.

Much has been written about the over dependence of the Arab economies on oil. It is said that the decline in industrial nations dependence on oil compared to the 1970s, the variability in the price crude and the fall in OPEC's share of trade in crude oil have impacted negatively on Arab countries. Diversification has been seen as the solution. However, this misses the point or the root cause. Oil in itself is not the core issue. Dependence wholly on the external market is. Thus diversification into tourism and international banking as is in the case of Dubai or the exporting of cash crops such as cotton as in the case of Egypt or deregulation of telecommunications to encourage foreign investment as in the case of Saudi Arabia will in no way reduce or remove the dependence on external markets.

An export growth strategy also has to be combined with a competitive exchange rate policy. Such a policy involves maintaining high currency reserves and its associated costs. The currency reserves that need to be held could alternatively be used in a productive way to bolster the economy. A competitive or devalued exchange rate tends to result in higher inflation and higher costs of basic and staple foods for the nation's people and as a result hardship. At the same time inflation is likely to cause higher unemployment in export sectors and industries. Unemployed in turn causes problems for government finances as it reduces public revenues and increases demand on public finances.

The lack of sustainable growth in the Arab world is directly the result of export orientated policies. Growth never becomes broad based or self-sustaining because either there are external shocks like floods or poor harvests that reduce the exporting country's potential to sell goods abroad and/or recessions in the developed countries - usually every 3-5 years – hit the countries export demand.

Capitalism's Contradictions

On many issues the agenda presented by the Western nations and Capitalism, as solutions are not that at all. This is exemplified by the fact that on many occasions especially related to a countries vital interest these are not the policies and systems that the Western countries themselves implement.

Firstly, if we look at focussing development or growth strategy on exports. As has been illustrated this is not a root to self-sustaining growth because fundamentally the country is extremely vulnerable to factors outside its control. Moreover, if one looks at the composition of GDP among Western economies exports play a relatively insignificant role. In the USA, which has the world largest economy, exports represented less than 10% of GDP in 2002 . These figures can be compared to Arab countries where exports represent sometimes 50% of GDP – as in the case of Kuwait . In Saudi Arabia exports account for a significant 30% of GDP . In both cases exports are dominated by just one category of commodity – petroleum products.

Secondly, a cornerstone of the IMF's policy proposals to Arab countries throughout the 1980s was to achieve balanced budgets – for annual expenditure to equal income. This involved cutting public spending on education, health and infrastructure spending. However, this had a direct negative impact on human development in the region as was identified in the UN Human Development Report 2002. As an example - presented above - in the case of Egypt it led to food riots in 1977. The IMF and Western economists and bankers continue to handout this prescription, with Argentina the most recent casualty.

However, these are not the policies pursued by Western nations when their own economies are facing difficulties. As an example post September 11 2001 both the USA and Europe eased monetary policy considerably with interest rates falling to 40 year lows. At the same time public expenditure rose massively – particularly in the UK – with the aim being to ease the impact of recession. This is in stark contrast to the policy stance adopted against the people in the developing world – high interest rates and public expenditure cuts – who face an even more desperate situation with many already living in poverty and without social security handout as in the Western countries.

Thirdly, the fallacy of trade liberalisation. The World Trade Organisation (WTO) targeted Doha last year and preached the benefits of free and open trade, in particular encouraging Muslim countries to embrace laissez faire market polices and to move away from protectionism. The WTO in conjunction with the IMF and the World Bank argue that openness stimulates economic growth and therefore developing countries must dismantle their trade barriers and liberalise their economies - remove subsidies - in order to expand industry and reduce poverty. In particular, the USA (an important backer of the WTO) spoke of the need to launch new global trade talks aimed at reducing trade barriers, which restrict the free movement of goods and services between nations.

However, recent events have exposed the hypocrisy of such statements and policies. In March 2002, the US unilaterally raised trade barriers by imposing tariffs (import taxes) of up to 30% on steel imports in order to protect inefficient domestic steel makers from international competition. Indeed, this was not the first time that such hypocritical policies had been exposed. The US resorted to similar measures against steel imports following the Asian economic crisis in 1997. The US also heavily subsidises its farmers, with the recent farm bill significantly increasing these subsidies.

The European Union (EU) has openly criticised the US and has threatened retaliation against the trade barriers on steel which are hurting European steel exports. Yet the EU itself presides over one of the most heavily subsidised agricultural sectors in the world under the auspices of CAP or the Common Agricultural Policy.

Whilst these are among the most publicised examples of protectionism by the USA and Europe they are by no means the only ones. An international law firm (Mayer, Brown, Rowe & Maw) has calculated that of the 348 anti-dumping investigations launched in 2001, only India rivalled the US as being the most active user of these informal trade barriers to protect domestic producers . Meanwhile, the EU was the second most popular target for anti-dumping investigations – aside from the CAP - with regards to supporting/subsidising domestic producers.

Moreover, a recent report from Oxfam – Rigged rules and double standards trade, globalisation and the fight against poverty – ranks the EU ahead of the US, Japan and Canada as the most heavily protected industrialised economy to imports from developing countries. Among the most heavily protected sectors in industrialised countries are agriculture, textiles and clothing some of the most important export (or potential export) sectors for many developing countries in Asia and Africa.

Significantly, an internal agency within the IMF – Independent Evaluation Office of the IMF – has very recently published a report , which highlights some of the failings of IMF lending in the late 1990s. To list a few of the admissions:

• The IMF failed to give proper warnings to the authorities concerned that crises were on their doorstep.
  
• Some of the IMF's remedies turned out to be too painfully drastic for the problems at hand.
  
• The IMF prescribed macroeconomic policies, especially interest rates that were too tight – particularly in the early stages of its intervention usually at the height of the crises.
  
• As a condition of its aid, it demanded some structural reforms that were unnecessary.
  

Islam's view towards the economy and economic growth

The economic system in Islam determines how to distribute the wealth, how to possess it, and how to spend it or dispose. This is based on a unique viewpoint that Islam has towards ownership that is different from Capitalism and Socialism.

Property and human effort are components of wealth and they are the means that produce benefit. Islam interferes directly in the question of utilising some properties – so it prohibits the use of some commodities such as wine and dead foodstuffs. Similarly, it prohibits benefiting from some of man's actions such as prostitution. Additionally, regarding the method of possessing property and man's effort Islam has put numerous laws regulating this ownership, such as laws of hunting, land reclamation, and the laws of leasing, manufacturing, inheritance, donations and wills.

However, regarding generating the production of wealth, Islam encourages that through motivating the people generally to earn. Islam did not interfere in defining the technical manner of increasing production or the quantity of production, rather it left that to the people to achieve as they like. This falls in the realm of economic science and as with other sciences is universal to all nations and it is not associated with a particular ideology. This encourages innovation and technical development to increase efficiency and output.

Thus Islam views wealth ownership and wealth utilisation differently from increasing production. The former being economic system based on a particular viewpoint, and the latter being part of economic science and therefore universally shared by all nations.

This is in stark contrast to Capitalism, which treats both economic science and system as one subject. So the distribution of commodities and services is included in the subject of the production of these services and commodities. The implication of such an incorrect understanding is that Capitalism solution to all economic problems is merely to increase production or economic growth.

Islam's view towards the oil and gas sector

Crude oil is considered a Public Utility (Al-Milkiyyah Al-Ammah). Assets, which are public property, are those, which the Lawgiver stated as belonging to the community as a whole, and those He (SWT) prevented the individual from possessing.

Ibn Abbas narrated that the Prophet (SAW) said: "Muslims are partners (associates) in three things: in water, pastures and fire," reported by Abu Dawud.

Anas narrated from Ibn 'Abbas adding. "and its price is haram".

Ibn Majah narrated from Abu Hurairah (ra) that the Prophet (SAW) said: "Three things are not prevented from (the people); the water, the pastures and the fire".

Ownership of oil and related factories

In the 1960 and 1970 most Arab countries nationalised their oil sectors revoking past concession to a number of Western oil companies. As an example, in Iraq the Oil Ministry was a signed the task of overseeing the oil industry through the Iraq National Oil Company (INCO). This included oil exploration, engineering, design and all upstream and downstream operations. Nationalised property is neither public property nor state property. Under capitalism, nationalised industries are generally assets owned, run and managed by the state.

In Islam public property cannot be owned by the state as all individuals have a right to the property. State property such as Kharaj and Jizya can be given to some individual to the exclusion of others depending on the opinion of the Khalifah. However, with regard to the public properties, the State has no right to assign or give its origin (body) to anyone, although all peoples can benefit from them. The State has to manage the oil resources and related products together with the factories used to produce those products for the benefit of all Muslims. These factories are also allowed to be owned by individuals, where the state can hire them for a certain amount. However, the ownership by individuals, of the tools and factories does not allow them to use them in producing oil for themselves because oil is from the public properties for all Muslims.

Implications of public ownership

Public ownership is dogmatically condemned by Capitalism. This is because Capitalism propagates freedom of ownership and public ownership is to restrict or deny private individuals, companies and institution the right to procure assets ranging from schools and hospital to defence companies. It is argued that freedom of ownership brings with it incentives that pushes private companies to:

• Innovate
  
• Reduce costs and improve efficiency
  
• Focuses output on improving customer satisfaction
  

Additionally it is argued that privatisation

Removes the potential for corruption which is likely when assets are publicly owned

Removes costs from the public sector and thereby reduces public spending

Whilst Capitalist theory suggests this, empirical evidence of the realised benefits of private ownership are rather mixed.

Press headlines criticising excessive profits among private utilities, which were formally in the public sector, are examples of the public's dissatisfaction of some of the privatisations. In effect privatisation converted State monopolies in gas, water, electricity and telecommunications into private monopolies with ultimately the consumer paying the price.

In the UK, a recent report by a government body asserted a complete rethink in the involvement of the private sector in public projects largely because some of the so-called benefits of private ownership and private sector involvement have not been realised. Indeed, in many cases the opposite outcomes have actually transpired. As an example the report highlights the 10-fold increase in the costs of the IT system at GCHQ under the governments' Private Finance Initiative.

The biggest failed privatisation in the UK has been on the railways. Under Railtrack, a private company set-up to maintain, build and develop the rail network, Britain's railway system actually regressed. Following privatisation profits rose and directors' pay climbed accordingly. At the same time the costs of running and maintaining the system surged, there was massive under investment in the infrastructure and safety appeared to be comprised with a spate of fatal accidents including the Hatfield rail crash, which eventually led to the government dissolving Railtrack.

Finally, the idea that privatisation removes political corruption is very much questionable given that many of the government ministers and politicians that were involved in UK's privatisations of water, gas and telecommunications ended up on the board of directors at the same privatised companies.

Thus the dogmatism with which public ownership is seen by Capitalism has to be questioned.

Furthermore – and just as importantly – in Islam public ownership is not nationalisation . The perception in Capitalist economies is that nationalised industries are 'lame ducks' financed by the tax payer and the private sector and managed by workers with jobs for life – akin to a parasite.


In Islam Public Ownership is not Nationalisation

In Islam public ownership means responsibility and accountability. Capitalism believes individuals solely seek material interest while Islam motivates the Muslims to worship their Creator in all of life's actions. With respect to public ownership this mentality is exemplified by Khalif Umar Abdual Aziz who when a man came to him to discuss some personal issues turned out the candle he used when deal with public affairs and light his personal candle in order to deal with the man's issues.

Thus Islam does not deny that individuals need incentives. This incentive is the same in the private and public sector – above all the Muslim seeks to worship his Creator and that is his foremost motivation in all actions. Such a mentality should ensure that the Muslim does not waste public resources. Indeed it will motivate him to look after the public resources to the best of his ability – reduce costs and raise efficiency - because the resources/wealth/property is an ammanah, which Allah SWT will account him for. The role of the Islamic State is therefore to ensure that the issue of responsibility and accountability is at the forefront of the individuals' mind whether he is a worker or manager in the publicly owned oil sector.

Competition is arguably as important an incentive as ownership. Excessive profits in water, gas and the telecoms sectors in the UK resulted largely due to an absence of effective competition, which is particularly detrimental when the companies are privately owned, as there is little consideration of public interest. Thus the Islamic State – while keeping oil assets under public ownership – should encourage competition between its different oil producing and refining units using pay and rewards linked to productivity and efficiency.

The Islamic State while keeping oil assets under public ownership is allowed to hire or lease rigs, platforms, pipelines, tankers and refining plant and machinery to process the oil and get it to the market. Consequently, as long as there is competition within these industries, the State should produce oil and oil products competitively and efficiently.

Public ownership of assets also does not preclude the State clearly and precisely defining a service or an output that it wants to achieve – say the testing of oil samples – and contracting it to private enterprise or asking private enterprise to bid for such a contract. Indeed, any activity that can be clearly and precisely defined can be contracted to the private sector, which will have the incentive to innovate and be efficient.

The State should also establish bench marking between its various oil producing units to spread best practice (efficient) operations and processes amongst all. In effect this will remove inefficiency among the low performing operations.

Public ownership of oil will also ensure that long term investment and planning is devoted to a most valuable resource so that waste is minimised and oil is preserved for future generations. This is particularly important as short-termism in the private sector has led to waste and inefficiency.

A pertinent example here is the flaring of gas that occurs in Nigeria. Oil companies in Nigeria – many of which are household names in the West – have for a decade flared natural gases which are a by-product of the oil production in the region. The companies justify the wholesale wasting of this gas – not to mention the health and environmental damage it causes – by arguing that this is the cheapest option as it would cost too much to capture, store and transport the gas to market. This short sighted view has led to an enormous waste of resources given that Nigeria has an estimated 180 billion cubic feet of proven natural gas making it the ninth largest concentration in the world. In 2002, with more than 1,000 oil field located in the Nigerian delta, the country's oil producing operations were flaring 75% of the gas produced – that's equivalent to 2bn standard cubic feet of gas.

Public ownership of oil resources will also mean that the revenue generated is invested in the public interest and can be used for development. If the profits of the private oil companies are anything to go by this could provide significant funds for useful and productive public investment. To illustrate this, oil producers are among the biggest companies in the world with Exxon Mobil at number 3; Royal Dutch/Shell at number 10; and BP at number 15. An immense amount of development could be possible if this wealth is reinvested in the countries from which much of it is taken from. The Nigerian delta is among the least development regions in the world with desperate residents lacking in basic schooling and health care despite over a decade of oil exports from the region.

Oil produces many by-products such as synthetic rubbers, fibres, polystyrene, adhesives, road building material and most importantly plastics (it is estimated that 90% of all consumer goods use plastic). The State can assist businesses with easy and inexpensive access to oil in order to nurture and develop petrochemical industries. The State should also aim to be at the forefront (cutting edge) of new research and development into petrochemicals and gasses.

Islam's view towards OPEC

OPEC's eleven members (10 of which are Muslim countries) collectively supply about 40 per cent of the world's oil output, and possess more than three-quarters of the world's total proven crude oil reserves. OPEC under the leadership of Saudi Arabia manipulates the world oil market by assigning each member country a production quota – in realty fixing output. In fact, OPEC has been politically manipulated through Saudi Arabia to generally serve the interests of capitalist (oil consuming) nations. Saudi Arabia has acted as a 'swing' supplier increasing or decreasing output to stabilise world prices to serve the interests of industrial nations.

Mohammad (saw) forbade practices like hoarding which manipulate the market.

Narrated from Ma'akal ibn Yasar that he said the Messenger of Allah (SWT) said: "Whosoever was involved in any of the prices of the Muslims, so as to increase it for them it would be due on Allah to place him in a great fire at the Day of Judgement".

Thus, the practices of OPEC are contrary to the shar'a.

Conclusion

Thus, the Arab world specifically and the Muslim countries generally are at a cross-roads: do they continue to fumble with pragmatic, inconsistent capitalist – IMF and World Bank – inspired policies and systems or do they embark on a radical solution. A solution that was applied and worked for 1300 years – the Kheelafah State. The thoughts and systems applied in the Kheelafah brought the glory and honour and the development and progress from science and medicine to architecture and culture that this honoured Muslim Ummah currently yearns for.

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