Session 16

Global Political Economy

Middle East and North Africa (MENA) and Oil Price

Partha Ray
Professor of Economics
IIM Calcutta
March 24 2021
 Schedule of Sessions: Post Mid term (March 5 – April 7)
No Broad Heading Date No Broad Heading Date

11 Asia: Emergence of China BPA Mar 5 12 China and Global Trade War PR Mar 10

13 Russia and the Second BPA Mar 12 14 Russia and the CIS Economies PR Mar 17
Cold War

15 Politics of the Middle East and BPA Mar 19 16 Middle East and Oil Prices PR Mar 24
North Africa (MENA)

17 India and its Neighbours BPA Mar 26 19 Emergence of India as an PR April 2

Economic Power

18 Globalization and New BPA March 31

Nationalism: Towards a New
Normal?

20 Summing -up BPA & PR April 7

End-term Exam ( Apr 8 – 10)

Oil & Some Country Classification
Five Global Areas

Gulf Cooperation Council (GCC) Countries

Middle East

MENA
(Middle East & North Africa)

MENAP
(MENA + Afghanistan & Pakistan)

OPEC
(Organization of the Petroleum Exporting
Countries)

4
Countries under the four Taxonomy
GCC Countries Middle East MENA MENAP OPEC

1. Bahrain GCC plus Middle East plus MENA plus 1. Iran (1960)
2. Kuwait 2. Iraq (1960)
3. Oman 1. Cyprus 1. Egypt 1. Pakistan 3. Kuwait (1960)
4. Qatar (?) 2. Iran 2. Algeria 2. Afghanistan 4. Saudi Arabia
5. Saudi 3. Iraq 3. Morocco (1960)
Arabia 4. Israel 4. Tunisia 5. Qatar (1961)
6. UAE 5. Jordan 5. Libya 6. UAE (1967)
6. Lebanon 7. Libya (1962)
7. Syria 8. Algeria (1969)
8. Turkey 9. Venezuela (1960)
9. Yemen 10. Nigeria (1971)
11. Ecuador (1973)
12. Angola (2007)

Eight of the 12 OPEC Countries are in MENA

5
 Taxonomy …further
• MENAP oil exporters (MENAPOE) comprise Algeria (ALG), Bahrain (BHR), Iran (IRN), Iraq (IRQ),
Kuwait (KWT), Libya (LBY), Oman (OMN), Qatar (QAT), Saudi Arabia (SAU), the United Arab Emirates
(UAE), and Yemen (YMN).
• MENAP oil importers (MENAPOI) comprise Afghanistan (AFG), Djibouti (DJI), Egypt (EGY), Jordan
(JOR), Lebanon (LBN), Mauritania (MRT), Morocco (MAR), Pakistan (PAK), Somalia (SOM), Sudan
(SDN), Syria (SYR), and Tunisia (TUN).
• MENA comprises Algeria, Bahrain, Djibouti, Egypt, Iran, Iraq, Jordan, Kuwait, Lebanon, Libya, Oman,
Mauritania, Morocco, Qatar, Saudi Arabia, Somalia, Sudan, Syria, Tunisia, the United Arab Emirates,
and Yemen.
• MENA oil importers comprise Djibouti, Egypt, Jordan, Lebanon, Mauritania, Morocco, Somalia,
Sudan, Syria, and Tunisia.
• The Gulf Cooperation Council (GCC) comprises Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the
United Arab Emirates.
• Non-GCC oil-exporting countries are Algeria, Iran, Iraq, Libya, and Yemen.
• The Caucasus and Central Asia (CCA) ccountries comprise Armenia (ARM), Azerbaijan (AZE), Georgia
(GEO), Kazakhstan (KAZ), the Kyrgyz Republic (KGZ), Tajikistan (TJK), Turkmenistan (TKM), and
Uzbekistan (UZB).
– CCA oil exporters comprise Azerbaijan, Kazakhstan, Turkmenistan, and Uzbekistan.
– CCA oil importers comprise Armenia, Georgia, the Kyrgyz Republic, and Tajikistane
 Middle –East
• Middle East, the lands around the
southern and eastern shores of
the Mediterranean
Sea, encompassing at least the Arabian
Peninsula and, by some
definitions, Iran, North Africa, and
sometimes beyond.
• Some of the first modern Western
geographers and historians tended to
divide what they called the Orient into
three regions.
– Near East applied to
the region nearest Europe, extending from
the Mediterranean Sea to the Persian Gulf;
– Middle East, from the Persian Gulf
to Southeast Asia; and
– Far East, those regions facing the Pacific
Ocean.
 A Crasher on history of Oil in Middle East
• In March of 1908, after years of difficult conditions and failure, geologist George Bernard Reynolds
discovered oil in Persia (modern-day Iran).
• The production in the Middle East began in Persia by the turn of the 20th century. The British were
looking for energy sources and found oil there, making Persia their reliable supplier.
• After World War I, oil was seen as a strategic resource. The European powers competed for the control
over areas where it was suspected to exist.
• The Great Depression put Saudi Arabia and other nations of the Persian Gulf in trouble and motivated
the search for water sources in the desert. Not much water was found but oil was - and lots of it.
– The first significant Saudi Arabian discovery was at Dammam well no 7 on March 4, 1938.
• American and European companies acquired concessions to exploit this resource.
• After World War II, the American economic boom and the world recovery from the war pushed the
demand, increasing exploration and production in the Middle East.
• Iran started the process of nationalization of oil production in the 1950s.
• Eventually, most nations did the same, and foreign companies lost the hegemony and had to adapt to
the rules of the different governments. However, profits were still high so they carried on, often
partnered with newly-established local companies.
• The Organization of Petroleum Exporting Countries, OPEC, was founded in 1960 by Venezuela, Saudi
Arabia, Iran, Iraq, and Kuwait. Today, 14 countries are members. The goal was to unify local policies for
keeping market shares stable.
• For the Middle East, the OPEC was also an opportunity to ally with the experienced South American
producer and reduce the dependence on European and North American companies.
• The 1980s saw a significant glut in oil following the 1970 energy crisis. Petroleum production peaked in
the 1970s, which caused a sharp rise in oil price and a subsequent decrease in demand.
• Oil-producing countries suffered during this glut, with OPEC struggling to maintain high oil prices through
decreasing oil production. The dissolution of the Soviet Union can also be attributed in part to a loss of
influence as an oil producer.
• The glut lasted six years, with oil prices gradually recovering in 1986, but a similar surplus in oil started in
2014 and continues to have effects on global oil prices.
• The oil and gas industry is still thriving today despite competition from renewable sources of energy,
albeit in a more volatile state than ever due to world events.
 GCC: Some Features
• The six Heads of State of Bahrain, Kuwait, Oman, Qatar, Saudi
Arabia and the UAE founded the GCC by signing the “Charter of the
Cooperation Council” in Abu Dhabi in May 1981.
• The institutional framework of the GCC today comprises three main
pillars, namely
– The intergovernmental decision-making and consultative bodies with
the Supreme Council and the Ministerial Council at its core,
– the Secretariat General as the major supranational institution, and
– a number of specialized regional agencies
• In terms of population and aggregate output, Saudi Arabia is the
largest of the six countries, comprising about 24 million inhabitants
(about 70% of the total GCC population) and accounting for more
than half of total GCC GDP.
• On 1 January 2003, a GCC customs union finally came into effect
with the enactment of a common external tariff, a unified customs
code and the single entry point principle.

9
Macro Map of MENA

Memo:
Growth in
Current Oil Price
Pre Capita Volume of Govt lending Gross Gopvt External
GDP Growth Global Share Account (Dubai,
GDP at PPP Inflation (%) exports of / borrowing Debt (% of Debt (% of
(%) (%) balance medium,
(USD) goods and (% of GDP) GDP) GDP)
(% of GDP) Fateh) US$
services (%)
per barrel
2000 7,609 5.7 8.1 3.6 9.1 5.0 48.3 6.4 27.7 26.1
2001 7,782 2.1 8.0 3.6 2.7 0.3 51.0 4.0 30.5 22.7
2002 7,749 3.5 8.1 4.8 1.1 -1.5 60.9 3.5 35.7 23.7
2003 8,236 10.3 8.5 5.1 14.7 1.1 54.9 5.6 44.5 26.7
2004 8,958 8.8 8.7 5.9 11.4 3.3 54.5 7.0 39.6 33.4
2005 9,603 6.2 8.8 6.9 10.4 9.3 41.5 12.5 33.8 49.2
2006 10,294 6.5 8.9 8.1 5.7 10.2 32.8 13.5 32.1 61.4
2007 10,919 5.7 8.9 10.0 7.7 8.1 28.3 10.5 35.3 68.4
2008 11,262 4.4 9.0 12.8 5.7 9.9 24.2 11.9 31.4 93.7
2009 11,214 1.1 9.1 7.1 -5.9 -2.0 29.6 1.3 35.0 61.7
2010 11,645 4.9 9.1 6.8 6.8 1.5 27.2 5.9 31.8 78.1
2011 12,348 4.7 9.0 8.9 9.6 3.8 24.8 11.9 28.6 106.0
2012 12,592 5.1 8.8 8.8 3.1 4.5 25.9 11.2 28.2 108.9
2013 12,565 3.1 8.6 8.3 3.1 2.4 26.1 8.6 28.4 105.4
2014 12,413 3.1 8.4 6.4 2.8 -1.5 26.4 5.1 29.2 96.7
2015 11,349 2.7 7.6 5.5 4.8 -7.3 36.4 -4.0 38.2 51.2
2016 11,137 4.5 7.4 5.7 3.2 -8.9 42.8 -4.2 41.4 41.2
2017 11,472 2.6 7.4 6.9 1.5 -5.3 44.2 -0.8 44.6 53.1
2018 11,751 2.1 7.3 9.5 0.7 -2.1 43.6 2.8 44.4 69.1
2019 11,887 1.4 7.2 7.8 -2.9 -3.4 47.3 0.7 46.2 63.1
2020 11,277 -4.1 7.2 9.3 -10.4 -9.6 55.7 -3.7 53.1 42.6
 Some Macro Numbers for Select Countries
Government primary net
GDP Growth Inflation lending/borrowing Current account balance
(%) (%) (% of GDP) (% of GDP)
Saudi Saudi Saudi Saudi
Kuwait Qatar Arabia UAE Kuwait Qatar Arabia UAE Kuwait Qatar Arabia UAE Kuwait Qatar Arabia UAE

2010 -2.4 17.7 5.0 1.6 4.5 -2.4 5.4 0.9 16.9 8.3 4.7 0.9 31.8 20.0 12.6 4.2

2011 9.6 11.3 10.0 6.9 4.9 2.0 3.9 0.9 26.5 8.8 11.6 5.5 42.9 31.1 23.6 12.4

2012 6.6 4.7 5.4 4.5 3.2 1.8 2.9 0.7 25.4 12.0 11.7 9.3 45.5 33.2 22.4 19.5

2013 1.2 5.6 2.7 5.1 2.7 3.2 3.6 1.1 25.8 22.8 5.2 8.8 40.3 30.4 18.1 18.8

2014 0.5 5.3 3.7 4.3 3.1 4.2 2.2 2.3 12.7 16.6 -4.2 2.2 33.4 24.0 9.8 13.5

2015 0.6 4.8 4.1 5.1 3.7 1.0 1.2 4.1 -7.5 23.2 -17.9 -3.2 3.5 8.5 -8.7 4.9

2016 2.9 3.1 1.7 3.1 3.5 2.7 2.0 1.6 -14.2 -3.3 -20.2 -2.7 -4.6 -5.5 -3.7 3.7

2017 -4.7 -1.5 -0.7 2.4 1.5 0.5 -0.8 2.0 -9.4 -1.1 -11.1 -1.8 8.0 4.0 1.5 7.1

2018 1.2 1.2 2.4 1.2 0.6 0.2 2.5 3.1 -3.0 7.4 -6.5 2.3 14.5 9.1 9.2 9.6

2019 0.4 0.8 0.3 1.7 1.1 -0.6 -2.1 -1.9 -7.8 6.5 -4.5 -0.3 9.4 2.4 5.9 8.4

2020 -8.1 -4.5 -5.4 -6.6 1.0 -2.2 3.6 -1.5 -22.4 5.1 -12.2 -9.3 -6.8 -0.6 -2.5 3.6
 Exchange Rates in GCC
Period Saudi Riyal Kuwaiti Dinar Bahraini Dinar Omani Riyal Qatari Riyal U.A.E. Dirham
1993 3.7450 0.3013 0.3760 0.3845 3.6400 3.6710
1994 3.7450 0.2976 0.3760 0.3845 3.6400 3.6710
1995 3.7450 0.2984 0.3760 0.3845 3.6400 3.6710
1996 3.7500 0.2995 0.3760 0.3845 3.6400 3.6710
1997 3.7450 0.3038 0.3760 0.3845 3.6400 3.6710
1998 3.7450 0.3045 0.3760 0.3845 3.6400 3.6721
1999 3.7450 0.3047 0.3760 0.3845 3.6400 3.6724
2000 3.7450 0.3067 0.3760 0.3845 3.6400 3.6725
2001 3.7488 0.3069 0.3760 0.3845 3.6400 3.6725
2002 3.7500 0.3034 0.3760 0.3845 3.6400 3.6725
2003 3.7500 0.2978 0.3760 0.3845 3.6400 3.6725
2004 3.7500 0.2947 0.3760 0.3845 3.6400 3.6725
2005 3.7500 0.2920 0.3760 0.3845 3.6400 3.6725
2006 3.7500 0.2902 0.3760 0.3845 3.6400 3.6725
2007 3.7500 0.2842 0.3760 0.3845 3.6400 3.6725
2008 3.7500 0.2688 0.3760 0.3845 3.6400 3.6725
2009 3.7500 0.2878 0.3760 0.3845 3.6400 3.6725
2010 3.7500 0.2866 0.3760 0.3845 3.6400 3.6725
2011 3.7500 0.2760 0.3760 0.3845 3.6400 3.6725
2012 3.7500 0.2800 0.3760 0.3845 3.6400 3.6725
2013 3.7500 0.2836 0.3760 0.3845 3.6400 3.6725
2014 3.7500 0.2845 0.3760 0.3845 3.6400 3.6725
2015 3.7500 0.3009 0.3760 0.3845 3.6400 3.6725
2016 3.7500 0.3022 0.3760 0.3845 3.6400 3.6725
2017 3.7500 0.3033 0.3760 0.3845 3.6400 3.6725
2018 3.7500 0.3020 0.3760 0.3845 3.6400 3.6725
2019 3.7500 0.3037 0.3760 0.3845 3.6400 3.6725
12
2020 3.7500 0.3067 0.3760 0.3845 3.6400 3.6725
 GCC Countries: Exchange Rate and the Impossible Trinity

• Since the beginning of

2003 all GCC currencies
have been pegged to the
US dollar . Free capital
• The peg is a conventional
peg according to the IMF flows
classification and, with
the exception of the
Kuwaiti dinar. Option 1
• The Kuwaiti dinar (U.S.) Option 2
fluctuates in a band of ±
3.5% around the central (GCC)
rate.
• As a result of the common
US dollar peg, there are
no exchange rate Independent Fixed
fluctuations between five
of the GCC currencies, monetary exchange
and only limited
fluctuations between policy Option 3 rate
those five and the Kuwaiti
dinar. (China)

13
OPEC Share in Crude Reserves
Economic
Features

16
 Middle East ≠ Oil

MENA Oil Importers: Djibouti, Egypt, MENA Oil Exporters: Algeria, Bahrain, Iran, Iraq,
Jordan, Lebanon, Mauritania, Morocco, Kuwait, Libya, Oman, Qatar, Saudi Arabia, Sudan,
Syria, South Sudan, and Tunisia. UAE, and Yemen. 17
 The Resource Curse:
The Political and Economic Challenges of Natural Resource Wealth

18
 Resource Curse
• The term resource curse encompasses the significant social,
economic and political challenges that are unique to countries rich
in oil, gas and minerals.
• Many oil-, gas- and mineral-rich countries have failed to reach their
full potential as a result of their natural resource wealth. In general,
they are also more authoritarian, more prone to conflict, and less
economically stable than countries without these resources.
• While there are many challenges unique to oil, mining and gas
extraction, governments can make policy decisions that help avoid
some of the negative consequences of extraction and maximize the
benefits.
• Examples: Oil producers in the Middle East & Africa have relatively
little to show for their resources.
• Meanwhile, East Asian economies achieved western-level standards
of living despite being rocky islands (or peninsulas) with virtually no
exportable natural resources.
– Japan, Singapore, Hong Kong Korea & Taiwan,
– followed by China. 19
Growth falls with fuel & mineral exports

20
Oil Prices: Past, Present and Future
Demand for Energy as a Derived
Demand

22
 Energy Demand: The Basics
• Energy demand depends primarily on
demand for desired services, availability
and properties of energy conversion
technologies, and costs of energy and
technologies used for conversion.
• For example,
– consumers use gasoline to fuel an
automobile or other motorized vehicle,
Energy Demand
converting gasoline to mechanical energy
for motive power.
• Electricity is purchased by consumers only
to perform functions using electricity, such
as, lighting, refrigeration, space heating,
air conditioning, clothes washing, drying,
dish washing, water heating, operating
electronic equipment such as computers
or televisions.
Urbanization Industrialization
• In each case, efficiency of energy
conversion equipment also determines
energy demand.
• Typically, energy conversion equipment is
long-lived – automobiles, air-conditioning
units, refrigerators, televisions, computer
systems, furnaces.

23
Example: Vehicle Miles & Efficiency
• In general, increased energy prices reduce demand by reducing use
of energy services and motivating selection of higher conversion
efficiency equipment.
• For example, gasoline prices influence demand through vehicle
miles and fuel efficiency of vehicles.
• Vehicle miles is influenced by cost per mile of driving, including per
mile gasoline costs, equal to the ratio Pg/Mpg (where Pg is the
gasoline price), and other costs.
• Increased gasoline prices lead consumers to purchase more fuel
efficient cars.
• Both factors imply that increased gasoline prices reduce gasoline
demand, with the vehicle miles adjusting relatively quickly and
vehicular fuel efficiency adjusting slowly as vehicles enter the fleet.

24
 Broad Trends in the Oil Market

OIL ≠ Middle East / The Arab World / OPEC

25
1 exajoule to joule = 1.0E+18 joule
 Major Oil Reserves
(Thousand Million Barrels)
2019 2019
(Share)
Total North America 244.4 14.1
US 68.9 4.0
Canada 169.7 9.8
Total S. & Cent. America 324.1 18.7
Venezuela 303.8 17.5
Total Europe 14.4 0.8
Norway 8.5 0.5
Total CIS 145.7 8.4
Azerbaijan 7.0 0.4
Kazakhstan 30.0 1.7
Russian Federation 107.2 6.2
Total Middle East 833.8 48.1
Iran 155.6 9.0
Iraq 145.0 8.4
Kuwait 101.5 5.9
Qatar 25.2 1.5
Saudi Arabia 297.6 17.2
United Arab Emirates 97.8 5.6
Total Africa 125.7 7.2
Libya 48.4 2.8
Nigeria 37.0 2.1
Total Asia Pacific 45.7 2.6
China 26.2 1.5
India 4.7 0.3
Total World 1733.9 100.0
 How are Oil Prices Determined?
Oil Price

Extent of
Demand for Oil Supply of Oil Financialization of
Oil

Extraction Policy of Has Oil become a

Growth in Oil Producing / financial
Economies Exporting Countries commodity?

Efficiency of Oil
Usage Geo-Political Factors

Availability of Non-
Oil Energy Sources

30
Long Term Trends in Oil Prices

31
 Oil Prices
• The oil price generally refers to the spot price of a
barrel of benchmark crude oil.
• The major benchmark oil prices in the world are
– Brent crude oil price,
– WTI (West Texas Intermediate) crude oil price
– Dubai/Oman crude oil price.
• The different type of oil are with different density
and sulfur content, that leads to the oil price
difference.
32
Long Term Trends

33
34
35
36
37
38
Has Oil become a Financial Asset?
 UNCTAD Policy Brief No. 25, Sept 2002

“It is not commonly recognized that demand from financial

investors in the commodity markets has become overwhelming
during the last decade. Of course, supply and demand shocks can
still move commodity prices time and again. But with the
volumes of exchange-traded derivatives on commodity markets
now being 20 to 30 times larger than physical production, the
influence of financial markets has systematically transformed these
real markets into financial markets. This calls for strong and prompt
policy and regulatory responses in the financial markets, rather than
in the physical markets.”
Financialization of Oil

41
42
Inverse relationship between the value of the dollar
and commodity prices?

43
Recent Trends in Oil Prices

44
 0.00
20.00
40.00
60.00
80.00
100.00
120.00
140.00
1960M01
1961M03
1962M05
1963M07
1964M09
1965M11
1967M01
1968M03
1969M05
1970M07
1971M09
1972M11
1974M01
1975M03
1976M05
1977M07
1978M09
1979M11
1981M01
1982M03
1983M05
1984M07
1985M09
1986M11
1988M01
1989M03
1990M05
1991M07
1992M09
1993M11
1995M01
Crude oil, average ($/bbl)

1996M03
1997M05
1998M07
1999M09
2000M11
2002M01
2003M03
2004M05
2005M07
2006M09
2007M11
2009M01
2010M03
2011M05
Long Run Trends in Oil Price

2012M07
2013M09
2014M11
2016M01
2017M03
2018M05
2019M07
2020M09
 Crude Oil (petroleum), simple average of three spot prices (Dated Brent, Dubai Fateh & WTI)
(US$ per barrel)
120.0

104.1 105.0 104.1

100.0 97.0 96.2

79.0
80.0

71.2
68.3
64.3
61.8 61.4
60.0
53.4 52.8
50.8

42.8 41.7
40.0 37.7

28.2 28.9
24.3 25.0

20.0

0.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
JAN-19 56.58

FEB-19 61.13

MAR-19 63.79

APR-19 68.58

MAY-19 66.83

JUN-19 59.76

JUL-19 61.48

AUG-19 57.67

SEP-19 60.04

OCT-19 57.27

NOV-19 60.40

DEC-19 63.35

JAN-20 61.63

FEB-20 53.35

MAR-20 32.20

APR-20 21.04

MAY-20 30.38
CRUDE OIL PRICE ($/BBL)

JUN-20 39.46
Recent Trends in Oil Price: Jan 2019 – Feb 2021

JUL-20 42.07

AUG-20 43.44

SEP-20 40.60

OCT-20 39.90

NOV-20 42.30

DEC-20 48.73

JAN-21 53.60

FEB-21 60.46
Oil Price in March 2021 so far
49
50
Shale Gas in the US is more expensive
• According to the International Energy Agency, “it
takes approximately 2,500 wells per year to
maintain production of 1 million barrels per day
in North Dakota, while it requires about 60 wells
per year to maintain the same level of oil
production in Iraq.”
• “This is why it costs $100 to produce a barrel of
oil in the Bakken basin of North Dakota and
Montana, while producing the same barrel of oil
in Saudi Arabia's prolific Ghawar field costs in the
order of $10.”

51
 Way Ahead
• The evolution of energy markets over time is
significantly impacted by government policies.
• The current trend is expected to lead towards
a long-term convergence that focuses on
– energy efficiency,
– the increasing adoption of clean modes of energy
and
– a tightening of fuel emissions standards.

52
 Oil Price and The Covid-19 Pandemic
• Uncertainty is bad for the economy, bad for consumer sentiment, and bad for business
investment.
• The COVID-19 outbreak is occurring at a time when the oil market is already weak and prices
are under pressure.
• Because of the disease’s potential for further business disruption, the oil industry is
concerned.
• When it looks at China and sees a lot less construction, less tourism, fewer people going out
to movies and restaurants, and so many factories shutting down, it sees trouble.
• In the past, short-term crises were met with workaround solutions.
• The closing of the Suez Canal in 1956, for example, didn’t have much of an impact on oil
prices because tanker traffic went around the Horn of Africa. Transit took longer, but the oil
was delivered.
• Travel and tourism are likely to be the industries most affected by a longer outbreak. For the
oil business, that means a drop in jet fuel prices much greater than any decline in the price of
gasoline.
• China uses roughly a million barrels of jet fuel a day, accounting for about 12% of global jet
fuel demand. Much of that fuel is used for international travel, which has been affected
already, but a lot is used for domestic flying, and it’s not clear how much of that is shutting
down.
 Oil Price Forecasts of the US Energy Information Administration

NYMEX (The New York Mercantile Exchange) is a commodity futures exchange

owned and operated by CME Group of Chicago.
Thank You