Chalk up another landmark year for the region's oil

Four years stand out as landmarks in Middle East oil: 1951, 1973, 1979 and 1991. To those memorable dates, we can now add 2011, writes Robin Mills.

Last year was a memorable one for oil. AFP

Four years stand out as landmarks in Middle East oil: 1951; 1973; 1979; and 1991.

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In those years, the old certainties burned in revolutions and wars, oil prices soared, and the world's energy affairs were set on an entirely different course. To those memorable dates, we can now add 2011.

The regimes that crumbled in the face of popular protests were those in which the failure of the rentier state model became impossible to ignore. The money from modest oil and gas production, in Egypt's case supplemented by foreign aid and Suez Canal tolls, was disbursed on low-paid but undemanding government jobs, and subsidised food and fuel.

Over the past two decades, the lethal combination of declining oil revenues against fast-growing populations pushed Tunisia, Egypt and to some extent Syria into reforms that appeared to produce reasonable economic growth. But this superficial success concealed crony capitalism, "privatisation" of state enterprises to well-connected insiders, lay-offs, growing unemployment and inequality.

Much poorer Yemen was blighted not only by sharply falling oil production, but also by declining water supplies driven by poorly planned subsidies - a double failure to turn a temporary windfall into durable improvements in living standards.

Libya's oil revenues, spent well, could easily have made it as wealthy and developed as the UAE, but they were squandered by a cruel, capricious and incompetent clique. The wonder is not that Muammar Qaddafi's regime fell last year, but that it lasted as long as it did.

Meanwhile, events in the obvious flashpoints, which would have made front-page headlines in any other year, were relegated to the inside pages.

US and European sanctions on Iranian oil prompted Tehran's threat to cut off the Gulf's exports by closing the Strait of Hormuz. This distracted attention from Iran's own mismanagement of its resources, and from the more likely and vulnerable targets in the event of hostilities. Nor did Iran's opposition manage to repeat the protests of 2009 and emulate their revolutionary brethren.

Iraq also flared up again at the end of the year. For most of last year, the oil industry grew steadily, but despite swelling coffers, the government failed to solve the country's underlying problems: the lack of basic services such as electricity; the ongoing dispute over Kurdistan's oil; and the growing clamour from other resource-rich provinces for autonomy.

And in the eastern Mediterranean, giant gas discoveries have the potential to transform the region's economy. In waters contested by Palestinians, Lebanese, Israelis and Greek and Turkish Cypriots, these finds produced a flood of angry rhetoric but fortunately, as yet, no hostilities.

Last year's loss of a single mid-ranking producer, Libya - and that only for part of the year - produced record average oil prices that, at more than US$100 per barrel, weighed on the weak global economy. This illustrates the continuing irreplaceability of oil. Imagine if, in addition to Libya, output from another major producer - say, Algeria, Iraq or Iran - had been disrupted. Then we would certainly have been back in the "oil shock" territory of 1973 or 1979.

Even as it is, Saudi Arabia enjoyed bumper oil revenues, which it used to prop up neighbouring Arab allies, and to boost subsidies and jobs at home. But to be effective, aid should be linked to systematic reform, not political loyalty. And a fundamentally unsustainable economic model has to be abandoned, not expanded.

The region may be in ferment for many years, as new governing systems struggle against remnants of the old regimes, and perennial geopolitical tussles keep oil markets on edge. Or dynamic new economies may offer an alternative to the Gulf's state-led, oil-funded development.

In either case, the oil exporters must heed the warning. Last year was a landmark indicating the right road to travel - and the wrong ones.

Robin Mills is the head of consulting at Manaar Energy, and the author of The Myth of the Oil Crisis and Capturing Carbon

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