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The heavy costs of too-cheap oil

By Shireen T. Hunter / August 8, 1985



AFTER nearly a decade of rising energy bills, the West is understandably enthusiastic about the recent fall in the price of oil and, with it, the fortunes of the Organization of Petroleum Exporting Countries (OPEC). The West indeed gains economic advantages, such as controlling inflation. But if continued, the oil price decline could set in motion economic, social, and political dynamics among the oil exporting countries that would seriously threaten vital Western strategic interests. In fact, the price of cheap oil may prove to be too expensive for the West.

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This threat is most serious in the Persian Gulf. During the last three years, the Gulf exporters (especially Saudi Arabia) have taken a serious financial beating. Shrinking revenues, in turn, have led to economic belt-tightening and a sharp reduction in other government spending. So far, the Gulf governments have put a brave face on their policy of economic contraction. They argue that their countries needed a period of consolidation after the frantic development pace of the 1970s. Still, economic downt urn is beginning to hurt all layers of Gulf societies.

In economies dependent on government spending, all businesses are suffering, and bankruptcies are increasing. Some private capital is leaving the Gulf region, and the financial and banking sector is showing signs of serious vulnerability. In fact, this sector was an early victim of economic downturn, illustrated by the Kuwaiti stock market crash and the banking problems of the United Arab Emirates and Bahrain.

The effects of economic downturn are not limited to big business but are affecting local economies at every level. For example, visitors from the Gulf report that the usually bustling Dubai gold souk is quiet; shopkeepers are competing for a dwindling number of customers. The professional classes, including the military, are also affected. Salaries and benefits have been cut sharply, and some government employees are not being paid for two to three months.

This is a potentially explosive mixture. Development experts generally agree that absolute poverty is seldom conducive to widespread social and political unrest or revolution. But even a relative downturn, after a long period of prosperity, could lead to political turmoil. This is particularly true in societies whose political institutions are inadequately developed, that lack proper channels for political expression, and where the legitimacy of governments is based largely on their ability to pro vide economic and financial rewards.

All these conditions prevail in the Gulf. In fact Iran already set a precedent. Its economic downturn of 1976-78 played a significant role in the 1978 disturbances that finally brought down the Shah's regime.

Grumbling in the Gulf has already started, along with growing public sensitivity to income disparities and the privileges of the ruling elites. This creates fertile ground for all kinds of radical ideas. In particular, Islamic militancy could flourish, because crises of any sort strengthen its popular appeal.

Other Middle East countries could also be affected. In the last 10 years, many of them have come to depend on aid and worker remittances from the Gulf states. Both have been falling. In addition to worsening the political atmosphere in these countries, growing economic problems would generate public resentment toward the Gulf states and their leaders. They would become even more vulnerable to radical attacks. Moderate Gulf states could be undermined politically in the region; the Middle East balance cou ld tip in favor of the radical states.

Given these dangers, how should the West respond to falling oil prices? The best solution -- though not the easiest -- would be a producer-consumer agreement to guard against sharp fluctuations of oil prices. This is not a new idea. During the past 25 years, variants of it have been proposed at various times by both producers and consumers, but to no avail. When it has come to turning thought into action, neither has been willing to plan for the future. Yet now that both oil producers and consumers have

experienced the shock of sharp fluctuations, an agreement may be possible.

Consumer nations are enjoying low oil prices, but they must remember that the glut will not last forever. A consumer-producer agreement, today, would help preserve their strategic interests. It could also save them from tomorrow's troubles, after the onset of another cycle of tight energy markets.

Shireen T. Hunter, deputy director of the Middle East Program at the Center for Strategic and International Studies, Georgetown University, wrote ``OPEC and the Third World: The Politics of Aid.''