Politically, the broadly-defined region that stretches from North Africa across the Arabian Peninsula to Iran has been marked by instability and violence since the collapse of British colonial rule in the early 20th century. It is home to a young, fast-growing population frustrated by long-term economic stagnation, as the recent “Arab Spring” uprisings make clear.
Middle East Home to Oil and Gas Reserves
The Middle East enjoys generous amounts of attention from Western politicians and corporations because it contains some of the world’s largest reserves of conventional oil and gas. In some countries, fossil fuel exports have created massive trade surpluses that fund extravagant construction projects; the United Arab Emirates is a prime example. Dubai has embarked on a long-term building spree that has produced the world’s tallest man-made structure and an as-yet-unfinished chain of man-made islands made to represent the world’s continents.
However, this arrangement may slowly be weakening. Most Western companies are attracted to the Middle East by its ample oil reserves. Exxon-Mobile, Royal Dutch Shell, and other energy conglomerates have invested billions of dollars in the region and continue to honor long-term arrangements with its governments. The large amounts of money flowing into these countries has generally become concentrated in a few hands, which has limited the organic development of a consumption-oriented “middle class” with the ability to purchase large numbers of imported consumer goods. As such, few major Western companies outside of the energy industry and related economic sectors have robust trading relationships with Middle Eastern nations.
Technological Advancements in Fossil Fuel Industry
At the same time, some Western nations are discovering new fossil fuel reserves and producing more homegrown energy than ever before. Thanks to new technological developments that make it easier to extract energy from shale formations, the United States may be the world’s largest producer of oil and natural gas by 2017. Canada’s northern “tar sands” may contain upwards of 1.5 trillion barrel-equivalents of oil. Brazil recently discovered massive offshore oil deposits that could turn it into a major energy exporter.
Development of Renewable Sources of Energy May Affect Trade
A decade from now, Middle Eastern oil may be a relatively small source of energy for the West. Although fast-growing China may step in to absorb some of the region’s output, that country’s ample supplies of coal coupled with its aggressive push to develop renewable sources of energy may limit this effect. Decreasing reliance of the world economy on middle-eastern oil may lead to those countries becoming marginalized if their economies do not develop and diversify.
Two recent trends have made the region’s wholesale marginalization less likely. First, the large-scale economic liberalization of the United Arab Emirates and some other Arabian Peninsula countries has created a development framework for other countries in the region. The U.A.E. now has a stable consumer class that purchases cars, electronics, and leisure services at a rapid clip. While many of these products and services are still imported, the region could soon reach a critical mass that permits economic diversification and the creation of native manufacturing and technology industries. Were this to occur, trade between the developed world and the Middle East would be far more even-handed and less dependent on the whims of the energy markets.
Secondly, the democratic “Arab Spring” uprisings have made the preservation of an oligarchic, autocratic status quo unlikely. While it’s equally unlikely that robust democracies will suddenly appear across the region in the coming years, any “baby steps” toward political stability are likely to produce corresponding economic reforms. Spurred by political liberalization, local entrepreneurs may begin to expand and improve their enterprises and create a valuable new source of goods for developed-world consumers.
Alfonso has been covering the forex market for more than 10 years, working at trading desks and global research and analysis teams. He works with OANDA (see page here: http://fxtrade.oanda.com/trade-forex/fxtrade/) regularly as a market specialist in business dailies and online portals. You can read more of Alfonso’s work at http://plus.google.com/115398446627521086777/about.