Oil & Petrodollars Arming the Middle East

Oil is sold in US dollars; surplus dollars are recycled into these countries or paid for purchasing of military hardware. In return the absolute monarchies are protected by the Western countries. The Arab Spring has had no effect on the arms sale. Will vested interests allow peace to prevail or will they let the cauldron of Middle East simmer? Only time can tell.

Issue: 3 / 2013By Lt General (Retd) Naresh Chand

Middle East is broadly the region of West Asia with Arabs as the largest ethnic group apart from Turks, Turkomans, Persians, Kurds,Jews, etc. It includes many nations like Bahrain, Egypt, Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Oman, State of Palestine (non-member state), Qatar, Saudi Arabia, Syria, Turkey, United Arab Emirates and Yemen. The region is very ancient and has been the centre of world affairs. It is also the region where many major religions like Judaism, Christianity and Islam originated. Large quantities of crude oil have been discovered in many countries around the Persian Gulf which has made the region very rich and also made it the centre of conflicts for the control of oil.

Oil Holding Nations

Saudi Arabia: Before the discovery of oil, Saudi Arabia was one of the poorest countries in the world relying on revenue from limited agriculture produce and pilgrimage. After the discovery of vast reserves of oil in the Al-Hasa region, Saudi Arabia’s road to prosperity started. The oilfields began yielding oil in 1941 under the US-controlled Arabian American Oil Company which gave Saudi Arabia prosperity and greater control in world affairs. However, mismanagement and wasteful expenditure by the government led to large governmental deficits which resulted in excessive foreign borrowing. By 1976, Saudi Arabia had become the largest oil producer in the world. King Khalid developed Saudi Arabia’s economy rapidly, transforming the infrastructure and educational system of the country. It also developed very close ties with the US which is still continuing. Ninety-five per cent of exports are of oil and about 70 per cent of government revenue come from oil. OPEC Annual Statistical Bulletin 2010-11 estimates that Saudi Arabia has about 20 per cent of world’s oil reserves amounting to about 264.5 billion barrels.

Iran: Iran is one of the world’s oldest civilisations in antiquity. The Persian Constitutional Revolution established the nation’s first parliament in 1906 which was within a constitutional monarchy. The UK and US triggered a coup d’état in 1953, resulting in Iran becoming a more autocratic country. The Iranian Revolution of 1979 led to establishment of an Islamic Republic. Iran is a founding member of the United Nations (UN), Non-Aligned Movement (NAM), Organisation of Islamic Conference (OIC) and Oil and Petroleum Exporting Countries (OPEC). Iran ranks second in the world in natural gas reserves (16 per cent) and third in oil reserves of 151.2 billion barrels. Within Middle East it has the second largest oil reserves. It is OPEC’s second largest oil exporter and is an energy superpower.

Iraq: Iraq has been known to the world by the Greek toponym ‘Mesopotamia’ (land between the rivers) and has been home to continuous successive civilisations since the sixth millennium BC. Iraq’s modern borders were mostly demarcated in 1920 by the League of Nations when the Ottoman Empire was divided by the Treaty of Sèvres. Iraq was placed under the authority of the UK and a monarchy was established in 1921. Iraq gained independence from UK in 1932. In 1958, the monarchy was overthrown and the Republic of Iraq was established. Iraq was controlled by the Ba’ath Party from 1968 to 2003 until the invasion of the US and UK which removed the Ba’ath Party and multi-party parliamentary system of government was established. The US withdrew from Iraq in 2011. With its 143.1 billion barrels of proven oil reserves, Iraq ranks third within Middle East. Oil production levels have reached 3.4 million barrels per day by December 2012 and Iraq plans to increase its production to five million barrels per day by 2014. Iraq was one of the founding members of OPEC. Iraq’s economy is based on oil and has provided it with about 95 per cent of foreign exchange earnings.

Kuwait: Kuwait is situated at the tip of the Persian Gulf and its name in Arabic means “fortress built near water”. The region was the site of Characene, a major Parthian port for trade between Mesopotamia and India. After World War I, it emerged as an independent sheikhdom under the protection of the British Empire and became independent in 1961. Large oilfields were discovered in the late 1930s in Kuwait and the oil industry has seen phenomenal growth since then. In 1990, Kuwait was invaded and annexed by neighbouring Iraq. The US-led military forces ended the sevenmonth- long Iraqi occupation under Saddam Hussein. In 2003, Kuwait was used as a launching pad for the invasion of Iraq led by the US armed forces to remove Saddam Hussein. The country has the world’s fifth largest oil reserves and petroleum products now amounting to nearly 95 per cent of export revenues and 80 per cent of government income. Kuwait has proven crude oil reserves of 101.5 billion barrels estimated to be 10 per cent of the world’s reserves. Kuwait currently pumps 2.9 million barrels per day, which is expected to increase to four million barrels per day by 2020. Kuwait spends close to $5 billion for defence.

United Arab Emirates (UAE): The UAE is a federation of seven emirates each governed by a hereditary emir, who choose one of their members to be the president of the federation. Oil was first discovered in the 1950s. UAE oil reserves of 97.8 billion barrels are ranked seventh in the world. It also possesses the world’s 17th largest reserves of natural gas resources and it is one of the most developed economies in Western Asia. Since 1962, when Abu Dhabi became the first of the emirates to begin exporting oil, the country’s society and economy were transformed. The US and France have important defence cooperation agreements including providing military hardware.

Oman: Oman is an Arab state which is strategically located at the mouth of the Persian Gulf. From the 17th century, Oman had its own empire and competed for influence in the Persian Gulf and the Indian Ocean. During 20th century, its power declined and it came under the influence of the UK. Oman has proven oil reserves of about 5.5 billion barrels which is 24th in the world. Production of oil during 2012 was about 9,30,000 barrels per day. Oman has natural gas reserves of about 49.5 billion cubic metres which makes it 28th in the world.

Qatar: Qatar is a sovereign Arab state, occupying the small Qatar Peninsula on the north-eastern coast of the Arabian Peninsula. Qatar has been ruled as an absolute and hereditary emirate by the Al Thani family since the mid-19th century. It was one of the poorest Persian Gulf states and a British protectorate from 1916 to 1971. The discovery of oil in 1939 has changed its economy radically. It has a proven oil reserve of 15 billion barrels and proven natural gas reserves of about 26 trillion cubic metres, about 14 per cent of the world total and the third largest in the world.

Petrodollar diplomacy

Successive US Governments have followed policies which ensure that they have access to Middle East oil, suppressing any regional powers to challenge them and prevent the proliferation of weapons of mass destruction. The US has security alliances with countries like Israel, Saudi Arabia, Egypt, Kuwait, Oman, Qatar and UAE. Many countries like Saudi Arabia, Kuwait and Oman have allowed the US to establish their military bases. Other countries like UK, Russia, China, France and Germany also have security and economic ties with Middle East due to their energy interest.

Petrodollar: Most oil sales throughout the world are carried out in US dollars and the US guards this policy very strongly. In 2000, Iraq converted all its oil transactions under the ‘Oil for Food’ programme to Euros. After the US invasion of Iraq in 2003, this policy was reversed. Thus any US dollar earned by a country through the sale of its oil to another country is called petrodollar. A petrodollar can also refer to the Canadian dollar when Canada sells its oil. Rise in the price of oil effect the value of the dollar. Major oil producing nations invest their surplus petrodollars profitably, mainly in western countries. A large portion of Arab petrodollars were invested directly in the US Government securities and in the financial markets of the largest five economies. Thus all oil purchasing countries are forced to maintain a large stockpile of dollars which raises the price of the US dollar regardless of the economic scenario in the US. It benefits the US a great deal as it can run higher budget deficits at a more sustainable level than can most other countries. It also makes imports cheaper for the US. Iran has made an effort to create its own oil bourse which started selling oil in gold, euros, dollars, and Japanese yen. Thus by allowing the sale of oil only in the US dollars, the US stands to gain substantially in economic terms as majority of the dollars it spends on buying oil is recycled back into its economy by investment and sale of military hardware. In return, the US protects the rulers of oil producing countries.

Arming the Middle East

Saudi Arabia: There has been significant increase in the defence spending of Saudi Arabia since the mid-1990s. It was about $25.4 billion in 2005. In 2011, it spent $58.5 billion and ranked eighth in the world. The US alone sold more than $80 billion in military hardware between 1951 and 2006 and during October 2010, the US State Department notified Congress of its intention to make the biggest arms sale in the US history of about $60.5 billion to Saudi Arabia. From 1985 to 2006, the UK has supplied military aircraft like Tornado and Eurofighter Typhoon and other equipment worth about £43 billion (about $65.36 billion) and thought to be worth a further £40 billion (about $60.80 billion). In May 2012, British defence giant BAE signed a £1.9 billion ($3 billion) deal to supply Hawk trainer jets to Saudi Arabia.

Iran: Once Iran’s nuclear programme was disclosed in 1995, there has been an effort by the western world, led by the US to prevent it. This has also led to UN Security Council imposing sanctions against Iran, thereby causing its economic isolation globally. The defence expenditure was $7 billion during 2008, but does not include expenditure on Islamic Revolutionary Guards Corps. Iran’s military spending is the lowest in the Persian Gulf and it has been striving hard to develop its own military hardware due to the embargo on arms sale.

Iraq: The history of the US military aid to Iraq is quite murky. A large amount of the US military aid flowed into Iraq during the Iran-Iraq War, which lasted from September 1980 to August 1988. It was reported by a high level committee that about two of every seven licences for the export of “dual use” technology items approved from 1985 to 1990 by the US Department of Commerce went to Iraq, which it could use for its military or divert it to develop nuclear weapons. Confidential Commerce Department files also disclosed that the Reagan and Bush administrations approved at least 80 direct exports of military hardware to the Iraqi military. Saddam Hussein’s military machine was partly destroyed in the first Iraqi invasion named ‘Operation Desert Storm’ and completely annihilated during the second 2003 Iraqi invasion named ‘Operation Iraqi Freedom’. After the US first sold military hardware to Iraq in petrodollars, then completely destroyed it and again sold it under the cover of the programme to arm Iraq’s military, appears to be a questionable policy benefiting the US and its defence contractors. Some of the major military hardware sold to Iraq is F-16 fighter jets, M1A1 Abrams main battle tanks, cannons and armoured personnel carriers. The Obama Administration is moving ahead with the sale of nearly $11 billion worth of arms and training for the Iraqi military during 2012.

Kuwait: The US has provided military assistance to Kuwait from both foreign military sales (FMS) and commercial sources with all transactions made by direct cash sale. The US Office of Military Cooperation in Kuwait is attached to the US Embassy and manages the FMS programme. The US military sales to Kuwait total $5.5 billion over the last 10 years.

UAE: The US and France have important defence cooperation agreements including providing of military hardware. The UAE discussed with France the possibility of a purchase of 60 Rafale fighter aircraft in January 2013. During 2009, UAE has reported to have spent $15.77 billion on defence. As per the US Defence Security Cooperation Agency notification, UAE signed an initial order for $1.96 billion of terminal high-altitude area defence (THAD) weapons systems last year and requested for additional 48 THAD missiles with support systems valued at $1.135 billion.

Oman: Oman has long-standing military and political relations with UK and the US. During 2010, Oman spent $4.074 billion on military expenditures. The Sultanate has a long history of association with the British military and defence industry. Major US sales to Oman are expected as part of an estimated $20 billion sales package to the Gulf states under the US. “Gulf Security Dialogue” intended to contain Iran.

Qatar: Qatar has strong military ties with the US and US Central Command’s Forward Headquarters and the Combined Air Operations Centre is located in Qatar. In 2008, Qatar spent $2.355 billion on military expenditures, 2.3 per cent of its GDP. As the US Defence Security Cooperation Agency, Qatar has requested the possible sale of two THAAD fire units, 12 launchers, 150 interceptors, parts, training and logistical support for an estimated cost of $6.5 billion.

The Stockholm International Peace Research Institute (SIPRI) has revealed in its 2012 analysis report that arms transfer to Middle East was $123 billion with an increase of 4.6 per cent. Economies of the US, UK and other European nations have been thriving due to the continuous Arab-Israel and Sunni-Shia conflict in the Middle East. Oil is sold in the US dollars; surplus dollars are recycled into these countries or paid for purchasing of military hardware. In return the absolute monarchies are protected by the Western countries. The Arab Spring has had no effect on the arms sale. Will vested interests allow peace to prevail or will they let the cauldron of Middle East simmer? Only time can tell.