Does Middle East Harbour Fears of Oil Drying Up?

MIDDLE EAST - Will the world soon experience a major oil and gas crunch? Many global countries are gradually becoming self-dependent and planning to adopt new drilling technologies in the hope of discovering their own oil reserves. The Middle East, which has long maintained its stature as the world’s largest oil exporter, now feels great pressure. Someday the oil reserve will dry up under the burden of consumption of a vast volume of barrels of crude oil per day.

Governments and those involved in framing policies in the Middle East are now aware that the world’s oil fields are depleting at a rate of 9.1% per year, which is terrifying. It has been reported that if nothing is done to overcome the threat, then oil production could fall 38% in only five years. A recent report in the Guardian revealed that conventional sources of oil are expected to continue to decline and future oil demands will need to be satiated through more unconventional resources.

This is a matter that requires immediate attention for most of the oil producing nations in the Middle East. What if the economic highs created by the precious oil drop down to nothing? This very fear has brought economic diversification to the center stage. The only saving grace that can protect the global population from experiencing this painful outcome is to introduce a diversification strategy.

The concept of economic diversification is to improve the GDP. Economic diversification is a process that generates a growing range of economic outputs. This diversifies the markets for exports or income sources outside of domestic economic activities (i.e. income from overseas investment). The Middle East and its constituting nations have adopted the concept, where previously they were characterized by the lack of it.

Other sectors will now stand with pride and make their own contributions to the GDP and thus lead to a flourishing fiscal health. At the moment, private sectors are the first visible output of the economic divergence protocol.

Price and demand are two of the most important aspects of the global economic system and fiscal diversification is one way to escape the complex phenomenon. Countries and their respective economic systems are experiencing problems such as low growth rates, lack of public and private incentives to accumulate human capital, lack of competition in manufacturing, and similar problems. This is something that has coaxed the countries in the Gulf Cooperation Council to opt for economic diversification.

Economic diversification can reduce a nation’s economic volatility and increase its real activity performance. With oil consumption going up at a very steep rate, diversification is something that can pacify the fear in the Middle East associated with its diminishing oil reserve.

The answer lies in the relationship between fiscal divergence and private sector economic reforms. The theory suggests that diversification will help increase the private sector and will lower the contribution of the public sector to a certain level. One of the reasons for more private sector involvement is that a part of economic divergence relates to the issue of the foreign direct investments. A report from LSE suggests FDIs can bring in capital, create new jobs for people living in the Middle East, encourage development of new technology, and formulate management methods. These will help the countries build and expand their societies and knowledge communities.

It can safely be said that the potential of the Middle Eastern nations to attract FDI is severely limited without a well-functioning private sector. The growth of the private sector in the overall GCC economy has not only brought a fresh breath of air but has also created ripples in the employment market as a whole. The premise is simple: Take the revenue from oil and gas and invest it in other budding industries and sectors.

The expectation of fiscal diversification is freedom from the monopoly of oil and gas revenue on the GDP, and newcomers entering the economic arena. The Gulf would soon be relieved from the fear of depleting oil reserves and could still manage the country with a growing private sector. There would be well-paying jobs in the Middle East and the standard of living would still be maintained.

Follow Vinita on Twitter Twitter: @nahmias_report Middle East Correspondent: @vinita1204

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When Christine Lagarde Talks, Everyone Listens

Ayanna Nahmias, Editor-in-ChiefLast Modified: 01:14 AM EDT, 27 September 2012

WASHINGTON, DC - Christine Lagarde, the International Monetary Fund, Managing Director is arguably the most powerful woman in global finance next to German Chancellor Angela Merkel.

Merkel is noted for her role in trying to resolve the Eurozone debt crisis, as leader of Europe's biggest and most robust economy. Merkel has also been named by Forbes magazine as the most powerful woman in the world.

Since the global economic slowdown, various countries have struggled to retire debt in the face of increased jobless rates, volatile financial markets, and decreased GDP.

Therefore, when Lagarde announced that the IMF is set to cut its forecast for global growth next month, the news was greeted with trepidation by the United States and other governments including China.

At issue is the growing lack of confidence in the ability of European policymakers to attack head on the crisis affecting the Euro Zone, as well as an increased unwillingness by countries with strong economic growth and low debt, like Germany, to support the bailout of countries that refuse to implement effective austerity measures.

In fact, the S&P 500 fell for a fifth straight trading day on Wednesday as protests in Spain and Greece over euro zone austerity measures raised fresh concerns over Europe's ability to get its debt crisis under control. The possibility of countries with stronger economies defecting from the euro zone in favor of a return to their national currency also contributes to continued market instability.

When Lagarde announced that the IMF is cutting its global growth projection for 2013 to 3.9 percent although it left its 2012 forecast at 3.5 percent in July 2012, it was widely viewed as a lack of confidence in Europe's ability to resolve the euro zone crisis.

In particular it was viewed as a tacit indictment of government officials inability to effectively address the economic downturn in their respective countries. The failure of these countries to implement austerity measures to reduce their debt has adversely affected the economies in the rest of the world.

In fact, Lagarde stated that she believes the euro zone crisis poses the greatest risk to the world economy followed by the looming U.S. fiscal cliff which she believes also presents a "serious threat."

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Published: 27 September 2012 (Page 2 of 2)

"We continue to project a gradual recovery, but global growth will likely be a bit weaker than we had anticipated even in July, and our forecast has trended downward over the last 12 months," Christine Lagarde said.

"Markets briefly rallied after the European Central Bank's decision to launch a conditional bond-buying program for troubled states. ECB President Mario Draghi introduced a program to buy European nations' debt on a potentially unlimited scale — with major conditions. The most important at the moment is that a country must formally request the assistance and agree to financial conditions from the international lenders." (Source: Seattle Times)

This model is similar to the U.S. Troubled Asset Relief Program which was enacted by President George W. Bush in 2008. The TARP program purchased assets and equity from financial institutions to strengthen the financial sector and stave off a severe financial downturn unseen since the Great Depression. However, it remains to be seen if the ECB’s approach will prevent the euro zone from slipping into deeper recession.

Lagarde said that the IMF supports Europe moving to a banking union which will prevent nations from being dragged down by sickly banks. The euro zone is currently weighed down by the faltering economies of Portugal, Greece, and Spain; and in the case of the latter, Lagarde believes that it appears headed toward a bailout like the one that Ireland received after rescuing its banks.

Despite this, Legarde does support the idea of giving Spain and Portugal more time to implement budget and other reforms. But she also expressed caution and was wary of Italy and France, two of Europe’s biggest economies, sincerity in charting a path to substantive economic and budget reforms.

Lagarde said structural reforms and fiscal adjustments are going to be unavoidable in crisis-hit euro zone countries, and that continued austerity measures must be more steadfastly enforced as a prerequisite for receiving future bailout funds.

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