Does Middle East Harbour Fears of Oil Drying Up?

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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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The Cannabis Capital of the World

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Michael Ransom, Contributing EditorLast Modified: 06:45 p.m. DST, 24 June 2014

LAZARAT, Albania -- This past week, the Albanian government waged a war against the large-scale cultivation of marijuana in the small town of Lazarat, which is 140 miles south of the Albanian capital. Lazarat has been called the 'cannabis capital' of Europe, and it comes by this title honestly. International officials estimate that the small village alone produces 900 metric tons of cannabis each year, which brings in over $6 billion annually.

The offensive began last Monday, 16 June, as Albanian special forces donned Kevlar vests and stormed the village in army vehicles designed to withstand automatic weapons and shelling attacks. Their protective gear proved important, as cartel-style gangs defended drug warehouses and weapons caches. The firefight lasted days, and on Wednesday, 18 June, police and rebels reached a ceasefire agreement.

In 1990 and 1997, the Albanian government was overhauled in order to address widespread corruption and centralized wealth. The new socialist administration has sought to join the European Union multiple times in recent years, but their intentions have not translated to EU membership for a variety of reasons. Perhaps the most problematic aspect of Albanian admission is the cannabis industry.

For nearly two decades, Lazarat has made Albania the 'cannabis capital' of the European bloc, as their marijuana yield is distributed through nearby Italy and further westward. Armed with weapons seized during the 1990 and 1997 revolutions, gangs in Lazarat were omnipotent until last Wednesday. Similar problems may persist in other rural areas of Albania, but certainly not to the same extent as Lazarat.

While opposition to Albania's inclusion in the EU is centered around the production of marijuana, many Albanians see the industry as useful and profitable. Most in Albania would agree, however, that the gangs in Lazarat and other townships gain tremendous revenue through the distribution of marijuana, and these organized crime vehicles present a threat to residents of Lazarat and nearby locales.

The defensive volley of ammunition and explosives that were discharged from gang controlled safe houses is best explained by what is at stake in the standoff. The $6 billion industry in Lazarat alone totals half of the entire country's Gross Domestic Product. It is astounding that such a small village, located in a relatively small nation, could feed so much of the European marijuana market on its own.

More than marijuana, this move by officials in Tirana signals the eradication of small gang militias, which in a sense own and operate the small village of Lazarat. Those in charge in Tirana believe that the people of Lazarat will be better off without the coalition of gangs running the township, but that will remain to be seen. In the meantime, Albania is one step closer to association with the European Union.

Follow Michael on Twitter Twitter: @nahmias_report Contributing Editor: @MAndrewRansom

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Legarde's IMF Jenga Gambit

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Ayanna Nahmias, Editor-in-ChiefLast Modified: 00:49 AM EDT, 22 February 2012

FRANCE, Paris - In the latest Greek Tragedy, aka the 'Greek Deal,' the Troika seems determined to ignore the adage of “not pouring good money after bad.”

Greece, Ireland and Portugal are the first three countries in the euro zone to agree to ‘bailout’ plans with the so-called Troika consisting of the European commission, the European Central Bank (ECB) and the International Monetary Fund (IMF) which place them under the direct tutelage of their creditors.

Although exact figures haven’t been publicly disclosed, it is believed that after this second bailout Greece will owe a total of €50 billion to the IMF, and according to German Finance Minister Wolfgang Schaeuble, bailout No. 2 for Greece will be roughly €23 billion.

The IMF, ECB and European Commission have concluded that Greece's debt could hit 160% of GDP by 2020.  Even with recently implemented austerity measures which many claim are not substantive enough, Christine Legarde, the IMF’s managing director, seems poised to infuse additional capital into Greece’s foundering economy.

On Tuesday, Legarde issued the following statement, “The combination of ambitious and broad policy efforts by Greece, and substantial and long-term financial contributions by the official and private sectors, will create the space needed to secure improvements in debt sustainability and competitiveness.”

The obfuscated motivation behind the IMF’s desire to hurriedly conclude months of bailout negotiations despite Greece’s reticence and its likely inability to repay anything close to 100 cents on the drachma, has some questioning the deal.

According to financial news sources, this infusion has less to do with Greece and more to do with the rescue of the rest of Europe in an effort to prevent massive defaults and/or an exodus from the euro. Despite deep criticism, Legarde is faced with the same dilemma President Barak Obama wrestled with early in his presidency – capital infusion via bailouts or risk the total collapse of the economic system.

Legarde, as the IMF managing director is gambling that these measures will ensure the preservation of a 17-nation euro zone. Though many would argue that this is not central to the IMF's core mission, the global economies are so interdependent that like the game of Jenga, without careful positioning and risky calculations, it could all come tumbling down.

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