Oil, Institutions and Sustainability in MENA: A Radical Approach through the Empowerment of Citizens 3030259315, 9783030259310

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Mohammed Akacem  Dennis Dixon Miller John Leonard Faulkner

Oil, Institutions and Sustainability in MENA A Radical Approach through the Empowerment of Citizens

Oil, Institutions and Sustainability in MENA

Mohammed Akacem • Dennis Dixon Miller John Leonard Faulkner

Oil, Institutions and Sustainability in MENA A Radical Approach through the Empowerment of Citizens

Mohammed Akacem Department of Economics Campus Box 77 Metropolitan State University of Denver Denver, CO, USA

Dennis Dixon Miller Baldwin Wallace University Berea, OH, USA

John Leonard Faulkner Arlington, VA, USA

ISBN 978-3-030-25931-0    ISBN 978-3-030-25933-4 (eBook) https://doi.org/10.1007/978-3-030-25933-4 © Springer Nature Switzerland AG 2020 This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

We dedicate this book to our wives, Khedidja, Nina, and Katherine.

Contents

1 Introduction����������������������������������������������������������������������������������������������    1 1 Introduction������������������������������������������������������������������������������������������    2 1.1 MENA (Middle East and North Africa)��������������������������������������    2 1.2 What This Book Is About������������������������������������������������������������    2 2 MENA and World Oil Markets������������������������������������������������������������    3 3 Resource Curse and Institutions����������������������������������������������������������    3 4 Democracy in MENA��������������������������������������������������������������������������    4 5 MENA and Alternative Sources of Energy������������������������������������������    4 6 Reducing the Demand for Oil��������������������������������������������������������������    5 7 The Population Threat��������������������������������������������������������������������������    5 8 Why the Status Quo Is Unsustainable��������������������������������������������������    5 9 Oil as a Path to Institutional Change in MENA����������������������������������    6 10 Positive Directions for Reform������������������������������������������������������������    6 Reference ��������������������������������������������������������������������������������������������������    6 2 MENA and World Oil Markets��������������������������������������������������������������    7 1 Introduction������������������������������������������������������������������������������������������    7 2 OPEC Then and Now��������������������������������������������������������������������������   10 2.1 Brief History of OPEC World Oil Markets ��������������������������������   10 2.2 Middle East Share of OPEC’s Oil in the World Economy����������   13 3 Price Leadership Within OPEC ����������������������������������������������������������   15 4 Conclusion ������������������������������������������������������������������������������������������   16 References��������������������������������������������������������������������������������������������������   17 3 Resource Curse and Institutions������������������������������������������������������������   19 1 Introduction������������������������������������������������������������������������������������������   19 2 The Resource Curse ����������������������������������������������������������������������������   20 2.1 Hypotheses and Concepts������������������������������������������������������������   20 2.2 Empirical Evidence ��������������������������������������������������������������������   22

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3 Institutions�������������������������������������������������������������������������������������������   24 3.1 Do Institutions Matter?����������������������������������������������������������������   24 3.2 Extractive and Inclusive Institutions��������������������������������������������   26 3.3 Institutional Problems in MENA ������������������������������������������������   27 4 Conclusion ������������������������������������������������������������������������������������������   38 References��������������������������������������������������������������������������������������������������   39 4 Democracy in MENA������������������������������������������������������������������������������   41 1 Introduction������������������������������������������������������������������������������������������   41 2 State of Democracy and Freedom in the World and MENA����������������   42 3 Why Is Democracy So Rare in MENA?����������������������������������������������   46 3.1 Values and Culture����������������������������������������������������������������������   46 3.2 Economic Development��������������������������������������������������������������   47 3.3 Religion ��������������������������������������������������������������������������������������   50 3.4 Preference for Democracy ����������������������������������������������������������   50 4 Autocracy in MENA����������������������������������������������������������������������������   51 4.1 Effect of Modernization��������������������������������������������������������������   52 4.2 Survivability of Autocracies��������������������������������������������������������   52 5 Summary and Conclusion��������������������������������������������������������������������   54 References��������������������������������������������������������������������������������������������������   55 5 MENA and Alternative Sources of Energy��������������������������������������������   59 1 Introduction������������������������������������������������������������������������������������������   59 2 Present Threats to Oil MENA Exporting Economies��������������������������   61 2.1 Shale Oil and Gas Development or “Fracking”��������������������������   61 2.2 Increased Discovery of New Oil and Natural Gas Deposits��������   63 3 Threats to Oil MENA from New Sources of Energy ��������������������������   66 3.1 Methane Hydrate Deposits����������������������������������������������������������   67 3.2 Energy from Nuclear Fusion ������������������������������������������������������   68 3.3 Energy from Thorium Reactors (Whitman 2017) ����������������������   70 3.4 The Traveling Wave Reactor�������������������������������������������������������   74 4 The Threat of Renewables to Oil MENA��������������������������������������������   75 4.1 Competition Against MENA Oil ������������������������������������������������   76 4.2 The Cost of Renewables��������������������������������������������������������������   81 4.3 Social Pricing of Fossil Fuels������������������������������������������������������   86 4.4 Renewable Energy in MENA������������������������������������������������������   87 5 Conclusion ������������������������������������������������������������������������������������������   88 References��������������������������������������������������������������������������������������������������   90 6 Reducing the Demand for Oil ����������������������������������������������������������������   95 1 Introduction������������������������������������������������������������������������������������������   95 2 Production, Consumption, and US Imports of Oil������������������������������   96 3 Benefit Principle����������������������������������������������������������������������������������   98 3.1 Infrastructure: Roads and Bridges ����������������������������������������������   98 3.2 External Costs of Oil Use for Transportation������������������������������  100 3.3 Military Costs of Protecting Middle East Oil������������������������������  102 3.4 Full Application of the Benefit Principle������������������������������������  103

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4 Hotelling Principle and Optimal Future Extraction of Oil Limited by Climate Change Mitigation������������������������������������  107 4.1 The Paris Agreement ������������������������������������������������������������������  108 4.2 Intergovernmental Panel on Climate Change (IPCC)�����������������  110 4.3 Limitations of the Analysis����������������������������������������������������������  110 5 Policy to Lessen the US Demand for Gasoline������������������������������������  112 6 Summary and Conclusion��������������������������������������������������������������������  117 A. Appendix: Estimating the Optimal Rate of Extraction of Oil Given the Limitations of the Paris Agreement and IPCC Report on Climate Change��������������������������������������������������  118 A.1 Assumptions����������������������������������������������������������������������������������  118 A.2 Analysis����������������������������������������������������������������������������������������  121 A.3 Results������������������������������������������������������������������������������������������  122 References��������������������������������������������������������������������������������������������������  126 7 The Population Threat����������������������������������������������������������������������������  131 1 Introduction������������������������������������������������������������������������������������������  131 2 Population Growth ������������������������������������������������������������������������������  133 2.1 Historical and Recent Context����������������������������������������������������  133 2.2 Political and Civil Liberties��������������������������������������������������������  141 3 Population and Food����������������������������������������������������������������������������  146 3.1 Arable Land ��������������������������������������������������������������������������������  149 3.2 Water Scarcity������������������������������������������������������������������������������  150 3.3 Less Wealthy MENA States��������������������������������������������������������  151 3.4 Exports����������������������������������������������������������������������������������������  153 4 Employment����������������������������������������������������������������������������������������  159 4.1 Youth Employment����������������������������������������������������������������������  159 4.2 Women Employment ������������������������������������������������������������������  161 4.3 Employment by Military or Government������������������������������������  164 5 Conclusion ������������������������������������������������������������������������������������������  165 References��������������������������������������������������������������������������������������������������  166 8 Why the Status Quo Is Unsustainable����������������������������������������������������  169 1 Introduction������������������������������������������������������������������������������������������  169 2 The Unsustainability Problem��������������������������������������������������������������  170 3 The Problems of Oil Economies����������������������������������������������������������  171 4 People Power���������������������������������������������������������������������������������������  172 5 Conclusion ������������������������������������������������������������������������������������������  173 References��������������������������������������������������������������������������������������������������  173 9 Oil as a Path to Institutional Change in MENA������������������������������������  175 1 Introduction������������������������������������������������������������������������������������������  176 2 Review of Similar Plans and Ideas������������������������������������������������������  178 3 Why Citizen Ownership?��������������������������������������������������������������������  181 3.1 The Rights of Citizens ����������������������������������������������������������������  181 3.2 Why Citizen Ownership Is Needed ��������������������������������������������  182 3.3 Benefits of Citizen Ownership����������������������������������������������������  187

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4 Citizen Empowerment Plan (CEP) as a Path to Institutional Change ������������������������������������������������������������������������������������������������  191 4.1 Starve the Beast ��������������������������������������������������������������������������  191 4.2 The Citizen Empowerment Plan (CEP)��������������������������������������  193 4.3 Sovereign Wealth Funds (SWFs)������������������������������������������������  196 5 Conclusion ������������������������������������������������������������������������������������������  204 References��������������������������������������������������������������������������������������������������  205 10 Positive Directions for Reform����������������������������������������������������������������  207 1 Introduction������������������������������������������������������������������������������������  208 2 Dealing with the Institutional Deficit����������������������������������������������  208 2.1 Sources of Rankings ����������������������������������������������������������  210 2.2 Institutional Reforms����������������������������������������������������������  211 3 Transition to Citizen Ownership of Oil������������������������������������������  214 4 Incentives����������������������������������������������������������������������������������������  215 5 Conclusion��������������������������������������������������������������������������������������  219 References��������������������������������������������������������������������������������������������������  221 Glossary������������������������������������������������������������������������������������������������������������  223 Index������������������������������������������������������������������������������������������������������������������  227

List of Figures

Fig. 1.1 Map of the MENA region (Reproduced from International Monetary Fund 2017) ����������������������������������������������������������������������    3 Fig. 2.1 Trends in daily oil production: Middle East vs North America (BP 2018a)����������������������������������������������������������������������������������������    9 Fig. 2.2 History of the international price of oil (US dollars per barrel) from 1861 to 2018 (BP 2018a) ��������������������������������������������������������   11 Fig. 2.3 Subsidies in selected MENA countries (IEA 2018)��������������������������   14 Fig. 2.4 Oil consumption annual growth rates, 2005–2015 (BP 2017)����������   14 Fig. 3.1 GDP per capita (World Bank 2018 GDP capita)������������������������������   23 Fig. 3.2 GDP and oil reserves per capita 2016 (World Bank 2017; BP 2017)�����������������������������������������������������������   25 Fig. 3.3 GDP and oil exports per capita 2016 (World Bank 2017; BP 2017)�����������������������������������������������������������   25 Fig. 3.4 Resource governance index rank (NRGI 2017) ������������������������������   28 Fig. 3.5 Corruption perception index score, 2017 (Transparency International 2017). ��������������������������������������������������������������������������   29 Fig. 3.6 Voice and accountability, 2017 (World Bank 2018 gov)������������������   30 Fig. 3.7 2017 Military expenditures as a percent of GDP (World Bank 2018 military)��������������������������������������������������������������   32 Fig. 3.8 MENA Country Index Rankings (World Bank 2019, Transparency International 2018, Legatum Institute 2018, Fund for Peace 2019)������������������������������������������������������������������������   35 Fig. 3.9 Foreign direct investment (FDI), net inflows in MENA (World Bank 2018 FDI)��������������������������������������������������������������������   37 Fig. 3.10 Foreign direct investment (FDI) as percent of GDP, net inflows 2017 (World Bank 2018 FDI%GDP) ����������������������������   37

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Fig. 4.1 Number of democracies (Diamond 2010a; Freedom House 2017, 2018 data) ����������������������������������������������������   42 Fig. 4.2 Freedom in MENA and Islam, 2017 (Freedom House 2018 data; World Bank 2018; Pew Research Center 2012)��������������������������������   43 Fig. 4.3 Democracy Index (The Economist Intelligence Unit 2018; World Bank 2018; Pew Research Center 2012)��������������������������������   44 Fig. 4.4 Democracy Index MENA (The Economist Intelligence Unit 2018) ����������������������������������������������������������������������������������������   45 Fig. 4.5 Liberal Democracy Index, 2017 (V-Dem Institute 2018) ����������������   46 Fig. 4.6 Inglehart–Welzel Cultural Map (IWC Map) (WVS 2019) ��������������   48 Fig. 4.7 GDP per capita 2016 and the GINI Index (World Bank 2017, 2018) ����������������������������������������������������������������   49 Fig. 5.1 Fig. 5.2 Fig. 5.3 Fig. 5.4 Fig. 5.5 Fig. 5.6 Fig. 5.7 Fig. 5.8

Historical US production of oil (BP 2018a; EIA 2018 STEO)��������   64 Proved world oil reserves (BP 2018a)����������������������������������������������   64 Global energy consumption 2016 by type (BP 2017)����������������������   77 Global consumption by energy resource–logarithmic scale (BP 2017) ��������������������������������������������������������������������������������   77 Global consumption by energy resources (BP 2017)�����������������������   78 Europe electricity prices vs installed wind and solar capacity per capita (Eurostat 2018; Eurobserv’er 2018; Wind Europe 2017) ������������������������������������������   83 Electricity cost increasing with cleaner energy technology (EIA 2017 electric; USCTLI 2017)��������������������������������   85 Middle East moving towards nuclear power and away from fossil fuels. (Reproduced from EIA 2018 nuclear; EIA 2017 IEO; IAEA 2019; World Nuclear Association 2019) ������   86

Fig. 6.1 US consumption vs production of oil, 1965–2018 (BP 2018; EIA 2019 Brent; EIA 2019 STEO)����������������������������������   97 Fig. 6.2 Components of US oil supply in 2017 (EIA 2019 supply; EIA 2018)������������������������������������������������������������������������������������������   99 Fig. 6.3 IPCC and Hotelling mitigation pathways (IPCC 2018 path)������������  111 Fig. 6.4 IPCC mitigation pathways for US gasoline��������������������������������������  114 Fig. 6.5 Average historical US gasoline prices (EIA 2019 explained; EIA 2019 real prices)������������������������������������������������������������������������  116 Fig. 6.6 The IPCC mitigation path for world oil (IPCC 2018 path)��������������  119 Fig. 6.7 World oil demand used in this analysis��������������������������������������������  120 Fig. 6.8 Estimated price and world demand for oil under various scenarios ������������������������������������������������������������������������������  123 Fig. 6.9 Estimated price and world demand for oil under additional scenarios��������������������������������������������������������������������������  124 Fig. 6.10 IPCC and Hotelling mitigation pathways with marginal values (IPCC 2018 path)����������������������������������������������������  126

List of Figures

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Fig. 7.1 Birth rates: 2014, per 1000s (UNDP 2016)��������������������������������������  139 Fig. 7.2 Economic and political freedoms’ impact on population. growth (Freedom House 2018a; World Bank 2019 pop growth)������  145 Fig. 7.3 Remittance received in non-oil-rich MENA countries (World Bank 2017 remit)������������������������������������������������������������������  152 Fig. 7.4 Youth unemployment (% of total labor force ages 15–24) in MENA and the OECD (World Bank 2019 unemployment youth) ����������������������������������������������������������������������  160 Fig. 7.5 Youth unemployment (% of total labor force ages 15–24) in selected MENA countries (World Bank 2019 unemployment youth) ����������������������������������������������������������������������  161 Fig. 7.6 Percent female labor participation: Age 15+ 2016 (World Bank 2017 labor female)������������������������������������������������������  162 Fig. 7.7 Seats held by women in national parliaments in 2018 (World Bank 2018 parliament) ��������������������������������������������������������  163 Fig. 7.8 Seats held by women in national parliaments in the Arab world, 2018 (World Bank 2018 parliament) ������������������������������������  164 Fig. 9.1 Annual dividend payments from the Alaska Permanent Fund (Alaska Department of Revenue 2018) ����������������������������������  179 Fig. 9.2 GDP per capita and resource rent as a percent of GDP in 2015 (World Bank 2016)��������������������������������������������������������������  184 Fig. 9.3 Deficit per barrel and break-even oil price (Bentley et al. 2014)������  185 Fig. 9.4 Youth unemployment in MENA (World Bank 2019) ����������������������  190 Fig. 9.5 OPEC per capita net oil export revenues, 2017 dollars (EIA 2018)����������������������������������������������������������������������������������������  195 Fig. 9.6 Top ten most transparent SWFs, 2015 (Stone and Truman 2016) ����������������������������������������������������������������������������  199 Fig. 9.7 Least transparent SWFs, 2015 (Stone and Truman 2016)����������������  199 Fig. 9.8 Top SWFs in the world (Sovereign Wealth Center 2018)����������������  201 Fig. 9.9 Oil reserves and share of total (BP 2018) ����������������������������������������  202 Fig. 9.10 Corruption Perception Index (CPI) (Transparency International 2018)����������������������������������������������������������������������������  202 Fig. 9.11 Democratic values and SWFs (Sovereign Wealth Center 2018; Freedom House 2018)����������������������������������������������������������������������  203 Fig. 10.1 Foreign direct investment (FDI): net inflows as a percent of GDP, 2017 (World Bank 2018a)��������������������������������������������������  212 Fig. 10.2 World Press Freedom Index 2019 (Reporters Without Borders 2019)������������������������������������������������������������������������������������  214

List of Tables

Table 3.1 MENA Country Index rankings (World Bank 2019; Transparency International 2018; Legatum Institute 2018; Fund for Peace 2019b) ������������������������������������������������������������������   34 Table 3.2 Freedom ratings (Freedom House 2018)����������������������������������������   38 Table 4.1 Summary of electoral democracies and indices 2017 (Freedom House 2018 data; World Bank 2018; The Economist Intelligence Unit 2018) ����������������������������������������   51 Table 5.1 Oil supply and prices change in opposite directions (Macrotrends 2019)������������������������������������������������������������������������   62 Table 5.2 US oil production and consumption compared to the world (BP 2017, 2018a; EIA 2017 energy)��������������������������   63 Table 5.3 Solar energy auction prices (Buckley 2017)����������������������������������   72 Table 6.1 Oil production, consumption, and exports to the United States in 2017 (BP 2018)��������������������������������������������������������������������������   97 Table 6.2 Highway fuel taxes, revenues, and expenditures in 2017 (EIA n.d.; Federal Highway Administration 2019; Chantrill 2017) ������������������������������������������������������������������������������   99 Table 6.3 Social cost of carbon (SC-CO2) per gallon (EIA 2016; Interagency Working Group 2016)������������������������������������������������  101 Table 6.4 Estimates of non-climate air pollution costs from vehicles������������  101 Table 6.5 Estimates of the additional increase in the price of oil by including US military costs in the Middle East in 2017 dollars��������������������������������������������������������������������������������  103 Table 6.6 Costs of gasoline currently not paid directly by the users��������������  104 Table 6.7 Exhaustion scenarios of limited oil reserves����������������������������������  109 Table 6.8 IPCC and Hotelling mitigation pathways (IPCC 2018 path) ��������  111 Table 6.9 Estimate of oil reserves that can be burned without causing global warming to exceed 2° C (McGlade and Ekins 2015; BP 2018; EIA 2019 STEO) ��������������������������������  119 xv

xvi

List of Tables

Table 6.10 Estimate of oil that can be burned on the IPCC mitigation path (IPCC 2018 path)��������������������������������������������������������������������  119 Table 6.11 Exhaustion scenarios of limited oil reserves����������������������������������  123 Table 6.12 IPCC and Hotelling mitigation pathways with marginal values (IPCC 2018 path)����������������������������������������������������������������  125 Table 7.1 MENA countries: 2017 populations and growth rates ������������������  138 Table 7.2 Freedom House 2017 index ratings and status of MENA countries ����������������������������������������������������������������������������������������  142 Table 7.3 2017 Freedom House ratings of OECD countries��������������������������  144 Table 7.4 Economic Intelligence Unit’s Global Food Security Index Rankings, 2018��������������������������������������������������������������������  147 Table 7.5 Percentage of household budgets spent on food����������������������������  151 Table 7.6 US patents granted to countries of MENA and Norway and Singapore, 2015 ����������������������������������������������������������������������  154 Table 7.7 Patent applications by office and origin, 2017 ������������������������������  155 Table 9.1 Summary of indices in this book����������������������������������������������������  183 Table 10.1 Population-weighted international indices of the MENA region (World Bank 2019b; Transparency International 2018; Fund for Peace 2019b; Legatum Institute 2018)����������������������������  210 Table 10.2 Summary of indices in this book����������������������������������������������������  216

Chapter 1

Introduction

Abstract  The Middle East and North Africa (MENA) region faces many challenges including rapid population growth, youth unemployment, limited arable land, misuse of the oil riches, wasteful spending and corruption, autocratic governments and absolute monarchies, and unstable future oil revenues with which to buy peace. Maintaining the status quo across MENA has become unsustainable. This introductory chapter raises many questions that are addressed throughout the book including these questions by chapter: 1. What is the scope of this book? 2. How have oil markets changed over time and will oil markets be a reliable source of revenue in the future? 3. Is MENA doomed by an oil curse? Is there such a thing as an oil or a natural resource curse? Or does the institutional deficit so prevalent in MENA explain the poor economic performance of the oil MENA region? 4. What explains the lack of democracy in MENA? 5. What are the threats to MENA’s oil revenue from the shale oil revolution, alternative energy, and renewable energy? 6. What would happen to the price of and demand for gasoline and oil if all social costs were included in their price and if climate change were truly mitigated as envisioned by the Paris Agreement and the Intergovernmental Panel on Climate Change (IPCC) report? 7. What can MENA do to curb its population growth, high youth unemployment, and low female labor participation rate? How can MENA feed its growing population with limited arable land? 8. Why is the status quo unsustainable? 9. How would a plan of citizen ownership of oil work and could it nudge MENA towards adopting more accountable governments? 10. What reforms are needed and how can they be achieved?

© Springer Nature Switzerland AG 2020 M. Akacem et al., Oil, Institutions and Sustainability in MENA, https://doi.org/10.1007/978-3-030-25933-4_1

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1 Introduction

1  Introduction The Middle East and North Africa (MENA) region faces many challenges including rapid population growth, unemployment, limited arable land, possible oil curse, autocracies, and unstable future oil revenues. Oil revenues are needed to buy themselves out of their problems. The status quo across MENA is simply unsustainable. Significant and purposeful change must occur to avoid violent revolutions or slow economic stagnation leading to decline and worsening instability. Our proposal is a step towards that change.

1.1  MENA (Middle East and North Africa) Since there is no standard definition of MENA, we have chosen to include countries more relevant to our analysis. These include the following countries unless otherwise indicated: Middle East  Bahrain, Iran, Iraq, Jordan, Kuwait, Lebanon, Oman, Palestine, Qatar, Saudi Arabia, Syria, United Arab Emirates (UAE), and Yemen North Africa  Algeria, Egypt, Libya, Morocco, and Tunisia We include countries such as Egypt—without appreciable oil wealth—because they receive significant remittances from family members who work in oil-rich nations; thus, these countries are somewhat dependent on the good fortune of the oil-rich nations for foreign exchange. We exclude some countries that are sometimes included in MENA, namely, Djibouti, Ethiopia, Israel, Malta, and Turkey. The following map includes some countries not in our definition of MENA (Fig. 1.1):

1.2  What This Book Is About Chapters 1, 2, 3, 4, 5, 6, 7, and 8 of this book explain the many challenges and problems faced by MENA and why the status quo is unsustainable. Each chapter explains an aspect of these challenges, which are summarized in Chap. 8. Chapters 9 and 10 discuss how to address these challenges and explain our proposal for citizen ownership of oil and what might help achieve it.

3 Resource Curse and Institutions

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Fig. 1.1  Map of the MENA region (Reproduced from International Monetary Fund 2017)

2  MENA and World Oil Markets The world oil markets have changed over time, and this chapter addresses the development since the golden era when the oil majors were in full control to the post-­ nationalization period. Can the Organization of the Petroleum Exporting Countries (OPEC) continue to exist as an effective cartel? Given the competition from the US shale oil, can the oil MENA region sustain the competition and the impact on its dominant source of revenue?

3  Resource Curse and Institutions We question the existence of an oil curse and if oil should be considered the sources of MENA’s economic ills. We review the theory of the resource curse and how and if it applies to the MENA region. The resource curse asserts that countries endowed with natural resources often perform worse economically than countries with little or no natural resources. This need not be the case as we shall show. Is it the resource curse or the institutional deficit that could explain why MENA fails to perform economically despite its oil riches? We examine the case of Norway which shows that despite the presence of oil riches, the country manages to surpass the whole MENA region in all of the institutional metrics. In other words, oil did not

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1 Introduction

prevent Norway from doing exceedingly well. The answer lies in the superior institutional setup with press freedom, rule of law, and the protection of property and human rights. The lackluster economic performance of MENA is due to factors such as the lack of economic diversification, corruption, lack of transparency, and poor institutions. We argue that oil need not be a curse but can be a blessing if the proper institutions are in place.

4  Democracy in MENA The only democratic country in MENA according to Freedom House is Tunisia, albeit it is a fragile democracy. What explains the lack of democracy in MENA? Is it religion, values, history, or the oil curse? Other Muslim countries, countries with oil, and countries without previous democratic experience currently have thriving democracies. Theories predict that as economies develop, people tend to adopt values that are conducive to democracy. In the early 1990s, the number of democracies in the world increased by over 50%. However, recently democracies have been threatened by the rise of populism, nationalism, and autocracy. Autocracy, not democracy, is the norm in MENA. How have autocracies been able to survive in MENA?

5  MENA and Alternative Sources of Energy In addition to shale oil, MENA’s ability to control oil prices is threatened by new alternative sources of energy and renewable energy. New sources of energy described in this chapter include the following listed below. How viable are these alternatives and how likely will they threaten MENA’s oil markets in the future? Methane hydrate Nuclear fusion Thorium reactors Traveling wave reactor (TWR) Renewable energy is growing faster than fossil fuels. Will it replace fossil fuels as many hope? The evidence is mixed. Problems include the intermittent nature of wind and solar energy requiring backup energy and thus an expensive dual infrastructure of fossil fuels and renewable energy. Can these problems be overcome? Could solar energy be a promising new source of energy from the deserts of MENA?

8 Why the Status Quo Is Unsustainable

5

6  Reducing the Demand for Oil The consensus at the climate change conferences in Paris and Hungary is that the world needs to reduce its dependence on fossil fuels. The problem is how? One way to reduce the demand for oil is to price it according to its full social cost, including the full cost of roads, highways and bridges, pollution and carbon emissions, and the military cost of maintaining access to oil in the Persian Gulf. Using US gasoline as a case study, what would happen to the price of and demand for gasoline if all these social costs were included in the price of gasoline? In order to limit global warming to 1.5–2° C, much oil must be left in the ground. How much oil can be burned and what should be the rate of exhaustion of this limited amount of oil over time? How do these questions apply to US gasoline and what polices could be used?

7  The Population Threat The population growth rate and youth unemployment in MENA are higher than most other regions in the world, which presents a challenge to the governments in the region. Since arable land is limited in MENA, the region must rely on food imports. How does MENA pay for these imports? What can MENA do to curb its population growth, high youth unemployment, and low female labor participation rate?

8  Why the Status Quo Is Unsustainable Oil revenues have enabled MENA to provide public goods and services, appease the population and opposition, and pay for imported food without much taxation. As a result, there has been little accountability and transparency, thereby allowing corruption, wasteful spending, and the enrichment of autocrats and their cronies. However, these revenues may not be sustainable in the long run due to unstable oil markets, competition from shale oil, energy alternatives and renewable energy, and efforts to combat climate change. In addition to unstable oil revenues, there is potential unrest due to a large segment of the youth being unemployed and poor institutions that make the situation in MENA unsustainable. What are the problems that need to be solved to achieve sustainability and what is the appropriate policy approach?

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9  Oil as a Path to Institutional Change in MENA The natural resources of a nation belong to the people or citizens of that nation according to the  covenants of the United Nations Universal Declaration of Human Rights. We propose a plan whereby the citizens would own the oil and the sovereign wealth funds (SWFs). As owners, they would receive their share of oil revenues distributed directly to them as well as their share from the remaining balance of the SWFs. How would this plan work? If oil profits were distributed to the citizens, governments would have to tax citizens in order to provide public goods and services. A large number of countries have no oil wealth and yet are able to fund government operations through taxation and do a better job compared to some in oil-rich MENA. Will our citizen ownership plan help MENA move away from the status quo and towards more accountable governments?

10  Positive Directions for Reform Citizen ownership of oil could be a path to better institutions, but better institutions may be needed for citizen ownership of oil to be implemented. What institutional reforms are needed? Why would autocrats give up power by implementing institutional and population reforms and give up control of oil revenues to their citizens? How can autocrats be given incentives to cede some power and control and open the political and economic space to improve MENA’s economic growth and development prospects? Given that the status quo is unsustainable is one reason but may not be enough of an incentive. What incentives are needed?

Reference International Monetary Fund (2017) Regional Economic Outlook Middle East and Central Asia, October, p 1

Chapter 2

MENA and World Oil Markets

Abstract  The world oil markets have evolved since the 1950s when the oil majors were in full control of the market from the MENA’s oil-producing wells to the gas stations in oil-consuming countries. Since then, OPEC has asserted its power, but recently it is facing challenges from the shale oil revolution as well as alternatives and renewable energy sources. Oil markets have gone through several phases. Prior to the 1970s, the major oil companies, known as the Seven Sisters, controlled the oil production and ramped up the rate of depletion because of the impending threat of nationalization by oil producers (the countries producing oil). Eventually, the oil producers reasserted control over their oil and reduced production resulting in the oil shocks of the 1970s. Later phases resemble the first phase with the vertical integration of some of the oil producers and major oil companies operating along with the national oil companies. OPEC’s long-term viability and its ability to secure a stable level of oil revenue to its members are now tested by the oil shale revolution. The latter has displaced a number of OPEC members’ oil exports as well as tampered the cartel’s control over oil prices. To make matters worse, the oil producers in MENA consume a large and growing share of their own production due to energy subsidies in an effort to appease the population. A dilemma facing the oil MENA and the OPEC cartel is that at its core, a cartel’s main goal is to restrict output. Doing so leads to higher oil prices which makes marginal oil wells outside of the MENA region and oil shale more profitable. It also increases investment into alternative sources of energy and renewables. If the cartel chooses to flood the oil markets to lower oil prices and keep shale oil and other marginal producers at bay, it only hurts itself financially with much lower oil revenues.

1  Introduction The purpose of this chapter is to set the stage for the main thesis of our book which centers around the role of oil in the oil MENA region, its use and misuse, and why the oil wealth has not produced the expected economic benefits for the region.

© Springer Nature Switzerland AG 2020 M. Akacem et al., Oil, Institutions and Sustainability in MENA, https://doi.org/10.1007/978-3-030-25933-4_2

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Yet, oil riches contributed greatly to Norway’s economic development despite having far less oil wealth, while Singapore did very well despite the absence of oil wealth. We present a short introduction of the world oil markets while keeping in mind its relevance to our oil revenue distribution model which will be explored in later chapters in greater detail. Central to a discussion of the global oil markets is the Organization of Petroleum Exporting Countries (OPEC) and its role in impacting the world oil market price. However, the chapter will not dwell on the theory of cartels which posits that oil cartels such as OPEC eventually self-“destruct” and disband because of cheating. It is true that the oil cartel has defied the odds and survived several writings that predicted its demise.1 Predictions about the breakup of the OPEC oil cartel have been made before, but it has managed to dominate the world markets for years. It faces, however, some challenges from the advent of fracking and the surge of the US oil production. OPEC’s behavior and the direction of oil markets are unpredictable. In May 2018, for instance, OPEC, Russia, and other oil producers (countries producing oil) outside of OPEC aligned themselves in a joint decision to cut oil production to firm up world oil prices (Faucon and Said 2018). But as soon as this decision was made, both OPEC and Russia did just the opposite and increased oil production (Said and Faucon 2018). The fundamental problems facing OPEC are twofold. First, it is essentially two cartels in one. Second, it is presently tested by competition from other producers, thanks to the advances of technology. Within OPEC, there are two sub-cartels. One is rich and includes the Gulf oil producers with large oil reserves and relatively smaller populations. It is in the interest of these producers to keep oil prices as low as possible2 to discourage the development of substitute sources of energy such as from shale oil or oil from more remote areas of the world. Moreover, the current US administration and President Trump in particular have called upon OPEC and Saudi Arabia to moderate oil price increases. US policy towards Saudi Arabia has been characterized by a rapprochement and an unwillingness to criticize the monarchy despite the murder of the Saudi journalist, Jamal Khashoggi, in the country’s consulate in Istanbul. This policy continues despite the United States’ own intelligence reports implicating the Saudi authorities and alleging that Mohammed Bin Salman (MBS) “was behind the order” (BBC 1  For example, F.M. Scherer, the noted economist on industrial market structure, remarked more than 35 years ago about this remarkable defiance by OPEC of economic theory when he wrote, “Notwithstanding predictions by economists that divisive forces and a 90 percent divergence between price and marginal costs would cause its early demise, OPEC provides a spectacular counterexample.” See Scherer (1980). We also unfortunately believed that the cartel’s demise or a metamorphosis into a smaller grouping was just a matter of time. We were wrong. See Akacem (1985). That was the first time that the GOPEC idea was advanced, but of course that was 33 years ago. Given the spat between Saudi Arabia, the United Arab Emirates, and Qatar, the chances of a smaller oil cartel like GOPEC may be tested by the regional events and how they will eventually unfold. See also Akacem (1993). 2  Within the range of oil prices that balance their budget.

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2018). This policy is likely to moderate Saudi Arabia’s stance on oil prices despite the country’s need for funds. In any case, such a position is consistent with the longterm economic interest of the rich group of producers within OPEC with large reserves and smaller populations. The second sub-cartel within OPEC is comprised of countries with larger populations and smaller oil reserves. For these producers, the optimum oil price path is one that maximizes the price of each oil barrel lifted from the ground. In other words, the more populated countries with smaller oil reserves have a shorter time preference, or time horizon. They prefer maximum income now rather than later. Maximizing income with high oil prices is likely to be short-lived since high oil prices foster the development of alternatives. The standard solution to this dilemma is the implementation of oil production quotas. But without an effective enforcement mechanism for quotas, this approach fails, and OPEC members cheat. Now the growing role of shale oil supplied by the United States threatens to diminish OPEC’s ability to influence world oil markets. Despite the surge in US production, the Middle East still dominates world oil markets, but its dominance will be tested in the coming years (see Fig. 2.1). However, the annual oil production growth rate for 2017 is much higher for North America compared to that of the Middle East (4.3% vs −0.8%) with the latter experiencing negative growth. Even when we compare the same annual growth rates over the years 2006–2016, North America still outpaces the Middle East (3.5% vs 2.1%). Furthermore, the Middle East’s production trend echoes that of Saudi Arabia, the leader in both OPEC and the Gulf in terms of daily oil production.

35,000 30,000 25,000

20,000 15,000 10,000 5,000 0

1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 2013 2017 Total North America

Total Middle East

Fig. 2.1  Trends in daily oil production: Middle East vs North America (BP 2018a)

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2  OPEC Then and Now 2.1  Brief History of OPEC World Oil Markets The world oil markets have gone through a number of phases throughout history. We identify four phases (Akacem 1992) that are explored and analyzed below. Phase 1  In the early days, the oil majors, referred to as the reign of the Seven Sisters,3 controlled every aspect of the oil operations from the wellhead to the gas station. These oil companies were essentially vertically integrated, while the sovereign oil producers were mostly absent from the decision-making about the pricing, and the rate of depletion of their countries’ oil resource. Oil prices in nominal terms were relatively flat throughout much of the period 1879 to 1971, an era often referred to as “golden era” of oil prices. Phase 2  In the early 1970s, oil-producing nations began to assert control over their oil wealth and thus began a series of nationalizations of the oil industry. Soon after this initial assertion of control, the world experienced the first oil shock in 1973 following the Yom Kippur War. The Organization of Arab Petroleum Exporting Countries (OAPEC) subsequently initiated an oil embargo. Oil prices quadrupled. This sudden spike in prices is shown in Fig. 2.2. The reassertion of national control over the oil producers’ oil wealth marked a significant departure of OPEC from the external control of oil-producing and pricing decisions by the Seven Sisters. Whereas before this assertion of control by OPEC countries, the oil producers were passive in oil pricing decisions, while the oil majors decided the level of prices. Then, the change of ownership shifted both the thinking and the resolve of the oil producers. Now, once they were in control as complete owners, only then did the cartel start to exhibit the behavior that we now associate with such an organization. Ali Johany (1980) added theoretical weight to the change that occurred in phase 2. He argued that the sudden change in prices in the early 1970s was due to a transfer of property rights from the oil majors to the oil producers, writing, “The net effect was a shift of property rights in crude oil from the private western oil companies to host countries (Johany 1980).” Johany’s theory added much to our understanding of the 1970s and the reshaping of the oil order at that time. The international oil majors enjoyed total control for over 100 years, but they knew fully well that oil belonged to the sovereign oil producers. Eventually, the day arrived when these nations demanded control over their

3  These were “1) Anglo-Iranian (started as Anglo-Persian Oil Company, now BP), 2) Gulf Oil (later Chevron), 3) Royal Dutch Shell, 4) Standard Oil Company of California (SoCal, now Chevron), 5) Standard Oil Company of New Jersey (Esso, later Exxon now part of ExxonMobil), 6) Standard Oil Company of New York (now part of Exxon Mobil), and 7) Texaco (later merged into Chevron).” Source: https://en.wikipedia.org/wiki/Seven_Sisters_(oil_companies).

2  OPEC Then and Now

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Oil price per barrel $140 $120 $100 $80 $60 $40 $20 $0 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 $ money of the day

$ 2017

Fig. 2.2  History of the international price of oil (US dollars per barrel) from 1861 to 2018 (BP 2018a)

oil wealth. The oil majors had exhibited a “high discount rate.”4 This meant that they wanted to produce as much oil as they could for as long as they could during the time that they still had control over oil pricing and production decisions. The fear of the imminent change of property rights from the oil majors to the oil producers catalyzed the formation of the oil cartel. Once the change of ownership was complete, oil producers slowed the depletion of their oil resource since it was now theirs to keep and control. Contrary to the oil majors, the oil producers adopted a much lower discount rate. This lower discount rate resulted in lower oil production and subsequent increases in world oil prices. Furthermore, the lower rate of discount increased the price volatility compared to the 1879–1971 period. Phase 3  The third phase5 in the world oil order resembles, albeit to a very limited extent, the first phase when the oil majors were vertically integrated. Members of OPEC such as Kuwait and Venezuela ventured outside their normal upstream opera-

4  The use of a discount helps estimate the value today of some amount in the future. As an example, if we take $100 at an interest rate of 3%, it would increase to $103 in 1 year. If we wanted to know what the present value of $103 at a discount rate of 3%, we simply reverse the process and in this case, it is $100. 5  We would argue that this phase could repeat itself in light of the Arab Spring and the pressures put on governments to respond to the demands on their economies brought about by the youth bulge and the relatively high unemployment rates.

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tions and invested in downstream activities such as Q8 for Kuwait and Citgo for Venezuela. While the vertical integration attempt by these two OPEC members is not as extensive as that of the oil majors, it shows an attempt at safeguarding outlets for their oil. We would argue that Phase 3 may repeat itself in light of the Arab Spring and the increasing demands by the general populations in the region for more of an opening of both the political and economic space. That will depend on how much control by OPEC and MENA governments remains in their hands should our proposed citizens oil ownership plan become a reality. More importantly, vertical integration by the oil producers is a business decision much like that of any private oil company.6 It is a form of portfolio diversification strategy that would secure an income stream beyond selling crude oil. Had the oil producers adopted such a strategy very early on, it would have secured a revenue stream beyond that from crude oil sales. Moreover, it would have linked the oil producers’ economies to those of the oil consumers and reduce volatility in the world oil markets. The benefit of such a strategy would have given the oil producers immediate feedback when the cartel increases prices significantly causing oil demand to drop and thus inducing a loss of revenue. The Arab Spring has forced the authorities in the Arab world to ensure that such an income stream not only endures for the citizens but also to safeguard their own power. The long-term solution, we propose, is the complete removal of the oil MENA governments from the collection of oil revenue to both empower the citizenry and reduce the excesses and waste by those in charge. Phase 4  The fourth phase of the world oil order is similar to the first. It is almost a return to the years when the oil majors ruled the market but not quite. Oil producers are not as opposed to having the major oil companies operate in their countries alongside the national oil companies. We believe that this trend will continue and may be more pronounced as oil producers compete to find markets for their oil. This is particularly so given the rapid surge in US shale oil production. One approach for OPEC that may address the fundamental problem of cheating by member countries is a balance of payment program fund. This would be funded by the cartel itself, that is, assuming they attach value to sticking to the quotas. The program would be akin to loan program within OPEC whose sole purpose is to assist “poor” members during periods of low oil prices. The incentive is to help these members avoid overproducing to gain more oil revenue. Funding would come from members’ contributions. The fund works as a lending agency akin to an international credit union that serves OPEC members only, the purpose of which is the support of OPEC members

6  However, we should note that our core policy prescription that will be addressed in a later chapter would diminish the option of vertical integration. It will argue that oil revenues should be distributed directly to the citizens cutting the government out of the collection of these revenues. At this stage, we are merely describing the phases that world oil markets have gone through.

2  OPEC Then and Now

13

to tie them over and avoid cheating on quotas.7 While the program theoretically may work, it faces a few problems. First, it is possible that the same group of members would draw from the fund, primarily the “poor” within OPEC. This could lead to the “rich” group wondering what benefits they get out of the fund since they are not likely to draw from it. However, given the current state of the oil markets and the need to maintain a floor on oil prices even for the well-to-do members, it may be worth it for them. The demand on other oil producers such as Russia and the coordination efforts are proof that the present cartel is struggling to remain relevant. Second, members that draw from the funds could abuse their access using the need to produce more oil and break the quota if they can’t access funding. Finally, as we will show in later chapters, the world oil price needed to balance the budgets of a number of OPEC members is higher than the prevailing oil price. This makes it difficult to implement the balance of payment scheme when rich and poor face a financial constraint unless the outlook for world oil markets changes and oil prices firm up and stay up.

2.2  Middle East Share of OPEC’s Oil in the World Economy Oil economies are consuming more and more of their oil (The Economist 2012). The problem that some of the producers face, particularly Saudi Arabia, is highlighted below: With domestic electricity demand rising 10% per year in Saudi Arabia, the kingdom now devours more than a quarter of its oil production—nearly three million barrels per day. International Energy Agency figures show that Saudi Arabia now consumes more oil than Germany, an industrialized country with triple the population and an economy nearly five times as large. (The Economist 2012)

A fundamental problem plaguing oil producers within OPEC relates to the subsidies in the energy sector. In 2017, the International Energy Agency (IEA 2018) put the total government oil subsidies in the world at $137 billion with OPEC’s share at 59% of that. Fig.  2.3 shows the subsidies of selected MENA countries in 2017. Figure 2.4 shows the average oil consumption growth rates of different regions and countries of the world over the 2005–2015 period. Unless these high levels of consumer subsidies are brought down, Arab oil-exporting economies will continue to deplete their oil wealth at a much faster rate than countries with sensible energy policies.8 As we will return to throughout the book, the events of 2011 that shook the MENA region have reshaped the spending priorities. At least for now, government expenditures tend to favor a higher rate of oil production in order to generate more

 For more details of this approach, see Akacem and Fleisher (1994).  The fundamental problem is that the subsidies are not targeted to those who need it. The rich and the poor benefit from the same subsidies. 7 8

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2  MENA and World Oil Markets

$1,600

80%

$1,400

70%

$1,200

60%

$1,000

50%

$800

40%

$600

30%

$400

20%

$200

10%

$0

Algeria

Egypt

Iran

Iraq

Kuwait

Subsidy per capita ($/person)

Libya

Qatar

Saudi Arabia

United Arab Emirates

0%

Average subsidisation rate (%)

Total subsidy as share of GDP (%)

Fig. 2.3  Subsidies in selected MENA countries (IEA 2018)

Oil consumption Annual Growth Rates: 2005-15 7%

5.7%

6%

4.8%

5% 3.6%

4%

2.9%

3% 2% 1% 0% -1%

US -0.6%

Total Europe Total Middle Total Africa & Eurasia East -0.9%

China

India

-2%

Fig. 2.4  Oil consumption annual growth rates, 2005–2015 (BP 2017)

oil revenue to keep the peace at home. This will add to the depletion of their vast oil wealth at a rate higher than normal unless the Arab oil-exporting economies address the youth population bulge head on. The evidence of the trend is not in their favor as Fig. 2.4 shows.

3  Price Leadership Within OPEC

15

Alternatively, they could consider our core proposal (presented in Chap. 9) to distribute oil revenues directly to the citizens and remove the fuel subsidies, thus unburdening their budgets as well as lessening the rate of depletion of their natural resource. Of the regions shown above, Europe and the United States have both decreased their oil consumption, while MENA, China, India, and Africa have all increased their oil consumption.

3  Price Leadership Within OPEC Saudi Arabia has performed the role of price leader and swing producer within OPEC. Evidence shows that Saudi Arabia has held the price leadership9 position for the duration of OPEC’s existence. Countries like Saudi Arabia, Kuwait, the UAE, and the other rich Gulf oil producers started sovereign wealth funds (SWFs). Kuwait was among the first to do so. This has allowed these countries to exchange petroleum assets in the ground for wealth-creating investments for future generations.10 As noted earlier, Saudi price leadership has been somewhat eroded by the US oil shale development and other geopolitical events. The recent Saudi unwillingness to lessen its petroleum output has had significant repercussions.11 It has distressed ­several other oil producers who prefer higher prices, and forced some US shale oil producers to declare bankruptcy. It has also  caused Russia, whose government is estimated to be 50% dependent on oil revenues, to seek agreement with Saudi Arabia to constrain production to boost international prices. But Russia’s support of the Assad regime in Syria has irritated Saudi Arabia. And the Saudi unwillingness to restrain oil production has caused considerable distress to Iran that wants a return to its pre-sanction levels of oil production at higher market prices. Saudi Arabia’s production and pricing strategy is about its long-range view of the oil market. More than a decade ago, world oil prices began to rise, hitting a peak price in 2008 during the Great Recession in the United States. This higher price was more than adequate to make economical the development of Canadian tar sands that produced oil at an estimated cost of $90 per barrel. Not only did these high prices 9  Although, recently, Saudi Arabia has joined forces with Russia and other producers in an attempt to tame the world markets since its actions alone and those of the rest of OPEC were not enough. 10  The sovereign wealth fund in this case approximates the so-called Hartwick rule put into action as described by Tom Tietenberg and Lynne Lewis, “John Hartwick … demonstrated that a constant level of consumption could be maintained perpetually from an environment endowment if all the scarcity rent derived from resources extracted from the endowment were invested in capital. That level of investment would be sufficient to assure that the value of the total capital stock would not decline.” From Tietenberg and Lewis (2015). The original article citation is the following: Hartwick (1977). 11  Another scenario that does not favor the balance of payment program when even the leader in OPEC chooses a high oil production strategy.

16

2  MENA and World Oil Markets

permit the extraction of more expensive oil coming from Canadian tar sands, but the high prices created incentives for more oil to flow from both deepwater drilling, shale oil and natural gas. The longer high oil prices were maintained, the greater the incentives were to improve oil extraction technologies. Energy companies that extract oil and natural gas from shale, or from “fracking,” quickly improved their technologies to implement more efficient low-cost production. Saudi Arabia saw that its persistently high oil prices sparked this improvement. Even in the recent 2018 moderation of world petroleum prices, oil extraction technology continued its improvement. This is evident in the increase in “… patent filings for earth drilling which have outpaced that of every other field. In 2015 alone, 1,465 earth drilling patents were granted. That’s 1,026 patents more than the next most popular field, geophysics, where 439 patents were granted. (That’s 236% more)” (Henry 2018). By 2017, “the number of software-implemented patents in the oil and gas industry has steadily increased over the past 15 years [2002 – 2017]” from roughly 10 to 140 (Henry 2018). OPEC has an estimated 72% of the world’s proven oil reserves (BP 2018b). Saudi Arabia now owns about 16% of the world’s proven crude reserves (BP 2018b). Only Venezuela has more proven reserves than Saudi Arabia, 303 billion barrels vs 266 (BP 2018b). But because of Venezuela political situation and high production costs,12 “Venezuela’s crude oil production now stands at its lowest level in more than 50 years. Output in May [2018] averaged at 1.36 million barrels per day (b/d), down from 1.41 million b/d in April [2018]” (Stanley and Verrastro 2019).

4  Conclusion The US surge in oil production, the continued geopolitical instability within MENA, both the United States and European Union’s decrease in oil consumption, and China’s reduction in use of petroleum have all changed the oil-pricing game considerably. As China, India, Europe, and the United States roll out even more electrical vehicles, the game will change even more. For oil producers both in and outside of OPEC to survive and maintain their market share, they would need to adopt more aggressive policies when it comes to gaining access to downstream operations in oil-consuming countries. They will benefit from an immediate feedback from the gas station to the wellhead when demand decreases on the downstream end and thus leads to a softening of oil prices. This is true even if the oil MENA region (or other oil producers) adopt our proposed citizen ownership plan. 

 The latest data on oil production costs indicate that Saudi Arabia incurs a barrel cost of $9.50, while Venezuela is more than double at $23.50. We should note that the cost represents capital expenditure costs and operational expenditure cost. The capital expenditure cost per barrel is a lot smaller at $4.50 per barrel for Saudi Arabia and $9.50 for Venezuela (CNN Business 2019).

12

References

17

As we have seen, however, the oil cartel has given up somewhat on maintaining price stability as many OPEC members are scrambling to unload their oil, at times even discounting it. Others such as Nigeria and Algeria have been displaced by US oil production and were forced to find new customers for their light crude.

References Akacem M (1985) From OPEC to GOPEC. Wall Street J Nov 11 Akacem M (1992) A new world order for oil. Middle East Policy 1(3):23–32 Akacem M (1993) The Twilight of OPEC, in the Christian Science Monitor, Nov 11 Akacem M, Fleisher T (1994) An alternative model for OPEC stability: the carrot and stick approach. J Energy Dev 20(1):97–108 BBC (2018) Jamal Khashoggi: all you need to know about Saudi journalist’s death. BBC Dec 11 BP (2017) Statistical review of world energy. http://www.bp.com/statisticalreview BP (2018a) Statistical review of world energy. http://www.bp.com/statisticalreview BP (2018b) Oil: total proven reserves. In: Statistical review of world energy, vol 12. BP Amoco, London CNN Business (2019) What it costs to produce oil. http://money.cnn.com/ interactive/economy/ the-cost-to-produce-a-barrel-of-oil/index.html?iid=EL. Accessed 14 May 2019 Faucon B, Said S (2018) OPEC, Russia oil officials hint at extending production cuts. Wall Street J, Apr 20 Hartwick JM (1977) Intergenerational equity and the investing of rents from exhaustible resources. Am Econ Rev 67:972–974 Henry M (2018) Oil and gas technology: trends in the patent landscape. Patent Law News + Insights. Aug 30. https://www.henrypatentfirm.com/blog/oil-and-gas-technology-patent-landscape IEA (2018) World energy outlook, fossil-fuel subsidies, International Energy Agency. https:// www.iea.org/weo/energy subsidies Johany AD (1980) The myth of the OPEC cartel: the role of Saudi Arabia. Wiley, New York Said S, Faucon B (2018) Russia, Saudi Arabia near deal to lift output, giving Moscow New Sway. May 25 Scherer FM (1980) Industrial market structure and economic performance, 2nd ed. Rand McNally College Company, Chicago, p 173 Stanley A, Verrastro FA (2019) How low can Venezuela oil production go? Center for Strategic and International Studies 18 June 2018. https://www.csis.org/analysis/how-low-can-venezuelanoil-production-go. Accessed 14 May 2019 The Economist (2012) Burning their wealth. The Economist Apr 5. https://www.economist.com/ free-exchange/2012/04/05/burning-their-wealth Tietenberg T, Lewis L (2015) Environmental & natural resource economics, 10th ed. Pearson, Columbus (2012, 2009), p 114

Chapter 3

Resource Curse and Institutions

Abstract  Natural resource wealth such as oil is thought to be a curse rather than a blessing. The main reason is that the flow of oil revenues goes to the government and leads to rent seeking and corruption. It also helps autocratic governments to remain in power with no incentive to alter the status quo. To make matters worse, economies that are heavily dependent on oil revenues tend to have overvalued exchange rates which hurt the non-oil sector and further deepen these countries’ dependence on oil. However, empirical evidence is mixed on the effect and the direction of causation between oil, institutions, and the economy. The evidence does show that countries such as Norway that discovered oil after having developed good institutions have done well despite the presence of oil riches. Yet, oil MENA, which discovered oil first, has tried to build viable institutions after discovering oil but is still struggling to do so. We also note that Singapore without any resource wealth but with solid institutions has done well. The presence or absence of oil does not explain the failure or success of a country. Institutions do. MENA rates poorly compared to the rest of the world on many institutional indices and economic indicators as shown in this chapter.

1  Introduction1 Oil can help an autocrat stay in power by providing a means to buy off the opposition. Since oil and other natural resources have been associated with autocracies, the concept of the resource curse has become popular. However, we do not believe that oil is necessarily a curse. As Karl noted “Petroleum after all, is nothing but a black viscous material” (Karl 1997, p 6). Norway is an oil producer  and is  a thriving democracy. Its GDP per capita far exceeds that of the MENA countries and even the

1  This research draws on and updates our past research in this area listed in the bibliography such as Akacem (2015), Akacem and Miller (2015).

© Springer Nature Switzerland AG 2020 M. Akacem et al., Oil, Institutions and Sustainability in MENA, https://doi.org/10.1007/978-3-030-25933-4_3

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United States, while Singapore’s GDP per capita exceeds MENA’s despite the lack of resource wealth. These differences are explained by the institutional deficit. This chapter will first explain the resource curse. Later, we will argue that oil does not have to lead to a resource curse and that good institutions can counter any negative impact of the so-called curse. The remainder of the chapter will discuss the state of institutions in MENA.

2  The Resource Curse The discovery of oil was not always welcomed. Former Saudi Arabian oil minister Ahmed Zaki Yamani said: “… I wish we had discovered water.” (Karl 1997, p 187) Outside of the Arabian oil region, the Venezuelan oil minister who was also instrumental in the formation of OPEC stated the following: “I call petroleum the devil’s excrement. It brings trouble. . . . Look at this locura—waste, corruption, consumption, our public services falling apart. And debt, debt we shall have for years.” (The Economist 2003)

2.1  Hypotheses and Concepts The literature on the resource curse is vast. As of 2015 there were 2360 scientific papers on the resource curse (Papyrakis 2017). We will not attempt to do an exhaustive literature review in this chapter but cover the main arguments, hypotheses, and concepts of the resource curse2. Rent Seeking and the Rentier Effect  Economic rent is the return from a resource in excess of what is required to bring forth its benefits. Oil rent then is the value of the oil above what it cost to produce it. In MENA, oil rents are high. Rent seeking involves increasing one’s wealth without producing new wealth, that is, appropriating the economic rent of oil for one’s benefit. If the oil is controlled by the government, then there is an incentive to seek its rent without being accountable. Rent seeking results in the rentier effect where governments get so much revenue from oil that they don’t have to tax their citizens. This leads to a government’s lack of accountability and a dependency on oil revenues. These pathologies can lead to corruption, waste, and armed conflict in the struggle to secure the rents. The Repression Effect and Armed Conflict  Competition for oil rents can lead to armed conflict and the repression effect (Ross 2001) where large amounts are spent on defense to secure rents. Oil rents provide the resources to spend heavily on  Many of the concepts below are explained in van der Ploeg (2011).

2

2 The Resource Curse

21

defense. Regional or ethnic conflicts may occur where oil wealth is geographically concentrated especially in a region populated by an ethnic minority such as the Kurdish region in Iraq. Accountability and Corruption  The more governments depend upon citizens for their funding, the more governments need to pay attention to their citizens’ demands. The more citizens are taxed, the more likely citizens are to monitor how governments spend their money. However, because of the rentier effect, where governments can get their revenue from oil instead of taxes, governments are less accountable to the citizens, especially in nondemocratic regimes. As a result, much of the oil revenue is wasted, misspent on grandiose projects that do not benefit the average person, or simply misappropriated for the benefit of a few. The lack of accountability then leads to corruption. The lack of accountability has also been addressed by the Arab Human Development Report, which states that: In the rentier state, therefore, government is absolved of any periodic accountability, not to mention representation. If the rent continues to flow, there is no need for citizens to finance government and thus expect it to be accountable to them. On the contrary, when the flow of rent depends on the good will of influential outside forces, as in the case of some Arab countries, the right to accountability passes to those who control the flow of rent, instead of remaining with citizens, who are turned into subjects. (The Arab Human Development Report 2004a, p 152)

The report goes on to warn that unless the MENA region adopts reforms quickly and opens the political space to citizens’ participation, the region could confront chaos (The Arab Human Development Report 2004b) much as we argue in this book. The openness that we call for is indirect. The institution building comes from empowering the citizens by stripping the government of oil revenue and directing it straight to the people. The Arab Human Development Report (AHDR) report concludes with the following: • Total respect for the key freedoms of opinion, expression and association. • Ending all types of marginalization and discrimination against social groups and minorities. • Guaranteeing the independence of the judiciary and ending reliance on military tribunals and other ‘exceptional’ courts. • Abolishing the ‘states of emergency’ that have become permanent features of governance in the region (The Arab Human Development Report 2004b).

Dutch Disease  Increased exports of oil or gas cause the exchange rate of a currency to appreciate, which raises the price of exports to other countries. Non-oil exports suffer as a result, and the trade deficit widens as imports increase. The term “Dutch disease” derives from the experience of Holland following the discovery of gas and its subsequent exports. This led to large capital inflows pushing the value of the Dutch exchange rate up and hurting the competitiveness of other Dutch exports and the economy.

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3  Resource Curse and Institutions

Boom and Bust Cycles  Both the demand and supply of oil are relatively inelastic in the short run, which means that small shifts in either demand or supply can cause large price changes. Such volatility in prices affects exchange rate volatility, which suppresses economic growth especially in oil-rich countries with poorly developed financial systems. Generally speaking, an oil price boom can result in the “Dutch disease” where a country’s currency appreciates, making its manufactured exports uncompetitive.

2.2  Empirical Evidence Sachs and Warner (1995) examined several countries to test the impact of natural resource wealth on economic growth and development. They found that economies with a high ratio of natural resource exports to GDP tended to have slower economic growth even after controlling for variables associated with economic growth, including per capita income, trade policy, government efficiency, and investment rates. Most oil-wealthy3 countries in MENA experience slower economic growth and lower GDP per capita compared to both other resource-rich countries such as Norway or resource-poor countries such Singapore as seen in Fig. 3.1. Despite the vast riches of Saudi Arabia and other Gulf states and their discovery of oil long before Norway, the latter surpasses them by a large multiple in terms of GDP per capita. Even Singapore which started at the bottom of the chart in 1960 took off and managed to slightly beat the United States as well as the other rich oil states. Yet, Algeria, which began at about the same level as Singapore, stagnated, and its GDP per capita remained relatively flat. Clearly, something other than the presence or the lack of oil is at play here. Why hasn’t oil been a “curse” for Norway as predicted by the literature? Why has Singapore done so well despite the lack of hydrocarbon wealth? The answer in both the cases of Singapore and Norway points to the presence of the institutions that are conducive to economic development.  If good institutions are present, a country can develop with or without natural resource wealth. Clearly, oil cannot be the only reason why oil MENA has not met the aspirations of its growing populations. The Arab Spring has exposed the pent-up frustrations and the yearning for something completely different than what previously existed in oil MENA. We need then to look for other factors causing such contradictions to the resource curse to create suitable policy prescriptions.4 While empirical evidence corroborates their poor economic performance, rentier states are not doomed to accept this fate. Rather, once the flow of oil and gas revenues bypass central governments and is distributed directly to the citizen owners,

3  While we are referring to oil here, we include gas wealth as well since some Arab oil economies such as Qatar and to some extend Algeria have substantial gas reserves. 4  For more information see Akacem and Miller (2015).

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2 The Resource Curse

GDP per capita: constant 2010$ $100,000

Norway

$90,000 $80,000 $70,000 $60,000

Kuwait

$50,000 $40,000

USA

$30,000

Singapore

Saudi Arabia

$20,000 $10,000

Algeria

$0 1960

1965

1970

Algeria Norway

1975

1980

1985

1990

Saudi Arabia Singapore

1995

2000

2005

2010

2015

Kuwait United States

Fig. 3.1  GDP per capita (World Bank 2018 GDP capita)

these oil MENA states will tend to, albeit slowly, transition to become an inclusive economic and political state comparable to that of Norway. Much evidence may appear to lend credence that oil is the prime suspect in the dismal performance of the economic parameters of oil MENA. Yet, the evidence from Norway and Singapore contradicts this. Towards this end, Alexeev and Conrad (2009) point to something other than oil: they call it factor “X”: The role of X has been played by the Dutch disease, civil conflict, rent seeking,5 neglect of human capital development, decline in saving and investment, and increase in income inequality, among other factors. Recently, deterioration of institutions appears to have emerged as the most popular interpretation of phenomenon X.

Like Alexeev and Conrad, Larsen  (2006) agrees that oil does not tell the whole story. He examined the experience of Norway as it related to that of its Scandinavian neighbors and offers the following compelling evidence: In the 1960s, Norway lagged behind its Scandinavian neighbors in the aggregate value of economic production per capita, as it had for decades. By the 1990s, Norway had caught up with and forged ahead of Denmark and Sweden. …why did Norway catch up? …deliberate  See Sect. 2.1 for an explanation of rent seeking and the Dutch disease.

5

24

3  Resource Curse and Institutions macroeconomic policy, the arrangement of political and economic institutions, a strong judicial system, and social norms contributed to let Norway escape the Resource Curse and the Dutch Disease for more than two decades.

The author clearly shows that it was oil that explains why Norway surged ahead of its neighbors rather than causing Norway to be left behind. Among other factors, it was the attention paid to its political and economic institutions and a strong judicial system that allowed it not to succumb to the oil curse or even the so-called Dutch disease.6 Further evidence that oil wealth is not necessarily the cause of poor economic development is a report (Brunnschweiler and Bulte 2008)7 that argues that the causation is in the other direction. Countries with poor economies and conflicts that discourage foreign investment are more dependent on natural resource exports. Evidence based on oil exports as a percent of GDP may be the wrong variable. When using estimated natural resources in the ground as a variable, there is no resource curse. Instead resource wealth correlates with slightly higher economic growth and fewer armed conflicts (Brunnschweiler and Bulte 2008). Norway is an example of how oil wealth resulted in higher economic growth than its Scandinavian neighbors. Figures 3.2 and 3.3 show that within MENA, GDP per capita tends to vary with both oil reserves and oil exports per capita implying that oil is not a curse within MENA. However, these figures don’t consider the distribution of the GDP and its composition, nor the welfare of the average citizen.

3  Institutions While the evidence is mixed on the existence of the resource curse, we believe that oil has had both positive and negative effects in MENA. However, MENA is not doomed by an oil curse as we show throughout this book by pointing out the existence of strong democratic countries that have both quality institutions and rich oil resources.

3.1  Do Institutions Matter? How much do institutions matter and how are they related to the oil curse? Apergis and Payne conclude from their study that “better institutional quality reduces the unfavorable effect of oil reserves on the performance of the real

6  The Dutch disease, “The term  was coined by the Economist in 1977”  (The Economist 2014), refers to the appreciation of a currency when faced with large inflows of capital as was the case in Holland due to the large gas exports. 7  This explanation can also be found and summarized in Tierney (2008).

GDP per Capita

$80,000

40,000

$70,000

35,000

$60,000

30,000

$50,000

25,000

$40,000

20,000

$30,000

15,000

$20,000

10,000

$10,000

5,000

$0

Oil Reserves per Capita - Barrels

25

3 Institutions

-

GDP per capita (current US$) 2016

Barrels of Oil Reserve per Capita

Fig. 3.2  GDP and oil reserves per capita 2016 (World Bank 2017; BP 2017)

250 200

$40,000

GDP per Capita

$35,000 150

$30,000 $25,000

100

$20,000 $15,000

50

$10,000 $5,000 $0

0 United Arab Emirates

Kuwait

Saudi Arabia

GDP per capita (current US$)

Iraq

Other Middle East

North Africa

Oil Exports - Barrel/Capita/Year

$50,000 $45,000

Total MENA

Exports barrels/capita/per year

Fig. 3.3  GDP and oil exports per capita 2016 (World Bank 2017; BP 2017)

e­ conomy” (Apergis and Payne 2014). While good institutions may reduce or eliminate the resource curse, the latter can result in poor institutions. With an abundance of resources, governments don’t have to tax their citizens, which can lead to a lack of accountability and corruption. We should add that some within MENA, such as Algeria for example, use taxation to raise revenue. Still, it relies on the oil revenue to fund a significant part of its expenditures.  Some economists think  that institutions are critical to economic development (Boettke and Fink 2011). Others assert that institutions matter, but not for everything. Acemoglu (2003) and Sachs (2003) show that geography is also an important

26

3  Resource Curse and Institutions

determinant of economic development, but poor geography and resource endowments do not doom a country to poverty. Chang (2011) questions the direction of causality between institutions and economic development and that economic development may lead to good institutions. Norway has not suffered from the oil curse, while oil-rich MENA states have done far worse economically. This is related to when oil was discovered. When oil is discovered after the appropriate institutional environment—including the rule of law and the protection of property rights—is well established, oil becomes a positive contribution, or even a “blessing,” and not a curse to be feared. Instead, the countries in oil MENA discovered oil before having adopted all the appropriate institutions. It is still possible to build the proper institutional environment after the rentier class has spread its tentacles throughout the economy. Tunisia, while not a major oil economy, still managed to make advances on democracy and on the institutional front following the Arab Spring. It is the only Arab country that has so far done so despite coming off many years of autocratic rule. We think that good institutions are a necessary but not a sufficient condition for economic development. Good institutions with mostly free markets and protection of private property rights support economic development and foreign direct investment (FDI). They may also lead to elitists and wealthy people gaining an increasing share of the resources and wealth of a nation leaving most of the citizens in poverty. Therefore, it is important that institutions include all citizens, which our citizen ownership proposal does. However, if the oil assets are privatized, that is, sold by the government to the highest bidder, the wealthy and the elite would eventually own the oil wealth as happened in Russia after the split-up of the Soviet Union. We believe that a case can be made that the oil riches have not helped but rather retarded economic growth in MENA. As such, one could make the argument that oil in this case may be a curse because of the absence of liberal institutions.8 However, with inclusive economic and political institutions, oil need not be a curse. The purpose of our citizen ownership of oil plan is to mitigate the impact of the oil sector and foster better institutions.

3.2  Extractive and Inclusive Institutions Acemoglu and Robinson (2012) argue that institutions are central to understanding why some nations fail. This is more in line with our proposal of citizen ownership of oil than what now exists in MENA. Acemoglu and Robinson argue that nations fail because of the absence of incentives. This failure is due to the presence of “extractive economic and political institutions … because such institutions are 8  By liberal institutions, we do not necessarily mean left or progressive institutions, but free markets, the protection of human and property rights, freedom of the press and speech, and the rule of law.

3 Institutions

27

designed to extract incomes and wealth from one subset of society to benefit a different subset” (Acemoglu and Robinson 2012, p 372). These institutions reinforce the power of those at the top. They state that: Nations fail today because their extractive economic institutions do not create the incentives needed for people to save, invest and innovate. Extractive political institutions support these economic institutions by cementing the power of those who benefit from the extraction. Extractive economic and political institutions, though details vary under different circumstances, are always at the root of this failure. (Acemoglu and Robinson 2012, p 372)

Norway, on the other hand, opted for inclusive economic and political institutions. Inclusive political institutions “make power broadly distributed in society and constrain its arbitrary exercise (Acemoglu and Robinson 2012, p 76). . . . [and] allow a free media to flourish, and a free media, in turn, makes it more likely that threats against inclusive economic and political institutions will be widely known and resisted” (Acemoglu and Robinson 2012, p 319). Acemoglu and Robinson explain inclusive economic institutions: . . .such as those in South Korea or in the United States, are those that allow and encourage participation by the great mass of people in economic activities that make the best use of their talents and skills and that enable individuals to make the choices they wish. To be inclusive, economic institutions must feature secure private property, an unbiased system of law, and a provision of public services that provides a level playing field in which people can exchange and contract; it also must permit the entry of new businesses and allow people to choose their careers. (Acemoglu and Robinson 2012, pp 74–75)

The Arab Spring exposed the failure of policies on both the economic and political fronts that led to the toppling of governments in Tunisia, Libya, and Egypt. The regional governments resorted to the default policy of increasing benefits in the hope of dealing with major structural problems hobbling their economies. Such an approach is not only misplaced but can only work in times of high oil prices, an era which may not repeat itself.

3.3  Institutional Problems in MENA This section explains how the lack of quality institutions in MENA may be at the root of the slower economic growth and development of the region. Natural Resource Governance  The Natural Resource Governance Institute (NRGI) rates countries on how well they govern based on these quality criteria (NRGI 2017, p 7): • Value realization. “Covers the governance of allocating extraction rights, exploration, production, environmental protection, revenue collection and state-owned enterprises.” • Revenue management. “Covers national budgeting, subnational resource revenue sharing, and sovereign wealth funds.”

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80 69

70 60

53

73

54

50 40

33

30 20 10 1

5

0 Norway

USA

Kuwait

Qatar

United Arab Saudi Arabia Emirates

Algeria

Fig. 3.4  Resource governance index rank (NRGI 2017) (Ranks are out of a total of 89 countries)

• Enabling environment. Includes “rule of law, control of corruption, political stability, absence of violence, open data, voice and accountability, regulatory quality, government effectiveness.” Most MENA countries were rated and received a poor overall score meaning that the “country has established some minimal procedures and practices to govern resources, but most elements necessary to ensure society benefits are missing” (NRGI 2017, p 5) (Fig. 3.4). Corruption  “In a region stricken by violent conflicts and dictatorships, corruption remains endemic in the Arab states while assaults on freedom of expression, press freedoms and civil society continue to escalate” (Fatafta 2018). National oil companies in Algeria and Brazil made the news in 2015 regarding alleged illicit capital flight and kickbacks related to oil projects in both countries (El Watan 2015; Connors and Magalhaes 2015). Data on corruption shown in Fig. 3.5 highlights the difference that the proper institutions make when it comes to spending oil revenues with effective checks and balances in place. Singapore and Norway, two countries mentioned earlier, show in Fig. 3.5 that the presence or absence of oil wealth does not matter when it comes to corruption. In other words, oil wealth does not inevitably translate into wasteful spending and misappropriation of public funds. The lack of quality institutions does. Singapore and Norway score in the top ten when it comes to the lack of corruption. But the countries in oil MENA do not rate as well according to Transparency International’s Corruption Perception Index.

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Corruption Perception Index Score 90 80 70 60 50 40 30 20 10 0

Fig. 3.5  Corruption perception index score, 2017 (Transparency International 2017). Higher score means less corruption

Voice and Accountability  Figure 3.6 presents the data on voice and accountability and shows how Norway surpasses the sample of oil MENA in the responsiveness of the government to its citizens. What is needed is a desire by the authorities in the region to give voice to the aspirations of the population and in turn be accountable to their fellow citizens. Because of the many problems of financing its government when oil prices are low, Saudi Arabia has considered diversifying its economy by selling 5% of its national oil company ARAMCO (Blas 2017)9 to fund other investments and wean the economy from the dependence on oil. One problem with the proposed sale, other than how transparent and accountable the company will be after the sale, is the absence of any role of the citizen. Consultants had more input than the actual owners of ARAMCO. In other words, the people’s wealth is being put on the market without any input from them. Yet they are the main stakeholders. This is consistent with the data that we have shown in this chapter and will show throughout the book. Such lack of inclusiveness is related to the weak or nonexistent institutions that would act as a check on the disposition of the natural resource. Moreover, the proposed sale by Saudi Arabia of parts of the country’s jewel, ARAMCO, is precisely why the citizens of Saudi Arabia need a plan like the one we propose in Chap. 9. 9  The announcement was made in January 2016 by the then Deputy Crown Prince Muhammad bin Salman. He is now the Crown Prince.

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2.0 1.5 1.0 0.5 0.0 Algeria -0.5

Norway

Saudi Arabia

United Arab Emirates

Kuwait

-1.0 -1.5 -2.0

Fig. 3.6  Voice and accountability, 2017 (World Bank 2018 gov)

This is particularly needed in an absolute monarchy that has few or no checks and balances on its power. The opacity of the planned IPO (Initial Public Offering), or sale, of part of ARAMCO by the Saudi Arabian monarchy is a clear example of the institutional deficit and the lack of checks and balances on power. The Financial Times reported the calls by the Natural Resource Governance Institute for the Saudi oil company to “disclose closely held data” (Raval 2017) and stated that “the kingdom was among the world’s most opaque oil-producing nations” based on the latest data (see Fig. 3.4). The NRGI ranks the country as 69th out of a total of 89 countries on its Resource Governance Index. The other oil-producing countries in the Gulf and North Africa do not do well either, while Norway ranks number 1, a testament to the solid institutional environment that the country enjoys. This is further evidence that contrary to much of the literature on the resource curse, natural resource wealth does not necessarily cause lower economic growth and development, but the lack of quality institutions does. Government Employment  The high rate of government employment strains the ability of MENA countries to grow their economies. MENA is an exceptional area of the world in terms of the percentage of the work force employed by their governments and the proportion of GDP that their governments spend: The MENA region . . . has the highest central government wage bill in the world (as a ­percentage of GDP), 9.8 percent of GDP compared to a global average of 5.4 percent….

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The high wage bill partly reflects that fact that government employment in MENA is comparatively high, but it also reflects the fact that public sector wages in MENA were on average 30 percent higher than private sector wages, compared to 20 percent lower worldwide. In all other regions of the world, public sector wages are either on par with or below private sector wages. (Kabbani and Kothari 2005)

A high level of public sector employment is known to retard economic growth since the incentives for efficiency are often lacking, such as the fear of going out of business. Among other studies, the prestigious Swiss business school, IMD (International Institute for Management Development), prints annually the Competitiveness Yearbook. It repeatedly has shown a very close correlation between economic growth in emerging economies and relatively low ratios of public employees as a percentage of their populations, particularly in Asia ­ (Henninger 2011). Here are a few examples. Turkey has only 13% of its working population employed in the public sector. Egypt, by comparison, has 35%. Jordan has nearly 50% (Henninger 2011). In the United States roughly 15% of total employment (not percent of population) was working for all sectors of government (OECD 2017). Wall Street Journal columnist Daniel Henninger pointed out other countries, which generally have healthy growing economies, employ a small percentage of their working populations in the public sector such as: Korea, Indonesia, India, Malaysia, Taiwan, Thailand and even China (at 8.3%) have low public employment as a percentage of total population. In Singapore, it’s less than 3%. Also, on the list, below 15%, are Colombia, Peru and Chile, three of South America’s strongest economies. A low number doesn’t guarantee strong growth, but a high number probably kills it. (Henninger 2011)

The taxes to pay these government wage bills detract from other sectors of the economy which are in many cases simply more productive and efficient than the government sector. To the degree that this is true, then high public sector employment will likely hinder productivity growth in the economy and lessen employment opportunities in general. It might also contribute to the “crowding out effect” on private business, a phenomenon often debated by economists. The problem for the MENA region is the inertia when it comes to undertaking bold macroeconomic policy adjustments even though the authorities are aware that the government and the public sector cannot sustain being the employer of last resort. It has been shown in the research that the longer policy adjustments are delayed, the higher the cost both politically and economically. Given that the oil MENA region depends on oil and that oil markets are volatile, it is unwise to maintain the status quo. Defense Spending  Data on military spending in oil MENA show that top-down control contributes to the excessive spending evident in rentier states. The domestic military elite then benefit at the expense of the general population. What is notable is that oil MENA consistently spends more on defense as a percentage of GDP compared to Norway, by a multiple in terms of the GDP share

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3  Resource Curse and Institutions 12%

Military Expenditures as a % of GDP

10% 10% 8% 6%

6% 4% 2%

3%

6%

6%

Algeria

Kuwait

3%

2%

0% Norway

United States

Singapore United Arab Emirates

Saudi Arabia

Fig. 3.7  2017 Military expenditures as a percent of GDP (World Bank 2018 military) Data for the UAE is from 2014.

(Fig. 3.7). Saudi Arabia,10 for example, spent 6.5 times as much as Norway and over 3 times as much as the United States as a percentage of GDP. This finding is consistent with the literature on the subject.11 Some MENA countries are engaged in war, such as Syria, Iraq, Saudi Arabia, Yemen, Iran and Libya. This implies high rates of military expenditure. Obviously, this high state of conflict does not help to spur foreign direct investment (FDI) in oil MENA, and FDI is precisely what the region needs to prepare for the day when the oil runs out. While encouraging FDI is a rational policy response, such a policy will not be successful until the institutional deficit has been addressed. The literature of the resource curse dwells on the so-called repression effect12 of natural resource wealth. This effect relates to the large spending on security as buffer to counteract any demands by the population for the opening of the political space for citizen participation. While data show that oil MENA did spend a larger amount on defense, it does not and did not prevent the unrest of 2011 from toppling

 The excessive spending on defense and the resulting illicit payments that are made were featured in an article by Leigh and Evans (2004). It noted the payments as a result of defense arms deal. “Most explosively, the documents detail £17 m in benefits and cash allegedly paid by BAE, which is chaired by Sir Dick Evans, to the key Saudi politician in charge of British arms purchases.” 11  Meaning that oil economies that do not have inclusive economic and political institutions such as Norway tend to spend more on defense. 12  Several authors addressed this issue but a summary of the impact of natural resources on governance can be found in Busse and Steffen (2011) 10

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a few governments both in and outside of oil MENA (e.g., Libya,13 Tunisia, Egypt). Immediately after the unrest, there was a sudden surge in social spending within oil MENA, e.g., on the youth, on security forces, and on increases in salary to several select segments of the oil-MENA economies. Military expenditures tend to transfer resources from the more productive sectors of an economy to armaments production or the import of war materiel. Military expenditures are necessary for a country’s security, but the size of these expenditures in MENA imply a significant cost to other, more productive, activities. This trade-off between “guns and butter” (i.e., weapons and domestic goods) is debated often and regularly in most democratic governments but less so in more authoritarian ones. However, in MENA, resource expenditure seems deeply stuck in military production and procurement. Large public sector employment and larger percentages of GDP spending on the military are bound to weaken the vitality of economies. Public sector employers have reputations for seldom firing unproductive workers which harms productivity. High military expenditures may produce the military might of a country, but it diverts investment away from creating productive human and physical capital that can aid in creating jobs. Business Environments  The economies of MENA are held back by the failure of the MENA governments to create the proper environment that can nurture business conditions that embrace private business activity. Corruption such as crony capitalism, political patronage, or the lack of the rule of law have all conspired to poison the environment where private businesses might flourish. With oil prices continuously fluctuating as they have been since 2008, oil wealth in MENA is not trustworthy enough to fuel economic development. Thus, a suitable investment climate is now a necessary substitute for the declining reliability of petroleum as a source to sustain and promote economic development. For instance, FocusEconomics has projected that for 2017, Saudi Arabia, despite being one of the major oil-exporting countries in the world, will soon have one of the slowest rates of GDP growth in MENA.  Of the 16 countries listed by FocusEconomics in the MENA region, Saudi Arabia was in the 15th lowest position in predicted GDP growth rates, outranking only Yemen, a country in civil war (Parasie 2017) and perhaps now, 2019, a failed state. An increased diversification of exports from MENA is increasingly not just a choice but a necessity for economies now dependent on natural resource wealth. Table 3.1 clearly shows that the MENA region lacks an attractive investment climate that encourages the diversification of its export base. The table shows that four international rating organizations have arrived independently at the same con Libya had a vast security apparatus but despite the spending to keep the lid on revolts, Qaddafi was toppled. While the literature covers mostly the period pre-Arab Spring, nevertheless, the consensus is that oil wealth can buy the peace by both spending on security and defense to maintain public order. We maintain that this paradigm does not hold and assumes a passive population that is willing to endure authoritarian governments. The Arab Spring showed that this is not the case.

13

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Table 3.1  MENA Country Index rankings (World Bank 2019; Transparency International 2018; Legatum Institute 2018; Fund for Peace 2019b) Ease of doing business Yemen 187 Libya 186 Syria 179 Algeria 173 Iraq 171 Lebanon 142 Iran 128 Egypt 120 Palestine 116 Jordan 104 Kuwait 97 Saudi Arabia 92 Qatar 83 Tunisia 80 Oman 78 Bahrain 62 Morocco 60 UAE 11 Norway 7 Singapore 2 World 95.5 median

Perception of corruption 176 170 178 104 168 138 138 105 NA 58 78 58 29 73 68 103 81 23 6 3 90.5

Legatum prosperity 147 NA NA 116 143 107 108 122 NA 91 66 86 46 102 69 51 103 39 1 21 75

Fragile states 178 151 174 107 166 135 127 145 NA 110 49 86 38 84 46 31 101 30 2 17 79.5

Since rankings start with 1 being the best, higher numbers are worse Bolded numbers indicate countries with rankings worse than the world median. Ease of Doing Business. The ranking of 190 countries are as of June 2018. A good ease of doing business ranking means the regulatory environment is more conducive to the starting and operation of a local firm. There are ten criteria that determine the rank of countries according to how trouble-­ free it is to do the following: (1) start a business; (2) deal with construction permits; (3) get electricity; (4) register property; (5) get credit; (6) protect minority investors; (7) pay taxes; (8) trade across border; (9) enforce contracts; and (10) resolve insolvency. See World Bank (2019). Perception of Corruption. Rankings of 180 countries are for 2017. “Transparency International (TI) has published the Corruption Perceptions Index (CPI) since 1995, annually ranking countries “... by their perceived levels of public sector corruption according to experts and businesspeople...” TI defines corruption as “the abuse of entrusted power for private gain” See  Transparency International (2018). Legatum Prosperity. The ranking of 149 countries for 2018 are based on the following criteria: (1) economic quality; (2) business environment; (3) governance; (4) education; (5) health; (6) safety and security; (7) personal freedom; (8) social capital; and (9) natural environment. The Legatum Prosperity Index, 2018 is found at Legatum Institute (2018). Fragile States. The rankings shown are for 2019. “The Fragile States Index [by the Fund for Peace] is an annual ranking of 178 nation states based on their levels of stability and the pressures they face. . . . Millions of documents are analyzed every year, and by applying highly specialized search parameters, scores are apportioned for every country based on twelve key political, social and economic indicators and over 100 sub-indicators that are the result of years of painstaking expert social science research”  (Fund for Peace 2019a). The Fragile States Index 2019  is at Fund for Peace (2019b). The rankings are reversed, for comparison to the other indices with the least fragile states having the lowest ranking.

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Ranking 200 180 160 140 120 100 80 60 40 20 0

Ease of Doing Business

Perception of Corruption*

Legatum Prosperity

Fragile States

Fig. 3.8  MENA Country Index Rankings (World Bank 2019, Transparency International 2018, Legatum Institute 2018, Fund for Peace 2019) Fig. 3.8 is Table 3.1 in graphical form. The indices are generally correlated as shown.14 Since rankings start with 1 being the best, higher numbers are worse.

clusions: MENA countries have created business climates inimical to normal business activity. We discuss below each of the findings of these rating organizations. Table 3.1 presents data on four indices to help us evaluate MENA’s rank compared to other countries. A total of 190 countries of the world were ranked ­according to the ease to start and conduct a business. Eleven of the 18 countries of MENA had a ranking below the median ranking of 95.5. This means that there are 434 million 14

 The actual Fragile States Index rank starts with the most fragile state as the lowest numerical ranking. For purposes of comparison to the other indices, this index was reversed with the highest numerical ranking being the most fragile.

14

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people living in MENA where it is more difficult than the rest of the world to start and operate a business. Seven of these MENA countries were ranked in the lowest third of all the 190 countries. Two countries, Libya and Yemen, were among the five lowest ranking countries in the 2018 rankings. Transparency International ranks countries according to the prevalence of corruption in 180 countries of the world. According to this ranking, 74% of MENA’s 2017 population15 lived in a country perceived to be more corrupt than the world median rank. The Legatum Prosperity Index for 2018 is the most pessimistic of all the indices shown in Table 3.1. The index rates 149 countries of the world. They are rated in terms of nine conditions that affect prosperity, hence the index’s name. These conditions are the following: (1) economic quality; (2) business environment; (3) governance; (4) education; (5) health; (6) safety and security; (7) personal freedom; (8) social capital; and (9) the state of the natural environment. The index shows that 10 out of 16 MENA countries have a rank that is worse than the world median index score (see Table 3.1). This ranking puts over 95% of the MENA’s residents in countries where they are not as likely to prosper as much as in those countries above the median index score. The five countries in our sample that are above the median all have relatively smaller populations, namely, Bahrain, Kuwait, Oman, Qatar, and the United Arab Emirates. Except for Oman, these are all largely dependent on oil for their prosperity and are members of the Gulf Cooperation Council (GCC). The Fragile States Index created by the Fund for Peace assesses 178 countries “based on their levels of stability and the pressures they face” (Fund for Peace 2019b). According to this index, in 2019, over two-thirds of MENA countries16 were more unstable than the world’s median level of fragility. All four rankings presented in this section indicate that the world is increasingly viewing the MENA region as one heading in the wrong direction. As a result, the rest of the world community sees very little reason, except for oil perhaps, to invest in them. Now, unfortunately, the region’s need for foreign investment is critical. Foreign Investment (FDI)  Figure 3.9 shows the history of foreign direct investment (FDI) in the region from 2002 thru 2016.  Early in the new millennium, FDI rose rapidly and peaked in 2007 but declined soon after due to the repercussions from the Great Recession. FDI reversed its decline in 2010 slightly but then plummeted. The impact on the region’s economies post-Arab Spring has been significant, but the long-term effects are still unknown. The uncertainty, insecurity, and vagaries of the world oil markets all add to a challenging future that will not welcome much foreign direct investments on the scale that other world regions have attracted such as Singapore, a country with zero natural resource wealth (Fig. 3.10).

15 16

 Not including the West Bank and Gaza, which were not ranked.  Of the 17 countries in MENA ranked not including the West Bank and Gaza.

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FDI (Billions Current US$) $140 $120 $100 $80 $60 $40

$20 $0 2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

Fig. 3.9  Foreign direct investment (FDI), net inflows in MENA (World Bank 2018 FDI)

FDI Net Inflows as a % of GDP

25% 19.65%

20% 15% 10% 5% 0%

0.09%

0.15%

0.21%

0.70%

Kuwait

Norway

Saudi Arabia

Algeria

1.83% United States

2.71%

United Arab Singapore Emirates

Fig. 3.10  Foreign direct investment (FDI) as percent of GDP, net inflows 2017 (World Bank 2018 FDI%GDP)

What is remarkable as Fig. 3.10 shows is how low FDI as a percentage of GDP was in the oil economies of MENA in 2017. Following the murder of the Saudi Arabian journalist, Jamal Khashoggi, on 2 October 2018,  in the Saudi Arabia’s Istanbul’s consulate, this trend is more likely to continue. Given the absence of many of the large companies interested in Saudi Arabia from the 18 October 2018 “Davos in the Desert” (Alkhalisi and Mullen 2018) meeting in Riyadh, FDI into Saudi Arabia and possibly in the whole region will take some time to recover. Singapore outperformed the closest Arab oil country by a factor of almost ten in terms of FDI.

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4  Conclusion The Arab Spring demonstrated that citizens, especially the youth, in MENA had become dissatisfied with their governments. The feeling among demonstrators at the time was that their governments were more interested in preserving centralized power than empowering their citizens. All governments including established democratic ones tend to become fixated with the maintenance of power. No one gives up power and control easily. However, it would be wise for MENA to at least try to disperse power so that the average citizen feels listened to and that she/he matters. It is safe to say that the Arab Spring has not produced the expected results. Only Tunisia has considerably enlarged the political space for citizen participation and allowed for more freedom. Egypt (Malsin and El-Fekki 2019) has returned to autocracy, and the Saudi Arabian government, under crown prince Mohammed Bin Salman, has limited the freedom of its citizens. Algeria is in the midst of another Arab Spring and so is Sudan (2019). Algeria managed to force the resignation of the president after almost a 20-year rule and stopped him from seeking a fifth term. As of this writing, the outlook is yet uncertain as to what meaningful changes will take place following more than six months of marches by millions of Algerians. In Sudan, the military removed the president who ruled the country for 30 years and negotiated a transition composed of civilians and the military. Still, and with time, by tightening the grips of power, MENA governments could produce a more violent reaction than what occurred during the uprising of 2011. Failure to think seriously about a transition away from central government control of the oil wealth will rob the oil MENA region of the economic growth and development potential that it could achieve. In addition, it will rob the region from a chance to transition to a democracy however slowly. Oil need not be a curse despite what has been written about it in the vast development literature. Oil wealth can be, and has often been, a blessing as the experience of Norway has shown. The lack of oil wealth is not a curse either. Singapore has shown this to be true. The rule of law, the protection of property rights, the separation of powers, and a free press are all important factors that can aid the region. For the oil MENA to achieve a faster rate of economic development and a transition to democracy, citizen ownership of oil can allow it to transition, even if slowly, to an ideal state that gives voice to its people. The region is not there yet (Table  3.2). Citizen ownership of their national oil wealth is of course but a start and a catalyst that would nudge the region towards a peaceful transition to peace and prosperity. Table 3.2  Freedom ratings (Freedom House 2018) Norway Singapore Kuwait Algeria Saudi Arabia UAE

Political rights 1 4 5 6 7 7

Score of 1 means mostly free and 7 least free.

Civil rights 1 4 5 5 7 6

Status Free Partly free Partly free Not free Not free Not free

References

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Legatum Institute (2018) The legatum prosperity index, http://www.prosperity.com/rankings. Accessed 15 May 2019 Leigh D, Evans R (2004) Arms firm’s £60 m slush fund, The Guardian, 4 May Malsin J, El-Fekki A (2019) Eight years after Egypt’s uprising, a new autocrat is determined not to permit a Sequel. Wall Street J, 25 Jan. https://www.wsj.com/articles/eight-years-after-egyptsuprising-a-new-autocrat-is-determined-not-to-permit-a-sequel-11548434153 NRGI (2017) 2017 Resource governance index. Natural Resource Governance Institute. https:// resourcegovernance.org/sites/default/files/documents/2017-resource-governance-index.pdf  OECD (2017) Government at a Glance 2017 OECD, section 3, table 3.1, page 91, 13 July. https:// www.oecd-ilibrary.org/sites/gov_glance-2017-24-en/index.html?itemId=/content/component/ gov_glance-2017-24-en Papyrakis E (2017) The resource curse  – what have we learned from two decades of intensive research: introduction to the special issue. J Dev Stud 53(2):175. https://doi.org/10.1080/0022 0388.2016.1160070 Parasie N (2017) First Test for Saudi Arabia’s King-in-Waiting: Fixing the Economy. Wall Street J, 22 June. https://www.wsj.com/articles/first-test-for-saudi-arabias-king-in-waiting-fixing-the-economy-1498146003 Raval A (2017) Saudi Aramco called on to improve data disclosure ahead of IPO, in the Financial Times, June 27 Ross ML (2001) Does oil hinder democracy? World Polit 53(03):325–361. https://doi.org/10.1353/ wp.2001.0011 Sachs JD (2003) Institutions matter, but not for everything: the role of geography and resource endowments in development shouldn’t be underestimated. Finance Dev, pp 38–41, June Sachs JD, Warner AM (1995) Natural resource abundance and economic growth. Working paper 5398. National Bureau of Economic Research, Cambridge, Dec The Arab Human Development Report (2004a) United Nations Development Program, http://hdr. undp.org/sites/default/files/rbas_ahdr2004_en.pdf The Arab Human Development Report (2004b) The Times Has Come: a call for freedom and good governance in the Arab World, 5 April. https://unispal.un.org/DPA/DPR/unispal.nsf/0/6FA2E0 87FFFE075985256FDA0070B8D0 The Economist (2003) The devil’s excrement: is oil wealth a blessing or a curse? 22 May. http:// www.economist.com/node/1795921 The Economist (2014)  The economist explains: what Dutch disease is, and why it’s bad, 5 Nov. https://www.economist.com/the-economist-explains/2014/11/05/what-dutch-diseaseis-and-why-its-bad Tierney J (2008) Rethinking the oil curse. New York Times, May 5 Transparency International (2017) Corruption Perceptions Index 2017. https://www.transparency. org/news/feature/corruption_perceptions_index_2017 Transparency International (2018) Corruption perceptions index 2018. https://www.transparency. org/cpi2018. Accessed 15 May 2019 van der Ploeg F (2011) Natural resources: curse or blessing? J Econ Lit 49(2):366–420. https://doi. org/10.1257/jel.49.2.366 World Bank (2017) World Development Indicators. https://databank.worldbank.org/data/reports. aspx?source=world-development-indicators# World Bank (2018 FDI%GDP) Foreign direct investment, net inflows (% of GDP). https://data. worldbank.org/indicator/BX.KLT.DINV.WD.GD.ZS World Bank (2018 FDI) Foreign direct investment, net inflows (BoP, current US$). https://data. worldbank.org/indicator/BX.KLT.DINV.CD.WD World Bank (2018 GDP capita) GDP per Capita (current US$). https://data.worldbank.org/indicator/NY.GDP.PCAP.CD World Bank (2018 gov) Worldwide governance indicators. https://databank.worldbank.org/data/ source/worldwide-governance-indicators World Bank (2018 military) Military expenditure (% of GDP). https://data.worldbank.org/indicator/MS.MIL.XPND.GD.ZS World Bank (2019) Doing business, rankings & ease of doing business score. https://www.doingbusiness.org/en/rankings. Accessed 15 May 2019

Chapter 4

Democracy in MENA

Abstract  Democracies grew rapidly throughout the world in the 1990s but have declined recently with populist and nationalist movements. The democracy deficit in MENA is due to several factors: Values and Culture. A recent analysis of the World Values Survey concluded that most cultures in MENA have traditional and survival values, not conducive to democracy. Traditional values emphasize religion, family, authority, and national pride. Survival values emphasize security over liberty with low levels of trust and tolerance. Economic Development. As economies develop, values tend to move away from traditional and survival value and become more conducive to democracy and freedom. However, oil-rich nations are not well developed in other sectors of the economy, and the income of most people in MENA is low. As a result, values in MENA tend to be traditional and survival. Religion. Strong Islamic values in MENA also help to explain the traditional values in most of the region. Preferences. Given the lack of democracy in the MENA region, the majority of the citizens would appear to prefer more democracy, However, the demand for democracy is not strong. There is a tendency, particularly among the educated elite, to prefer strong rule over democracy for fear of losing their place in society and the risk of elections leading to political Islam and their loss of whatever freedom they have. As a result, autocracies are the norm in MENA. However, since there is always an opposition, autocracies must balance their power by ceding some of it to the opposition.

1  Introduction The last chapter discussed the oil curse, institutions, and the relationship between them. It is not necessarily the oil curse that is causing poor institutions. The non-oil-­ rich nations of MENA also have poor institutions. What then is it about MENA that results in poor institutions? Could it be the lack of democracy, and why does MENA have such low levels of democracy as well as poor institutions? Establishing © Springer Nature Switzerland AG 2020 M. Akacem et al., Oil, Institutions and Sustainability in MENA, https://doi.org/10.1007/978-3-030-25933-4_4

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d­ emocracies in MENA would improve institutions since governments would be more accountable to the people. This chapter begins with the state of democracy in the world and MENA. Later in the chapter, we address the reasons democracy has yet to take hold in MENA, while autocracy is the norm. In Chap. 9 we offer a policy response to address this dilemma.

2  State of Democracy and Freedom in the World and MENA Welzel (2013) describes how democracies develop as follows. Throughout most of the history of nation states, people lived under miserable and repressive conditions. There has been a tendency of rulers to oppress people. As long as people were in a survival mode and poor, they did not try hard to gain their freedom. But when their living conditions began to rise above subsistence, subjected peoples tended to demand freedom and democracy. With the Industrial Revolution1 came relief from merely survival conditions, and people clamored for self-rule and self-governance, initiating a wave of democracies. Economic development tends to foster emancipative values, which include freedom of expression, equality of opportunity, tolerance, and political participation. These values along with capabilities provided by economic development empowered people to demand freedom and democracy. As seen in Fig. 4.1, the number of democracies in the world rose rapidly in the early 1990s, then leveled off, and has recently declined to 116 or 59% of countries listed by Freedom House (2018 data). The year 2018 was the 13th consecutive year of decline in global freedom (Freedom House 2019). In the past, the rise of ­democracies has not always experienced a steady increase and has often included a Number of Democracies 140 120 100 80 60 40 20 0 1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

Fig. 4.1  Number of democracies (Diamond 2010a; Freedom House 2017, 2018 data)

1  The Age of Enlightenment in the eighteenth century brought confidence in human reason and the emergence of the Industrial Revolution (Pinker 2018).

2  State of Democracy and Freedom in the World and MENA

43

decline followed by an increase (Welzel 2013; Berman 2019). Also, in the past, the decline in freedom was mainly concentrated in autocracies and dictatorships, while recently, populist and nationalistic forces in democratic states accounted for most of the decline (Freedom House 2017). The following quotes from Freedom House in three consecutive years  and from the V-Dem Institute highlight this decline of democracy: All of these developments point to a growing danger that the international order of the past quarter-century—rooted in the principles of democracy, human rights, and the rule of law— will give way to a world in which individual leaders and nations pursue their own narrow interests without meaningful constraints, and without regard for the shared benefits of global peace, freedom, and prosperity. (Freedom House 2017, p 1) Democracy is in crisis. The values it embodies—particularly the right to choose leaders in free and fair elections, freedom of the press, and the rule of law—are under assault and in retreat globally. (Freedom House 2018, p 1) The reversal [of democracy] has spanned all continents and a variety of countries, from long-standing democracies like the United States to consolidated authoritarian regimes like China and Russia. The overall losses are still shallow compared with the gains of the late 20th century, but the pattern is consistent and ominous. Democracy is in retreat. (Freedom House 2019, p 1) Global levels of democracy remain high, but autocratization – the decline of democratic attributes – affects 2.5 billion people and is gaining momentum. (V-Dem Institute 2018, p 6)

Figure 4.2 shows the Freedom House’s (2018) scores for MENA, select countries, and the world for 2017. Norway has the maximum score. The MENA region’s Freedom House Scores - Maximum = 100

100 90 80 70 60 50 40 30 20 10 0

Political Rights

Civil Liberties

Fig. 4.2  Freedom in MENA and Islam, 2017 (Freedom House 2018 data; World Bank 2018; Pew Research Center 2012) The height of the bars is the sum of the Freedom House (2018 data) scores for political rights and civil liberties. Political rights consist of electoral process, political pluralism and participation, and functioning of government—the maximum score is 40. Civil liberties consist of freedom of expression and belief, associational and organizational rights, rule of law, and personal autonomy and individual rights—the maximum score is 60. The maximum total score is 100. *Average weighted by 2017 population, which includes all residents regardless of legal status or citizenship. The Muslim countries include countries with a Muslim population greater than 45%. **The world average is not weighted.

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average is the worst in the world. Moreover, it is lower than the average for other Muslim countries, an indication that the democracy deficit is not related to the religion (Islam) but to other factors. As Larry Diamond notes: Outside the Arab world a number of countries with Muslim political traditions have had some significant experiences with democracy. So why has modern democracy taken hold in a number of countries in Africa and Asia for which there really were no precedents, but not in the Arab world? Why has democratization remained an insurmountable obstacle in the Arab world but not in large swaths of the rest of the world that had once also known only authoritarian rule? It is clear that ethnic or religious differences do not pose a more severe obstacle to democracy in the Arab world than they do in countries such as Ghana, India, Indonesia, and South Africa. Again, something else must be going on. (Diamond 2010b)

The Democracy Index (The Economist Intelligence Unit 2018) provides another measure of democracy. The results are similar to Freedom House’s scores above, albeit there are some differences in the order (see Figs.  4.2 and 4.3). In both ­measures, the MENA average is less than the average for other Muslim countries, which is less than the world average. The Economist Intelligence Unit (EIU) classifies countries according to their overall Democracy Index scores. Based on these scores, Tunisia is the only democracy in MENA but is rated as a flawed democracy. The United States is also rated as Democracy Score Maximum = 10 10 9 8 7 6 5 4 3 2 1 0

Fig. 4.3  Democracy Index (The Economist Intelligence Unit 2018; World Bank 2018; Pew Research Center 2012) The maximum total score is 10. *Average weighted by 2017 population, which includes all residents regardless of legal status or citizenship. The Muslim countries include countries with a Muslim population greater than 45% and in the Democracy Index. **The world average is not weighted.

2  State of Democracy and Freedom in the World and MENA

45

Democracy Index of MENA where 10 = Maximum score 10 9 8 7 6 5 4 3 2 1 0

Tunisia

Morocco

Iraq

Kuwait

Algeria

UAE

Saudi Arabia

Overall Score

Electoral Process and Pluralism

Functioning of government

Political participation

Political culture

Civil liberties

Fig. 4.4  Democracy Index MENA (The Economist Intelligence Unit 2018)

a flawed democracy albeit borderline just short of a full democracy with a rating significantly higher than Tunisia’s. Between autocracies and flawed democracies are hybrid regimes, which are Morocco, Lebanon, Palestine, and Iraq. All the rest of MENA countries are rated as autocracies (The Economist Intelligence Unit 2018). Figure 4.4 shows a more detailed breakout of the component parts of the Democracy Index for selected MENA countries. The components of the Democracy Index are listed below the graph. Iraq rates highly for political participation, but its government functions very poorly. Yet another index (Fig.  4.5) is the Liberal Democracy Index provided by the V-Dem Institute (2018). Again, the results are similar to the above indices although the ranking order may differ. This index is based on 71 indicators of electoral democracy, judicial and legislative constraints on the executive, equality before the law, and individual liberties. The similarity of the three indices above substantiates MENA’s lack of democracy and freedom relative to the rest of the world. The next section explains why this is so.

4  Democracy in MENA 1

200

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Fig. 4.5  Liberal Democracy Index, 2017 (V-Dem Institute 2018)

3  Why Is Democracy So Rare in MENA? Is it because of culture, religion, the resource curse, or something else? Although elections are held in some of the MENA countries, Freedom House (2018 data) does not consider them as electoral democracies2 except Tunisia. This section explores the possible reasons for the democracy deficit in MENA.

3.1  Values and Culture Is there something about the Arab culture that is alien to democratic organizing principles? In traditional Islamic cultures, individuals as citizens did not choose the people to represent them; instead leaders were chosen from and derived their power from certain social groups with whom they consulted (Lewis 2005). However, since there are democracies that have taken hold in Africa and Asia where there was no precedent of democratic organizing principles (Diamond 2010a), lack of democratic organizing principles may be an impediment but is not a barrier to democracy. 2  Freedom House assigns the designation “electoral democracy” to countries that have met certain minimum standards for political rights and civil liberties; “electoral democracy” designation should not be equated with “liberal democracy,” a term that implies a more robust observance of democratic ideals and a wider array of civil liberties (Freedom House 2019).

3  Why Is Democracy So Rare in MENA?

47

Inglehart and Welzel (2009) explain that human values influence institutions, gender equality, government, and the development of economies and democracies. They say that the attempt by the Bush administration to impose democracy in Iraq failed because certain social and cultural conditions and values did not exist. Freedom House (2017 and 2018 data) did not consider Iraq an electoral democracy because of corruption, insecurity, and  foreign influence including  the Islamic State (ISIS). Iraq’s Freedom House score and Democracy Index were slightly  above the average for MENA countries but below the average for other Muslim countries in Figs. 4.2 and 4.3. The World Values Survey (WVS 2019) has been doing extensive surveys on people’s values around the world since 1981. Political scientists Ronald Inglehart and Christian Welzel (2005) have analyzed data from these surveys and have mapped these values by country along two dimensions: Traditional vs Secular-Rational Values  Traditional values emphasize religion, traditional family values, authority, national pride, and a nationalistic outlook, while secular-rational values place less emphasis on these values. Survival vs Self-Expression Values  Survival values emphasize economic and physical security over liberty and tend to have an ethnocentric outlook with low levels of trust and tolerance. Self-expression values emphasize environmental protection, political participation, and gender equality and are more tolerant of foreigners and diversity: The strongest emphasis on traditional values and survival values is found in the Islamic societies of the Middle East. By contrast, the strongest emphasis on secular-rational values and self-expression values is found in the Protestant societies of Northern Europe. (WVS 2019)

As shown in Fig. 4.6, all the Arab states that were surveyed and analyzed fall in the traditional-survival quadrant, except Qatar, which is close. The United States, Norway, and China are shown for comparison.

3.2  Economic Development As Welzel (2013) explained, economic development generally leads to more freedom from want and a broadening of expectations and self-determination. Democracy is seen as a vehicle, or voice, to fulfill these expectations. Thus, economic development empowers people to achieve more democracy and freedom. With more development, people take survival for granted and tend to adopt self-expression values. Moreover, there is a tendency with more wealth for values to move from traditional values to secular-rational values3 with less emphasis on religion, traditional family values, authority, national pride, and nationalism (Inglehart and Welzel 2005). 3  “Secular-rational values and materialism were formulated by philosophers and the left-wing politics side in the French revolution, and can consequently be observed especially in countries with a long history of social democratic or socialistic policy, and in countries where a large portion of the population have studied philosophy and science at universities” (WVS 2019).

← Traditional Values

Secular-Rational Values →

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1.0

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Fig. 4.6  Inglehart–Welzel Cultural Map (IWC Map) (WVS 2019). (Adapted from the Inglehart– Welzel Cultural Map)

As economies develop, values tend to go in a northeast direction from survival and traditional values towards self-expression and secular-rational values as shown on the IWC Map in Fig. 4.6 (WVS 2019). However, given MENA’s oil wealth, questions arise as to why democracy is absent and why are MENA’s values survival-­ traditional as shown in Fig. 4.6. One reason is that in spite of the oil wealth, GDP per capita for MENA is about $67504 compared to the world average of about $10,000 (World Bank 2017). See Fig. 4.7. While there are democracies with low incomes per capita, higher incomes tend to foster values conducive to democracy.5 Figure 4.7 also shows the GINI indices, which are an indication of income distribution. The higher the GINI Index, the more unequal the income distribution is. While the GINI indices for the low-income MENA countries6 are lower than in the 4  The sum of the GDP for all MENA countries divided by the total population of these countries excluding Syria and Libya 5  Most member countries of the Organization for Economic Co-operation and Development (OECD) are democratic with free markets. 6  In descending order of GDP per capita, the low-income countries of MENA exclude the oil-rich countries of Qatar, UAE, Kuwait, Bahrain, Saudi Arabia, and Oman and include Lebanon, Iran, Iraq, Jordan, Algeria, Tunisia, Egypt, Palestine, Morocco, and Yemen.

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$90,000

45

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40

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5

$0

0

GDP per capita 2016

GINI Index

GDP per Capita

3  Why Is Democracy So Rare in MENA?

GINI Index

Fig. 4.7  GDP per capita 2016 and the GINI Index (World Bank 2017, 2018) GDP is gross domestic product, which is the market value of all final goods and services produced by an economy in generally a year. The GINI Index is a measure from 0 to 100 of income distribution with 0 being perfect equality and 100 total inequality with one person having all the income. The higher the number, the more the income is distributed unequally. ∗The GINI Index data are from 2009 to 2016, which is the most recent available and is not available for all countries including the wealthy oil-rich MENA countries (Qatar, UAE, Kuwait, Bahrain, Saudi Arabia, and Oman), Libya, Syria, and some of the other non-MENA Muslim countries.

United States, their average GDP per capita is less than $4000 (World Bank 2017), which may explain the survival values in these countries (Fig. 4.6). Most of the oil wealth in MENA is concentrated in the hands of the elite, the business class, and the governments of the oil-rich countries. Furthermore, while there is considerable wealth in MENA, many of their economies are not well developed but are rentier7 states that depend on their oil production. In addition, unemployment levels are high, particularly among the youth as discussed in Chap. 7. As a result, much of the population in these countries with low-income may be more in the survival mode with survival values in the IWC Map (Fig. 4.6). What then explains the traditional values on the traditional vs secular-rational values dimension? These values in MENA are explained in the following sections on religion, preferences of democracy, and autocracy. It should also be noted that since there are numerous non-Arab countries with democracies at all levels of development, economic development does not completely explain the position on the IWC Map. Development enhances but cultural conditions must exist for democracy (Lefes 2012). 7  “Rentier state means a country that receives substantial amounts of oil or other types of revenues from the outside world on a regular basis. It is independent from its society, unaccountable to its citizens, and autocratic” (USLegal.com 2018).

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3.3  Religion Strong Islamic values in MENA help explain the traditional values in the region, but do they explain the low levels of democracy and freedom in MENA? Not necessarily since there are eight other Muslim countries with electoral democracies as shown in Table 4.1. There is also a freedom gap between MENA and non-MENA Muslim states. The average Freedom House score for non-MENA Muslim states is 80% higher than that of the MENA states but still less than the world average.

3.4  Preference for Democracy Even though democracy is not the norm in MENA, some surveys indicate a preference for it. Of the countries in MENA surveyed (Pew Research Center 2013), the majority preferred democracy over strong rule. Is this a paradox? If Muslims prefer democracy, shouldn’t we expect more democracy in such countries? Maseland and van Hoorn (2011) provided the following explanation to this paradox. Such expectations assume that the direction of causality goes from democratic preferences to democratic institutions. However, the preference for democracy tends to be affected by the degree of democracy in a country, and this is true across different cultures, not just Arab and Muslim cultures. These dilemmas can be explained by marginal preference (the preference for more democracy given its current level) versus attitudes (preference for democracy in general). Attitudes may affect democracies, while marginal preferences are affected by the level of democracy. Since Arabs have so little democracy, they appear to aspire for more democracy. However, Mohammed Al-Ississ and Ishac Diwan (2016) found evidence that Arabs prefer strong rule over democracy. Using World Values Survey data (2008–2013), they did an empirical study of the Arab demand for democracy. They concluded that the Arab region did experience a democratic demand deficit compared to similar individuals in other countries with similar levels of development for three reasons8: Religion  As indicated by the index data (Figs.  4.2, 4.3, and 4.5 and Table  4.1), MENA countries are associated with less democracy and freedom than other Muslim countries. “Arabs are much more religious than elsewhere, and religiosity is associated with low preferences for democracy worldwide” (Al-Ississ and Diwan 2016). However, they conclude that this effect is relatively small. Individualism  Individualism is the ability to make autonomous decisions and innovate without undue social constraints. The strong global demand for democracy among the youth was stunted in the Arab region because the youth are less individualistic than most of the world.

 These three reasons are based on and summarized from Al-Ississ and Diwan (2016).

8

4  Autocracy in MENA

51

Table 4.1  Summary of electoral democracies and indices 2017 (Freedom House 2018 data; World Bank 2018; The Economist Intelligence Unit 2018)

MENA Non-MENA Muslim World

Number of electorala democracies   1   8 116

Percentb in electorala democracies  3% 42% 59%

Freedom House average scorec 100 = max 25 45 58

Democracy index averagec 10 = max 3.2 4.7 5.5

As rated by Freedom House (2018 data). of 2017 population for MENA and non-MENA Muslim countries and number of countries for the world. c Freedom House scores and the democracy index averages are weighted by 2017 population. Except the world average is not weighted. Not all countries have democracy indices. a

b

Education  Education is generally associated with a stronger demand for democracy but was stunted in the Arab region by economic, social, and political conservatism, anti-distributional biases, and status quo biases among the educated in the Arab region. These biases are due to their elite position in Arab culture and the influence of the autocracy on education. Since the educated generally have an elite position in Arab society, they may favor the status quo and may be afraid of losing their status with democracy. The manipulation by the autocracy on educational institutions may help favor their rule and promote respect for authority and political quietism. The educated may fear that elections could result in political Islam and the loss of whatever freedom and status they enjoy. As a result, they tend to prefer strong rule with managed elections. The effect of education on the preference for democracy in Arab countries overwhelms the effect of religion and youth according to their empirical findings (Al-Ississ and Diwan 2016). They suggest that educational reform in Arab countries should focus on social and political qualities and not just economic productivity. The Arab spring seems to contradict these preferences. Given that these preferences are only generalizations based on survey data, they do not apply to everyone, and many of these preferences for strong rule may not be strong.

4  Autocracy in MENA Autocracy is the norm in MENA. The conditions as discussed above, which do not favor democracy, include the position of the MENA countries on the Inglehart-­ Welzel Cultural Map (Sect. 3.1), the level of economic development (Sect. 3.2), religion (Sect. 3.3), and the preference for strong rule over democracy by the educated elite (Sect. 3.4).

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4.1  Effect of Modernization9 Traditionally in Islam, consultation was important in the conduct of government as explained by Lewis (2005). The ruler consulted with tribal chiefs, the rural gentry, and groups such as bazaar merchants, scribes, civil servants, religious hierarchy, and military establishments. The ruler’s power depended on the consent of the ruled. There was a contractual relationship between the ruler and ruled where each had obligations. As noted in Sect. 2 and 3.2, economic development tends to result in social and cultural values conducive to democracy. However, if economic development fails to bring about these social and cultural changes, democracy may fail to be achieved (Ross 2001). Contrary to modernization leading to democracies in most parts of the world, in MENA it brought tools of control, surveillance, and enforcement giving any small ruler more power than the great caliphs and sultans of the past. The intermediate powers, the landed gentry, the city merchants, the tribal chiefs, and others, which limited the power of the ruler, have been weakened. Some regimes including the Baath party were influenced by fascism and socialism from World War II (Lewis 2005). The future may be even more ominous. With artificial intelligence, facial recognition, and the loss in privacy with big data keeping track of much of our lives, dictators will have new high-tech tools to spread propaganda, keep track of dissent, and oppress their opposition and anyone who gets the slightest out of line (Fontaine and Frederick 2019).

4.2  Survivability of Autocracies Autocracies are threatened to be overthrown by coups, revolutions, unrest, etc. The Arab Spring was an example of such a threat, and the events in Algeria in the spring of 2019 are another.10 Autocracies reacted to the Arab Spring in various ways from the partial establishment of a democracy in Tunisia to the violent repression in Syria. To maintain power, autocracies must perform a difficult balancing act. They need to appease the opposition somewhat to avoid unrest but without giving too much freedom for fear of losing power. To avoid losing power, a regime might use selective repression and not be afraid to use force but only the minimum force to attain the desired result. If it uses too much force and becomes brutal, it will tend to increase the number of revenge-seeking enemies (Brumberg 2002).  This section is summarized and paraphrased from Lewis (2005) except where cited otherwise.  National marches by workers, students, and lawyers were able to stop the sitting president from running from a fifth term and demanded a drastic change of the status quo, the constitution, etc. (BBC 2019).

9

10

4  Autocracy in MENA

53

There are various ways to achieve this balancing act which Mubarak followed during his 30-year rule over Egypt (Diamond 2010a; Brumberg 2002): • Giving the appearance of democracy with managed elections, some limited participation, and partial openness. • Appeasing the opposition by giving them a voice in parliament or the cabinet. • Pitting opposition groups against each other, that is, they can divide and rule. • Legitimizing laws by having them be passed by compliant legislators and upheld by compliant judges. • Reinforcing each other’s power through the Arab League. There is a fear that an Islamic party could win an election with a democratic vote. In Algeria, the Islamic party won an election in 1990/1991, but the Army intervened and canceled the elections. Recently Egypt elected Mohamed Morsi, an Islamic Brotherhood president, and he was also toppled. Authoritarian governments and secular democrats tend to be fearful of such an outcome. The concern is that should Islamists prevail, then they may end the democratic process through “one person, one vote, one time” (Diamond 2010a). To prevent this, autocracies may cede some ideological and institutional controls to the Islamists to try to keep them at bay (Brumberg 2002). Having external enemies helps autocrats to maintain power (Orwell 1949) by diverting attention from domestic problems and providing a justification for authority. The Palestine-Israeli conflict provides such a diversion for many Arab governments: For the oppressive but ineffectual governments that rule much of the Middle East, finding targets to blame serves a useful, indeed an essential, purpose—to explain the poverty that they have failed to alleviate and to justify the tyranny that they have introduced. They seek to deflect the mounting anger of their unhappy subjects toward other, outside targets. (Lewis 2002) …the Arab-Israeli conflict… provides a ready and convenient means of diverting public frustration away from the corruption and human rights abuses of Arab regimes. Protests over the failings of Arab regimes themselves—the poor quality of education and social services; the lack of jobs, transparency, accountability, and freedom—are banned, but Arab publics can vent their anger in the press and on the streets in the one realm where it is safe: condemnation of Israel. (Diamond 2010b)

To survive, autocrats must provide rewards such as money and perks to their supporters. If they don’t reward their supporters sufficiently, their supporters may turn their support to an opposition leader that will reward them better. Therefore, much of a country’s wealth is siphoned off to the autocrats and their supporters leaving most of the population impoverished. Often it is advantageous for autocrats to keep their population weak and impoverished, so they won’t have the strength to revolt (de Mesquita and Smith 2011). There is empirical evidence that dictators tend to survive longer in power in some of the countries relatively better endowed with oil (Cuaresma et  al. 2011). Survivability of an autocracy depends on the ability to reward supporters and to

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deter opposing groups from cooperating with each other, which can often be accomplished by buying off these groups. The ability to reward supporters, buy off groups, and appease the opposition is helped by oil revenues. Because oil helps autocracies maintain power, it is one reason11 that oil is often considered a curse, as discussed in the previous chapter. Egypt, Jordan, and Morocco have little or no oil. Their Freedom House and Democracy Index scores are above the MENA average but below the average for non-MENA Muslim countries. In contrast the oil-rich countries (Kuwait,  Qatar, Oman, UAE, Bahrain, and Saudi Arabia), all have scores below the MENA average except Kuwait. See Figs. 4.2 and 4.3.

5  Summary and Conclusion Democracies grew rapidly throughout the world in the 1990s but stalled recently with populist and nationalist movements in the United States and Europe. The number of democracies did not increase in MENA until after the Arab Spring with just one democracy, Tunisia. The democracy deficit in MENA is due to several factors: Values and Culture  An analyses12 (Inglehart and Welzel 2005) of the World Values Survey (WVS 2019) conclude that most Arab cultures have traditional and survival values, less conducive to democracy. Traditional values emphasize religion, family, authority, and national pride. Survival values emphasize security over liberty with low levels of trust and tolerance. Economic Development  As economies develop, values tend to go towards secular-­ rational values with less emphasis on traditional values and from survival to self-­ expressive values with emphasis on environmental protection, political participation, gender equality, and tolerance. Secular-rational and self-expressive values are more conducive to democracy and freedom. Oil-rich nations are often not well economically developed outside their oil sector. The per capita income of most Arabs is low in both non-oil and oil economies where much of the oil wealth is squandered by the governments and elites. As a result, Arab values tend to be traditional and survival. Religion  Strong religious values in MENA also help to explain the traditional values in MENA.

 Other reasons for the concept of the oil curse include the rentier effect, the Dutch disease where oil exports raise the value of a country’s currency making other exports less competitive, and the apparent poor economic performance of such countries. See the previous chapter. 12  The World Values Survey (WVS) has been doing waves of surveys since 1981. Analyses have benn done with WVS data since the early waves. See WVS (2019) for mappings of the data from the early to recent waves of surveys. 11

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Preferences  Given the lack of democracy in Arab countries, most Arabs would appear to prefer more democracy. However, because of religion and less individualism in Arab cultures, the demand for democracy is not strong. There is a tendency, particularly among the educated elite, to prefer strong rule over democracy for fear of losing their place in society and the risk of elections leading to political Islam and their loss of whatever freedom they have. Ross (2012) shows with empirical evidence that oil-rich autocracies were less likely to transition to democracies. Oil-rich autocracies in MENA score poorly on many indices of freedom and democracy (see Sect. 2). As a result, autocracies are the norm in MENA. However, since there is always opposition, autocracies must balance their power with ceding some power to the opposition. Some of the ways they do this include managed elections, limited participation, partial openness, giving the opposition a voice in parliament or the cabinet and buying off the opposition with oil revenue. However, the situation may be changing, and the status quo in MENA is unsustainable as we have argued throughout  this book. The ability of autocracies to appease their opposition and their populations with oil revenues is threatened. Efforts to abate climate change and the development of alternative and renewable energy may dampen the future demand for and the price of oil. At the same time, economic and social problems in MENA put more pressure on the need for oil revenues. Chapters 9 and 10 of this book will address how to resolve these issues given the unwillingness of entrenched interests in MENA to fix the institutional deficit to facilitate the transition to democracy: If the peoples of the Middle East continue on their present path, the suicide bomber may become a metaphor for the whole region, and there will be no escape from a downward spiral of hate and spite, rage and self-pity, poverty and oppression…. But if they can abandon grievance and victimhood, settle their differences, and join their talents, energies, and resources in a common creative endeavor, they can once again make the Middle East, in modern times as it was in antiquity and in the Middle Ages, a major center of civilization. (Lewis 2002) The argument that some civilisations are unsuited to democracy has been used from Taiwan to South Africa: it seldom holds water for long. The Arab spring has so far been mainly a mess. But to condemn Arabs to political servitude is no answer. It only delays the explosion. (The Economist 2014)

References Al-Ississ M, Diwan I (2016) Individual preferences for democracy in the Arab world explaining the gap. Working paper 981, March BBC (2019) Algerian president Abdelaziz Bouteflika drops bid for fifth term. 11 March. https:// www.bbc.com/news/world-africa-47531917?intlink_from_url=https://www.bbc.com/news/ topics/cp7r8vglgyet/algeria&link_location=live-reporting-story. Accessed March 2019

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Berman S (2019) The long, hard road to democracy. Wall Street J, 8 Feb. https://www.wsj.com/ articles/why-democracy-is-so-hard-to-build-11549644330. Accessed 28 April 2019 Brumberg D (2002) Democratization in the Arab world? The trap of liberalized autocracy. J Democracy 13(4) Cuaresma JC, Oberhofer H, Raschky PA (2011) Oil and the duration of dictatorships. Public Choice 148(3/4):505–530. Published by: Springer. Stable URL: http://www.jstor.org/stable/41483710. Accessed 27 Oct 2017 De Mesquita BB, Smith A (2011) The Dictator’s handbook: why bad behavior is almost always good politics. Public Affairs Diamond L (2010a) Why are there no Arab democracies? J Democr 21(1):93–104 Diamond L (2010b) The Arab democracy deficit. Hoover Digest, Research and Opinion on Public Policy, No 4, Sept 29. https://www.hoover.org/research/arab-democracy-deficit. Accessed on 14 May 2019 Fontaine R, Frederick K (2019) The Autocrat’s new tool kit. Wall Street J, 15 March. https://www. wsj.com/articles/the-autocrats-new-tool-kit-11552662637. Accessed 28 April 2019 Freedom House (2017) Freedom in the world 2017, populists and autocrats: the dual threat to global democracy. https://freedomhouse.org/report/freedom-world/freedom-world-2017. Accessed 6 Dec 2017 Freedom House (2018) Freedom in the world 2018, democracy in crisis. https://freedomhouse.org/ report/freedom-world/freedom-world-2018 Freedom House (2018 data) Freedom in the world data and resources. https://freedomhouse.org/ content/freedom-world-data-and-resources Freedom House (2019) Freedom in the world 2019, democracy in retreat. https://freedomhouse. org/report/freedom-world/freedom-world-2019 Inglehart R, Welzel C (2005) Modernization, cultural change, and democracy. The human development sequence. Cambridge University Press. http://www.cambridge.org/us/ academic/subjects/politics-international-relations/politics-general-interest/modernization-cultural-change-and-democracy-human-development-sequence#U6XPrv83Kle5T tVV.99 Inglehart R, Welzel C (2009) How development leads to democracy what we know about modernization. Foreign Aff (Council on Foreign Relations) 88(2):33–48 Lefes WS (2012) Review of Inglehart and Welzel (2009) Lewis B (2002) What went wrong?  – the Atlantic, Jan. https://www.theatlantic.com/magazine/ archive/2002/01/what-went-wrong/302387/. Accessed 4 Nov 2018 Lewis B (2005) Freedom and justice in the modern Middle East. Foreign Aff 84(3):36–51 Maseland R, van Hoorn A (2011) Why Muslims like democracy yet have so little of it. Public Choice 147(3/4):481–496. Stable URL: http://www.jstor.org/stable/41483671. Accessed 27 Oct 2017 Orwell G (1949) Nineteen eighty-four Pew Research Center (2012) Religion & public life, table: religious composition by country, in percentages, 18 Dec. https://www.pewforum.org/2012/12/18/table-religious-composition-bycountry-in-percentages/. Accessed 5 May 2018 Pew Research Center (2013) Religion & public life, the World’s Muslims: religion, politics and society, chapter 2: religion and politics, 30 April. https://www.pewforum.org/2013/04/30/theworlds-muslims-religion-politics-society-religion-and-politics/. Accessed 2 Nov 2018 Pinker S (2018) The enlightenment is working. Wall Street J: Weekend Review, Feb 10-11, p C2 Ross ML (2001) Does oil hinder democracy? World Politics 53(3):325–361. https://scholar.harvard.edu/files/levitsky/files/ross_world_politics.pdf Ross M (2012) The oil curse: how petroleum wealth shapes the development of nations. https:// press.princeton.edu/titles/9686.html The Economist (2014) The lessons of Algeria, 19 April. https://www.economist.com/leaders/2014/04/19/the-lesson-of-algeria. Accessed 28 Apr 2019

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The Economist Intelligence Unit (2018) Democracy index 2017: free speech under attack. Economist 82:367. http://www.eiu.com/democracy2017 USLegal.com (2018) https://definitions.uslegal.com/r/rentier-state/. Accessed 18 Feb 2018 V-Dem Institute (2018) Democracy for all? V-Dem annual democracy report 2018 Welzel C (2013) Freedom rising: human empowerment and the quest for emancipation. Cambridge University Press World Bank (2017) World development indicators DataBank. http://databank.worldbank.org/data/ source/world-development-indicators/preview/on. Accessed 17 Dec 2017 World Bank (2018) World development indicators DataBank. http://databank.worldbank.org/data/ source/world-development-indicators/preview/on. Accessed 12 Oct 2018 WVS (2019) World values survey. http://www.worldvaluessurvey.org/WVSContents.jsp. Accessed 20 Mar 2019

Chapter 5

MENA and Alternative Sources of Energy

Abstract  MENA faces the following threats to its ability to control oil prices. Fracking. MENA faces a dilemma. If it reduces oil production in an effort to raise oil prices, it would stimulate more shale oil to come onto the market. High oil prices have helped the shale oil industry to become more efficient and resilient when confronted with lower oil prices. The cost of extraction by fracking has gone down to less than half of what it was in 2013. As a result, MENA must keep oil prices even lower to prevent competition from fracking; however, when doing so, its oil revenue is reduced. New sources of energy. The following may be potential threats to MENA in the future: • Methyl hydrate is abundant, and is found in crystalline solid form, and burns like natural gas. • Nuclear fusion may be available in the next decade according to some nuclear researchers but will take years to deploy. • Thorium, a radioactive element, could produce nuclear energy, but was not developed because uranium can be used more easily for bombs. • The traveling wave reactor (TWR) is a type of nuclear fission reactor that can convert nonfissionable material into usable fuel. A company called TerraPower is developing it. China is developing it as well. Renewable energy. While currently an insignificant source of energy, its growth rate exceeds that of fossil fuels. Furthermore, its cost is competitive with fossil fuels and is going down. The problem is  its intermittent nature, which will be solved when battery storage becomes economical. With the deserts and reliable sunshine, MENA could become a major source of solar power.

1  Introduction This chapter investigates potential energy substitutes that have the potential of displacing some of the oil produced in MENA oil-exporting countries. These future sources of energy, if and when they are developed, are certain to weaken the power © Springer Nature Switzerland AG 2020 M. Akacem et al., Oil, Institutions and Sustainability in MENA, https://doi.org/10.1007/978-3-030-25933-4_5

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of the major oil-exporting countries of MENA to have a significant impact on oil prices. These substitute energy sources include not only substitute oil and gas in other countries but also energy sources from conservation, renewable energy, new nuclear energy technologies, and improved oil extraction technologies. In this chapter we take quite seriously the statement by former Saudi Arabian Petroleum Minister, H. E. Sheikh Yamani, who stated that “The Stone Age did not end for lack of stones, and the Oil Age will end long before the world will run out of oil” (Quoted in The Economist 2003). Similarly Amory Lovins, director of the Rocky Mountain Institute and well-­noted international specialist on energy, has frequently mentioned that oil might become an obsolete source of energy for transportation given the rapid development of alternative energy and the steady progress in energy conservation.1 Whether the reader believes that oil will become “obsolete” or not, it would be unwise for a country to become too reliant on oil for most of its income given the possibilities of near substitutes that we describe in this chapter. Supporting the trends in the direction described by Yamani and Lovins are recently publicized concerns of some of the world’s largest oil companies. These companies worry about approaching “peak oil demand,” as opposed to the more commonly referred to “peak oil supply” predicted by M. King Hubbert. He once believed that “US oil production would reach its peak in the early 1970s” (Tietenberg and Lewis 2015). “Peak demand,” on the other hand, would be the result of international efforts to avoid severe climate change and the technological breakthroughs in conservation and alternative energy sources, which would soon lessen the desire of nations to demand more fossil fuels (Cook and Cherney 2017). As unrealistic as they might seem, projections do suggest that substitutes for oil might soon present tough competition for oil-exporting MENA countries.2 These looming realities will force the now oil-dependent economies in MENA to diversify their economies. This chapter considers many of these energy substitutes for the fossil fuels. The major problem for oil-exporting MENA countries is that their economies are now 1  Lovins’ intent is to get the United States off oil completely: “In 2004, Rocky Mountain Institute’s Chief Scientist, Chairman and Co-founder Amory Lovins and a team of RMI collaborators accomplished a highly complex and innovative task—the drafting of a roadmap for the United States to get completely off oil by 2050, led by business for profit.” Source: http://www.rmi.org/Winning%20 the%20Oil%20Endgame. Also, this theme is thoroughly developed in, Lovins and Datta (2004). See both Amory Lovins’ TED talks: his February 2005 TED talk at https://www.ted.com/talks/ amory_lovins_on_winning_the_oil_endgame; and his March 2012 talk at https://www.ted.com/ talks/amory_lovins_a_50_year_plan_for_energy. Both accessed 10 Mar 2017. 2  One new source of energy came to the authors’ attention not long before the manuscript of this book was to be submitted for publication. If the claims are true, it would be an energy “game changer.” The CBS show 60-minutes presented Xyleco, Inc. on its January 6, 2019, broadcast. It mentioned that the US Department of Energy stated that Xyleco, Inc. had developed technology that would allow access to the use of non-food competing biomass that might increase the world’s fuel supplies by 30%. It would also lessen CO2 emissions by 70% compared to corn-based biofuels. See https://www.cbsnews.com/news/marshall-medoff-the-unlikely-eccentric-inventorturning-inedible-plant-life-into-fuel-60-minutes/.

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highly dependent on the export of fossil fuels. Below we describe the challenges that these alternative sources of energy pose to these fossil fuel-dependent economies.

2  Present Threats to Oil MENA Exporting Economies 2.1  Shale Oil and Gas Development or “Fracking” 2.1.1  History Given the reputation of the advanced technology that is now being applied to shale oil and gas extraction, it is almost unimaginable that the first attempts at extracting natural gas in the United States occurred a long time ago in 1821.3 This was when William Hart, considered the father of natural gas, drilled the first gas well in Fredonia, New York. The well was only 27 feet deep (NaturalGas.org 2013) in contrast to wells that are fracked today that go between 2000 and 30,000 feet (Cash n.d.).4 Hart’s activity preceded Colonel Drake’s drilling of the first oil well in Titusville, Pennsylvania, in 1859. Hart’s drilling led to the later founding of the first gas company in the United States, the Fredonia Gas Light Company in 1858 (Wikipedia n.d.-a). Later in 1862, during the Civil War Battle of Fredericksburg, Virginia, Col. Edward A. L. Roberts observed that when “firing explosive artillery into a narrow canal that obstructed the battlefield” oil seeped out of the shale strata described as “superincumbent fluid tamping” (Manfreda 2015). Col. Roberts later was awarded his first patent for extraction by “exploding torpedoes in artesian wells” in November 1866 (Manfreda 2015). Journalist John Manfreda relates the incremental improvements in fracking over the successive decades. Then there was a long pause in the progress of fracking from the time of Col. Roberts’ patent in 1866 to the 1930s when “a nonexplosive liquid substitute called acid, instead of nitroglycerin” was applied (Manfreda 2015). At that time, the technology began to accelerate as strides were made almost every decade. After an experimental success in 1949, the hydraulic fracturing became ­commercialized (Manfreda 2015). However, “modern day fracking didn’t begin until the 1990s,” (Manfreda 2015) when hydraulic fracturing was “combined with horizontal drilling” (Manfreda 2015). The crude oil rise in price to $140 per barrel in 2008 gave hydraulic fracturing its greatest boost as the relatively high cost per barrel of oil from fracking was surpassed by the higher price per barrel of crude oil.

3  For a earlier history of human development of natural gas generally, both further back in time and in other lands, see NaturalGas.org (2013). 4  Lewis Cash who worked at Haliburton from 2000 to 2016, was former Global Project Manager at Oil and Gas Completion.

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2.1.2  Fracking Today Today, shale oil and natural gas have allowed the United States to regain its status as a significant producer of both energy sources. Dry gas production output has risen dramatically in the first two decades of the twenty-first century largely due to hydraulic fracking. In January of 2000, monthly US dry gas production was at 1623 billion cubic feet (bcf). By July 2018 monthly dry gas production reached 2585 bcf. This was a 59% increase over 18 years (EIA 2019 gas). This dramatic increase in the extraction of natural gas has allowed the United States to be less reliant on coal production for its electrical energy. The substitution of natural gas for coal has permitted the country to lessen its emissions of carbon dioxide compared to what emissions would have been had coal not been replaced. In addition to natural gas, hydraulic fracking has bolstered the domestic US production of crude oil enormously. Oil supplies in the United States have sometimes actually been opposite to the common notions about the relationship between price and quantity supplied as shown in Table 5.1. Improvements in oil fracking technology enabled this to occur. Oil production in the United States will likely increase as long as extraction technology continues to improve. For instance, Occidental Petroleum, operating in the Permian Basin of Texas, has continued to find lower cost techniques of oil production. It expects to produce oil there for another 48 years (Helman 2017). Such improvements made the United States the top crude oil producer in the world, ahead of Saudi Arabia (2nd) and the Russian Federation (3rd) by 2017 (BP 2018b, p 14). As the world price of oil was falling in November 2014, oil drillers reduced the number of high-cost shale oil  drilling rigs from production. This occurred even while US drilling actually increased oil output over time by using the more cost-­ efficient drilling rigs. This was also done by increasing the number of wells per rig while increasing the speed by which they were drilled. This resulted in reducing the difference between US consumption and production by more than one-half. It also lessened the US need for importing crude oil by more than one-half (BP 2017 and EIA 2017 energy). As a percent of the world’s production, US production rose because of shale oil fracking. However, as a percent of the world's consumption, US consumption fell thanks to energy conservation efforts. See Table 5.2.

Table 5.1  Oil supply and prices change in opposite directions (Macrotrends 2019) Date December 2006 March 2019 % Change a

US crude oil production million barrels per day (mbd) 5.3 12.2 130%

West Texas Intermediate Crude oil prices.

Oil pricea per barrel $76.92 $60.14 −22%

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Table 5.2  US oil production and consumption compared to the world (BP 2017, 2018a; EIA 2017 energy)

2005 2017 % Change

Thousands of barrels per day Production Consumption 6900 20,802 13,057 19,880 89% −4%

Difference 13,902 6823 −51%

% of world Production 8.4% 14.1%

Consumption 24.6% 20.2%

These oil production dynamics especially reduced US dependence on OPEC for its oil imports. Imports of crude oil by the United States from OPEC as a percentage imports of crude oil from all countries were reduced from 47% in 2011 to 33%  in 2018 (EIA 2019 imports). Also, the Energy Information Administration (EIA) reports, “During the past decade, the US trade gap for energy products has narrowed. From 2003 to 2007, the value of energy imports was about 10 times greater than the value of exports” (EIA 2018 trade). By 2017, imports were only about 1.5 times greater than exports according to data from the US Census Bureau  (2018). Hydraulic fracking accounted for most of this reduction.  Cost reductions have continued their trend downward in several of the major sites where hydraulic fracking is occurring in the United States.  These sites included the Bakken, the  Eagle Ford, the Niobara, the  Permian Delaware, and the Permian Midland sites (Crooks and Kao 2017).

2.2  Increased Discovery of New Oil and Natural Gas Deposits In addition to the hydraulic shale oil and natural gas developments, new supplies of oil and natural gas are continuing to be found worldwide. As mentioned earlier, newly found sources of oil have tended to discredit M.K. Hubert’s “peak oil (supply)” prediction that by 1969, US oil production would peak at about 3 billion barrels per year and would continue to decline thereafter (Smil 2003). Production began to decline in the mid-1970s but, as noted earlier, has increased since 2008 as shown in Fig. 5.1.5 Fifty years have passed since Hubert’s ominous prediction of a peak in oil production. At least one alarmist took M.K. Hubert’s prediction to imply the end of civilization.6 World proved petroleum reserves have actually increased over the years. Figure 5.2 shows this worldwide continuous discovery of more oil reserves. 5  The yearly production rate was calculated by multiplying the reported daily average production by 365.25 days per year. 6  Colin Campbell, founder of the Association for the Study of Peak Oil and Gas and petroleum geologist, believed the peak oil would result in “war, starvation, economic recession, possibly even the extinction of homo sapiens.” Quoted in Bailey (2015).

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U.S. Production Billion Barrels per Year 6.0 5.0 4.0 3.0 2.0 1.0 0.0 1960

1970

1980

1990

2000

2010

2020

Fig. 5.1  Historical US production of oil (BP 2018a; EIA 2018 STEO)

Proved World Reserves - Billions of Barrels 1800 1600 1400 1200 1000 800 600 400 200 1980

1985

1990

1995

2000

2005

2010

2015

2020

Fig. 5.2  Proved world oil reserves (BP 2018a)

More relevant to this book is the proportion of proved world petroleum reserves located in the MENA region (BP 2019). For instance, at the end of 1998, MENA held an estimated 63.9% of total worldwide proved petroleum reserves. By the end of 2018, MENA held only 52.0%. This decline suggests that oil-exporting MENA countries may have less control over world oil pricing in the future as even more proved oil reserves are found outside of MENA as the next few paragraphs discuss. Part of this loss in proportion of worldwide proven oil reserves held by MENA was due to the application of fracking technology. But the decline in OPEC’s control seems even more threatened as new sources of oil continue to be found

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elsewhere where fracking technology is being adopted. For instance, in November 2016, the US Geological Survey (USGS) published its Assessment of Undiscovered Continuous Oil Resource in the Wolfcamp Shale of Midland Basin, Permian Basin Province, Texas, 2016. In this report, the USGS reported that fracking can be used to extract these huge newly found petroleum and natural gas deposits. Furthermore, the USGS estimated these deposits to be roughly 20 billion barrels of oil and 16 trillion cubic feet of gas.7 Then there was a large find of oil on shore of the United States by the Spanish Company, Repsol. It found an estimated one billion barrels in Alaska’s North Slope (Oyedele 2017). But a change in the political climate in the United States might free up hydraulic fracking sites in states where it is now essentially prohibited, such as New York. Elsewhere, using new fracking exploration technologies, the United Kingdom in 2015 found oil deposits near London, perhaps as much as 100 billion barrels by some estimates (Tully 2015). The Tory government announced in May 2018 that it considers that “shale gas development is of national importance” to the United Kingdom’s national well-being and that the government will accept applications to determine if fracking might soon start (Editorial Board 2018). Although the earth is finite in size, progress in the discovery of oil deposits subject to fracking extraction currently appears to be ceaseless. For instance, in early 2017, Mark P. Mills an oil analyst at the Manhattan Institute, reported that production at oil shale rigs was growing at 20% per year (Mills 2017). Fracking was clearly challenging the pricing power of oil-producing MENA countries.8 But new sources of oil and natural gas subject to extraction by fracking are not just to be found in the developed countries. For instance, Diamond and Mosbacher projected that in only 10 years, newer oil and natural gas exploring and extraction technologies will enable the withdrawal of billions of barrels of oil for export from the East African Rift Valley and from West Africa’s Gulf of Guinea. Moreover, they predict the extraction of trillions of dollars in oil revenue for “dozens of African countries that have never before experienced such influxes” (Diamond and Mosbacher 2013). This, of course, raises concern about how to use this revenue in a way that aids the growth and development of their economies. A precondition for this to occur, however, is the existence of inclusive institutions to ensure that this newfound wealth benefits all people of these nations, not just a few. Not only are new discoveries of fossil fuel resources predicted for sub-Saharan Africa, but newly discovered deposits of natural gas have been discovered in the

7  “… [U]sing a geological-based assessment methodology, the US Geological Survey assessed technically recoverable mean resources of 20 billion barrels of oil and 16 trillion cubic feet of gas in Wolfcamp shale in the Midland Basin part of the Permian Basin Province, Texas.” See Gaswirth (2017).  And in England, the website Oilprice.com reported a discovery of oil near London, England, estimated to be as voluminous as Kuwait’s oil reserves, approximately 100 billion barrels. 8  Evidence of this is Saudi Arabia’s drive, on behalf OPEC, to enlarge the cartel size. This is a sign that they are losing control over their ability to control world oil prices.

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Mediterranean Ocean in the territorial waters of Egypt. It was there, in 2015, that the Italian drilling company, ENI (Ente Nationale Idrocarburi, or in English, the National Hydrocarbon Entity), discovered an estimated 30 trillion cubic feet (tcf) of natural gas deposits. This find, when fully developed, is estimated to be worth $100 billion (Reed 2015). Later, in 2018, Egypt found an even larger deposit of natural gas, an estimated 90 tcf in the offshore Noor field. In a short 3-year period, Egypt has been enriched by perhaps 120 tcf of natural gas discoveries. Egypt might possibly even export some of this natural gas to Saudi Arabia (Widdenshoven 2018). Certainly, if such positive trends in the discovery of fossil fuels continue, they will increasingly plague oil-rich countries of MENA with further problems in maintaining high enough petroleum prices to adequately support their governments’ present expenditures. Moreover, all extraction technologies such as fracking, and sources of petroleum and natural gas such as the Canadian tar sands, and deep-­ ocean drilling have shown an extraordinary long-run supply response to changes in prices (Kantchev 2017). There are exceptions such as Venezuela, an OPEC member that holds, by some estimates, oil deposits even greater than Saudi Arabia’s proven reserves. In early 2019, however, Venezuela was incapable of efficiently responding to global price changes by varying oil and gas production because of political instability (Naím and Toro 2018). Any post-Maduro government in Venezuela is likely to make up for lost development once political stability is restored. That restoration too would lessen the pricing power of oil-rich MENA countries. There are, moreover, many regions of the world that may contain undiscovered natural gas and petroleum deposits, such as the Arctic. And the two largest countries on earth, Russia and Canada, may also find more fossil fuel resources in their vast unexplored oblasts and territories. These possibilities loom over oil-rich MENA’s continued ability to exert control over world oil and natural gas prices and to meet the increasing budgetary demands of their national treasuries.

3  Threats to Oil MENA from New Sources of Energy Several new sources of energy threaten to reduce the world’s demand for oil and natural gas from oil-rich MENA countries and thus lessen their pricing power. These huge potential energy sources are still under development. The discussion in this section is limited to these four sources that appear to have the largest potential. If their potential is realized, they will significantly disrupt traditional energy markets. Of course, there are many other possible sources of energy, other than these four. Those smaller potential sources are just too numerous to describe here given the scope of this book.9 Just these four sources threaten to blindside those countries that  For those interested in how new sources of energy and energy conserving lifestyles will likely change the supply and demand for energy from gas and oil, aka, CO2 emitting fossil fuels, the authors recommend the book, by Hawken (2017). 9

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are now largely dependent upon petroleum and natural gas sales to fund government treasuries. These four possible sources are the following: methane hydrate deposits, nuclear fusion power, traveling wave reactors (TWR), and thorium-based nuclear reactors which are also referred to as “molten salt reactors or as liquid fuel thorium reactors (LFTRs).”10 All four sources are “promising” but still confront significant barriers to practicality. Section 4 of this chapter briefly looks at the potential of renewable energy, most specifically wind and solar energy. Section 5 gives a short discussion of hydrogen energy. Breakthroughs in any one of these sources promise to free humankind from its continued high reliance on oil and natural gas.

3.1  Methane Hydrate Deposits Given the great energy potential of methane hydrate, the US government, for many decades, has considered it a possible viable source of energy. If the barriers to its development can be overcome, methane hydrate could become a very significant source for the world’s energy future. The United States is not alone in its search to make methane hydrate a practical source of energy: “. . . Canada, [Russia], Japan and India all have vigorous research programs working to discover viable technologies for producing gas hydrates. Methane hydrate will likely play an important role in our future energy mix” (King 2019). The apparent advantages of methane hydrate are its abundance and its preference over coal and petroleum in relation to its CO2 emissions. Methane is found in many places around the world as remote as the Arctic and Antarctic. It is also exists near populated ocean coastal areas as well. Methane hydrate when burnt in its crystalline or liquid form oxidizes as does methane, which is what natural gas essentially is (US Department of Energy 2010, p 12) with the same greenhouse effect. This means that once it is burnt (oxidized), hydrogen and carbon dioxide are released in the atmosphere. In the hierarchy from worst to the best sources of fossil fuel in terms of emitted greenhouse gas per unit of usable energy, coal is the worst, gasoline is better than coal, and natural gas or methane hydrates are better than gasoline.11

 “Is Thorium a Magic Bullet for Our Energy Problems?” a discussion with Richard Martin (contributor to Wired magazine and the MIT Review of Technology), Dr. Arjun Makhijani (president of the Institute for Energy and Environmental Research), and Ira Flatow (the host of National Public Radio’s Talk of the Nation). From printed transcript of discussion aired May 4, 2012, 1:00 p.m. 11  Over the last decade, electrical utility companies in the United States have increasingly substituted natural gas for coal as a source of electricity. This is the major reason the United States has been able to reduce its greenhouse gases over the last decade. 10

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Methane hydrate is found in crystalline solid form. A study by the US Department of Energy estimates that the energy stored in methane hydrates could last from 350 to 3500 years at current rates of energy consumption.12 There are, however, significant barriers to its use. First is the harm done to the fragile underwater environments from which methane hydrate is extracted. This includes both wetlands and sub-oceanic locations that support fragile ecosystems. Second, methane, in its gaseous form rather than its hydrate form, has about 30 times more heat-trapping potential than carbon dioxide although its residency in the atmosphere is much shorter (Science Daily 2014). Even so, if these problems can be overcome, methane hydrates may play a large role in the economies of the United States and other nations: “Japan, India, China, and South Korea, have significant methane hydrate deposits and each have e­ normous and rapidly growing energy demands” (Methane Hydrate Advisory Committee 2014). Just substituting methane hydrate for coal would significantly reduce greenhouse gas emissions without impeding energy availability. Finally, the major study submitted in 2010 to the US Energy Department by the Committee on Assessment of the Department of Energy’s Methane Hydrate Research and Development Program concluded that the problems discussed above can be solved.13

3.2  Energy from Nuclear Fusion Another threat to the continued oil-pricing power of oil MENA countries is the prospect of abundant energy from nuclear fusion. Some humorously refer to nuclear fusion as the energy source that is always 20 or 30  years beyond our grasp. Apparently, things have changed. If just a few technological breakthroughs occur, then nuclear fusion could supply virtually limitless energy while producing no significant nuclear waste or greenhouse gases, perhaps within a decade.14 A recent news article stated, “Nuclear researchers say they’ll have fusion nailed in the next decade—unless Trump cuts their funding” (Muskus 2017). Ned Sauthoff, who

 About the potential of methane hydrate development, Lorie Langley, leader of the Oak Ridge National Laboratory Gas Hydrate programs for the Fossil Energy Program, stated “Estimates on how much energy stored in methane hydrates range from 350 years supply to 3500 years based on current energy consumption” (Oak Ridge National Laboratory 2000). 13  “Research on methane hydrate to date has not revealed technical challenges that the committee believes are insurmountable in the goal to achieve commercial production of methane from methane hydrate in an economically and environmentally feasible manner.” See Department of Energy (2010, p 6). 14  The European Union organization Fusion 4 Energy, describes fusion as follows: “Fusion is the process which powers the sun and the stars. It is energy that makes all life on earth possible. It is called ‘fusion’ because the energy is produced by fusing together light atoms, such as hydrogen, at the extremely high pressures and temperatures which exist at the center of the sun (15 million °C). At the high temperatures experienced in the sun any gas becomes plasma, the fourth state of matter (solid, liquid and gas being the other three)” (Fusion for Energy 2019). 12

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heads the US research unit at Oak Ridge, Tennessee, goes on to say, “It’s not just empty words, it’s actually a reality … . The scientific principles have been demonstrated, and it’s a matter now of raising it to industrial scale” (Muskus 2017). This means, Sauthoff continues, that “… 5 pounds of hydrogen, a raw material readily available everywhere, can yield the same amount of energy as 90 railroad cars full of coal” (Muskus 2017). The quest for virtually unlimited supplies of energy from nuclear fusion started about 60 years ago (US Department of Energy 2015). The US Department of Energy (2015) describes the quest for fusion as “the most challenging program of scientific research and development that has ever been undertaken … . The scientific progress has been tremendous.”15 Nuclear fusion’s feedstock is deuterium16 from the oceans which promise unlimited supplies. Other predictions, such as EU’s organization, Fusion 4 Energy, put nuclear fusion’s arrival as soon as the middle of this century.17 With fusion energy scientists believe that humans would conceivably have enough energy to create many of the bi-products derived from petroleum. The large variety of products derived from petroleum is often underappreciated.  Leif Wenar  (2016), in his excellent book, Blood Oil, lists at least 40 such products.18 Fusion would also eliminate the need for conventional nuclear fission power plants and their attendant problem of the indefinite containment of radioactive waste. This is still a troublesome problem. The World Nuclear Association reported that, “Around 11% of the world’s electricity is generated by about 450 nuclear power reactors. About 60 more reactors are under construction, equivalent to about 15% of existing capacity” (World Nuclear Association 2019).  “The pursuit of fusion energy embraces the challenge of bringing the energy-producing power of a star to earth for the benefit of humankind. The promise is enormous—an energy system whose fuel is obtained from seawater and from plentiful supplies of lithium in the earth, whose resulting radioactivity is modest, and which yields zero carbon emissions to the atmosphere. The pursuit is one of the most challenging programs of scientific research and development that has ever been undertaken …. The scientific progress has been tremendous, ….” (US Department of Energy 2015). 16  “Deuterium is an isotope of hydrogen with a neutron and a proton in its nucleus. Most hydrogen just has the one proton in its nucleus” (Wikipedia n.d.-b). 17  “Fusion will be available as a future energy option by the middle of this century and should be able to acquire a significant role in providing a sustainable, secure, and safe solution to tackle European and global energy needs” (Fusion for Energy 2019).  18  Here is the list of products and agricultural services that Leif Wenar provides in his book introduction: “asphalt, aspirin, balloons, blenders, candles, car bumpers, carpets, contact lenses, crayons, credit cards, dentures, deodorants, diapers, digital clocks, dinnerware, dyes eyeglass frames, furniture fabrics, garbage cans, glue, golf balls, hair dryers, infant seats, lipstick, lubricants, luggage, paint, patio screens, pillows, shampoo, shaving cream, slippers, syringes, tents, tires, toothpaste, toys, umbrellas, vinyl, vitamins, and wall paper. The role of oil in world food production is also significant. Modern agriculture depends on oil, not only to power farm machines but also for fertilizers and sprays. The Green Revolution of the twentieth century–which helped to double agricultural yields and the human population in a generation—grew on the nitrogen extracted from oil. As the philosopher John Gray has put it, ‘intensive agriculture is the extraction of food from petroleum’—yet another way in which oil today sustains the species at its size” See Wenar (2016). 15

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Of course, nuclear fusion would also eliminate the need for coal-fired power plants that continue to emit carbon dioxide that contributes to climate change whether lukewarming or catastrophic.19 The New  York Times, on July 1, 2017, reported, “Overall, 1600 coal-fired electrical plants are planned or under construction in 62 countries, according to Urgewald’s tally, which uses data from the Global Coal Plant Tracker portal. The new plants would expand the world’s coal-fired power capacity by 43 percent” (Tabuchi 2017). On average a coal-fired power plant provides about 1 gigawatt (GW) or more in electrical power capacity (Vaughan 2017). Workable fusion power plants would eliminate the need to burn fossil fuels for energy and allay fears of human-induced climate change.

3.3  Energy from Thorium Reactors (Whitman 2017) On August 28, 2017, ExtremeTech, a news agency, let the world know that the Netherlands had turned on the first thorium-based nuclear power plant in operation today, though it has been tried in the past and is quite promising. In doing so, the Netherlands has shown the world that thorium is a viable source of energy. But now the world awaits more news about how the plant is doing. So far, no negative news is good news about thorium’s prospects for most other countries of the world. The prospect of energy from thorium reactors is not new. The element thorium itself was discovered by the Swedish scientist Jöns Jacob Berzelius in 1828 and was named after the Nordic/Germanic god, Thor, whose hammering caused thunder from the heavens. In the late 1930s, the famous nuclear scientist Glenn Seaborg experimented with thorium (Martin 2012, p 49). Seaborg, who discovered or co-discovered more than ten different elements and was involved in developing the atom bomb through the top-secret Manhattan Project in the early 1940s (Martin 2012, pp 47–52), experimented with both uranium and thorium. The world chose to develop uranium-based nuclear power since uranium could be used to create atom bombs, while thorium cannot be used as directly as can uranium for such purposes. Seaborg’s career overlapped the start of the Cold War and the Soviet Union’s first denotation of an atom bomb on August 29, 1949. This detonation was why uranium-based fission power in the United States attracted the lion’s share of research and development funding from the US government. Thorium-based power fell by the wayside but remained in the minds of many committed nuclear power researchers, such as Alvin Weinberg (Martin 2012, p 50). It was under his leadership that the United States did eventually return to experiment with the liquid fuel thorium reactors (LFTRs) from 1959 to 1973 at the Oak Ridge National Laboratory in Tennessee (Martin 2012, p 123).

19

 For discussion of lukewarming climate change see Michaels and Knappenberger (2016).

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The Nixon administration ended the program in 1973 in favor of liquid metal breeders favored by their advocate, Milton Shaw (Martin 2012, p 126). Weinberg continued to believe in thorium as a feasible source of energy and that thorium was even a better fuel for nuclear power than the uranium-based nuclear power plants. He believed that thorium was more plentiful and a safer substance to mine and handle than uranium (Martin 2012, pp 121–144). Later, a nuclear power station was built that was partially fueled by thorium. That power plant ran from 1979 to 1989 and was referred to as the Fort St. Vrain Generating Station, at Platteville, Colorado. This electrical generating plant relied on “a combination of fissile uranium and fertile thorium microspheres” (Wikipedia n.d.-c). The station generated about 330 megawatts (MW) of electricity. It was discontinued due to a number of problems, namely, water infiltration and corrosion, electrical problems, and other operational issues causing it eventually to become too expensive to continue operating (Wikipedia n.d.-c). Eventually, the US government lacked the will and resources to continue with both thorium-based and uranium-based sources for electricity. The US government finally opted to continue with uranium-based power plants because, again, it is a better fit for the US national defense strategy. As economists might say, the United States became “path-dependent” upon uranium-based nuclear power, making a change to thorium too expensive and disruptive. Whether to support research and development of nuclear thorium generating power, however, is still in dispute in the United States. The opposition against thorium-­based electric power often points to experiments mentioned earlier. Those sceptics maintain that thorium is just too expensive and its safety is over-rated.20 Yet there are many credible advocates who endorse the development of liquid fuel thorium reactors (LFTRs).21

 One of two quite credible sources is Robert Alvarez. The reader can view Alvarez’s opposing argument in (Alvarez 2014). Alvarez in 2014 was a senior scholar at the Institute for Policy Studies and formerly was the senior policy advisor to the Energy Department’s secretary and deputy assistant secretary of national security and the environment from 1993 to 1999. Another, view that opposes thorium development in the United States is one held by Dr. Arjun Makhijani, president of the Institute for Energy and Environmental Research. His views are expressed in a discussion broadcasted on National Public radio moderated by Ira Flatow and joined by a major advocate of thorium energy, Richard Martin, a well-published science author and contributor to the Massachusetts Institute of Technology’s Technological Review. His book, referred to above, is a major source of information for writing this section. 21  Here’s a short list of persons who are advocates for the development of thorium as an energy resource, all of whom have made TED presentations that are available on-line: Sunniva Rose (TEDxOslo2013) who is holds a Ph.D. in Nuclear Science; Kirk Sorenson, who was a former aerospace engineer working for NASA and a later the chief nuclear technologist at Teledyne Brown Engineers and founder of Flibe, a business intent upon developing LFTRs; Sri Kumar Banerjee, nuclear scientist and metallurgical engineer who is the Indian Department of Atomic Energy’s Chair Professor at Bhabha Atomic Research Center (India’s equivalent to Los Alamos, NM, in the United States); Rusty Towell, Ph.D. In nuclear physics who worked more than 25 years with “atom smashers” in the United States. 20

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Besides the increasingly large number of thorium energy advocates, there are also several countries that are sufficiently convinced about thorium’s practicality as a future energy resource that they are willing to invest large amounts of resources to develop it. India is one such country. It is well endowed with thorium. As of 2012, India had 27 uranium-based nuclear reactors generating about 4.7 gigawatts (GW). The former Prime Minister Manmohan Singh of India, 2004–2014, predicted that India would build up to 62 reactors by 2025. These reactors are expected to generate 63 gigawatts. This will raise India’s electrical production by 25%. These new nuclear reactors will be mostly “advanced heavy-water conventional reactors that will run on an inexhaustible supply of thorium” (Martin 2012, p 144). India’s approach using thorium is a complicated three-stage development process. The reason is that, although less suited for weaponry than uranium, India has found a way that thorium can become integral to its nuclear weapons program. India desires to do this because it believes it is necessary to maintain nuclear weapons parity with two of its neighboring nuclear-armed countries, namely, Pakistan and China. One of thorium’s advantages as a nuclear fuel is that it reduces “the risk of weaponizeable material reaching the wrong hands” (Martin 2012, p 153). Thorium is attractive to India since India is blessed with abundant supplies of it, perhaps having more thorium than any other country in the world. Unfortunately, India has a poor record of reaching its nuclear energy goals. For instance, Homi Bhabha, considered the pioneer of nuclear energy in India, in the 1960s predicted that India by 1987 would be producing between 18,000 to 20,000 megawatts of nuclear power. By then the country was producing only 512 megawatts, much below Bhabha’s prediction (Martin 2012, p 147). Even so, India is the only country in the world with a three-stage program to use thorium reactors to attain its energy goals (Martin 2012, p 144). But by 2017, solar power had gained market share of energy provision due to solar power’s rapid cost decline. In May 2017, for instance, an auction of an energy contracts to provide solar energy was held in Rajasthan, the largely desert area of India. The bidding over less than 2 years for solar power contracts showed a rapid decline in the cost of solar energy. Table 5.3 shows this rapid decline of 43.8% in solar costs, in less than 2 years (Buckley 2017). Such a price reduction makes it difficult for the nuclear power, even thorium nuclear power, to compete with solar energy. Nevertheless, India’s demand for energy is predicted to grow at 10% per year. Furthermore, Rajasthan is India’s most arid and sunny region. The Rajasthani desert provides cheap real estate upon which

Table 5.3  Solar energy auction prices (Buckley 2017) Solar energy source Fortam of Finland Rajasthan desert in India

Date January 2016 May 2017

Price 4.3 rupees = 6.8 cents 2.4 rupees = 3.8 cents

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to locate significant acreage for solar power. This less expensive real estate might help compensate for the loss of electrical energy over the large distances between the Rajasthani Desert and India’s population centers where the energy would mostly be used. Whether or not India goes more towards solar or towards thorium-based power, the oil MENA countries will likely have less power to determine oil prices as consumers in India will increasingly use these two sources of power to substitute for oil-based sources of energy. China is determined to base part of its nuclear power program on thorium. As of 2016, China was operating 34 nuclear plants and 20 more were under construction (Silverstein 2016). By mid-twenty- first century, China expects to have in operation 400 nuclear reactors of various sorts (Conca 2015) including thorium-based22 and traveling wave reactors (Conca 2015). China’s most ambitious energy research program is about developing molten salt reactors and thorium. China hopes to commercialize the nuclear reactors in 15 years (Silverstein 2016). Since China had a small infrastructure created for its earlier nuclear power stations, it can support thorium power easier than can the United States. This is because the United States is saddled with nuclear power plants based on 50-year-­old nuclear technology and infrastructure built to support uraniumfueled power. China, on the other hand, can build its thorium nuclear power infrastructure with new technology specifically designed to support thorium-fueled energy which is safer, is easier to handle, creates smaller waste, and is abundant (Silverstein 2016). This will give China opportunities to lead the developing world in thorium-based nuclear power production technology. China is already exceeding the United States in its applications for international patent applications (see Chap. 7, Table 7.7) (Peter G. Pederson Foundation 2018).23 But information about exactly what these patent rights are is scarce. So, it is not farfetched that given China’s demonstrated eagerness to acquire experience and knowledge about thorium molten salt reactors, that China could conceivably replace much of the world’s dependency on fossil fuels from oil MENA countries with dependency on China’s cornered expertise regarding thorium molten salt reactors. In sum, thorium offers much promise as an alternative to fossil fuels. As mentioned earlier, the United States has already proven its practicality at Oak Ridge National Laboratories in Tennessee from 1959 to 1973, although there are some naysayers and that only molten salt reactors were tried then. But equally qualified specialists in nuclear energy matters claim that the experience with molten salt reac-

22  “China officially announced in February 2011 at a Shanghai scientific conference that it will begin a program to develop a thorium-fueled molten salt reactor (MSR), aka an LFTR” (Martin 2012, p 154). 23  Table 7.7 in Chap. 7 shows China’s outstanding record in its efforts to apply for patents. It’s not hard to imagine that some of those applications are for thorium power generation technology.

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tors proved positive. That experience gives hope for possibly more widespread use of thorium-based nuclear power. In any case, thorium-based nuclear power promises to be simpler, safer, cleaner, and more plentiful than uranium-based power. It is one of the most promising substitutes for the continued dependency on fossil fuels, particularly natural gas and petroleum. For example, China’s decision to become the world’s largest producer of electrical vehicles might be taken as a hint of China’s intent (Campbell and Ying 2018). India too is heading in that  direction. The minister of transport in India announced India’s intent that Indian car manufacturers make sure that at least 30% of their output of new cars be electrical by 2030 (Sharma 2018). Thus, with the success that is likely to occur in India and China, plus the already proven feasibility shown by the Netherlands, in their development of thorium-based nuclear power, oil-rich MENA countries have even greater reason to diversify their exports away from their dependencies on oil and natural gas revenues. Of course, if the Netherlands continues with its success, even the oil-rich MENA countries will want to adopt thorium as an alternative to burning their own oil and natural gas.

3.4  The Traveling Wave Reactor A traveling wave reactor is a type of nuclear fission reactor that can convert non- fissionable material into usable fuel (Wikipedia n.d.-d). Bill Gates, founder of Microsoft, and Nathan Myhrvold, the former chief technical advisor at Microsoft, founded TerraPower. Gates is now Chairman of TerraPower, and Myhrvold is its Vice Chairman of operations. They both are developing “safe, sustainable, and scalable energy solutions,”24 through TerraPower. They seem well on their way to doing just that by focusing on the “traveling wave reactor” (TWR). TerraPower’s major goal is to activate its first TWR within the next 20  years. Interestingly, the TWR would be based on molten salt (salt heated to liquid form) to assist in the recycling of spent uranium nuclear fuel. The nuclear waste from conventional nuclear heavy-water reactors (HWRs) and light-water reactors (LWR) can be used since there is much nuclear waste generated by HWRs. Only 1% of uranium is used in HWRs and LWRs to generate power. About 99%, therefore, is deposited as waste or “depleted uranium.” Supercomputer simulations of the TWR imply that there is enough depleted uranium waste from US nuclear power plants now stored near Paducha, Kentucky, that this waste could provide the United States with electrical energy for the next two centuries according to Bill Gates.25 Furthermore, John Gilleland, who is TerraPower’s chief executive officer, believes that, given supplies of depleted uranium as fuel plus the abundance of

24 25

 See the opening page of TerraPower’s website: www.terrapower.com  See Bill Gates TED presentation about the TWR reactor (Gates 2010).

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natural uranium, up-and-running TWR would be capable of supplying energy for humankind for a millennia without needing reprocessing.26 Gates opined that there would be enough fuel using the TWR “for the entire lifetime of the rest of the planet” (Gates 2010). When asked about when we should expect the TWR to be launched, he stated that it would take about “20 years to invent and 20 years to deploy” (Gates 2010). TerraPower is planning to build a 600 MW reactor by the early 2020s and then later a much bigger 1150 MW commercial plant (Conca 2015). China also is developing the TWR.  In September 2015, TerraPower and the China National Nuclear Corporation (CNNC) signed an agreement to mutually develop nuclear technologies, especially to focus on cost, safety, and environmental issues (Conca 2015). Like thorium-based molten salt reactors, the TWR offers a great deal of hope to the world in terms of a safer, simpler, and almost a limitless supply of electrical energy. These two sources, if brought to fruition within the next 40 years, may pose the greatest threat to oil-rich MENA’s pricing power. This is why it is urgent that oil-rich MENA diversify their economies from the present dependency upon oil exports. All of MENA might even consider developing some of the sources of energy already mentioned above as well as others that will be noted later in the chapter. This would prepare them for the time they begin to run out of oil and natural gas reserves. For the oil-rich MENA countries, such a switch to these alternatives would free up more oil and natural gas for export to countries that still depend primarily on fossil fuels for energy. All four of these sources—methane hydrate, fusion nuclear power reactors, the thorium molten salt reactor, and the traveling wave reactor—have various possibilities as breakthrough sources of energy. This means that oil and natural gas are becoming thin threads upon which oil-rich MENA countries are suspending their economic futures. Should none of these four potential sources of energy fulfill their promises, would renewable energy already on the market be able to take their place? Will renewables threaten the oil and natural gas pricing power of the oil-rich MENA countries? The next section looks at the future of renewables.

4  The Threat of Renewables to Oil MENA This section explores whether renewables could significantly threaten oil MENA. The next chapter explores how the demand for oil would be reduced by efforts to fully price the use of oil and to mitigate climate change.

26

 See interview script of interview of John Gilleland (Michal and Blake 2009).

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4.1  Competition Against MENA Oil Renewables, so far, offer only some limited competition to the oil-rich MENA countries as a source of energy. This is for at least two reasons. First, renewables are location specific. Solar energy is most practical in sunny climates; energy from wind turbines is most abundant in windy and less populated areas; hydroelectricity is mostly developed in mountainous and water abundant locations to tap falling water; geothermal is largely found in places that are geothermally active, such as Iceland and New Zealand. Second, crude petroleum is mostly used for transportation purposes. Transports are obviously not location specific. Thus, the location specific nature of renewables lessen their attractiveness for transportation use. Of course, should batteries become much more improved, then electrical energy from renewables might become considerably more attractive for transportation as it is already used in the small percentage of vehicles that are electrical. In 2015 crude oil fueled 90% of the world’s transportation (Smil 2017a). United States approximated the rest of world’s use of petroleum given that, “In 2017, petroleum products accounted for about 92% of the total U.S. transportation sector energy use” (EIA 2018 explained). Thus, only about 10% of the world’s transportation is fueled by other sources of energy. These sources include coal for steam ships and railroad locomotives in many third-world countries. Furthermore, electricity is used for subways in urban areas and interurban transportation in densely populated areas, such as parts of Europe. Renewable energy is mostly used to supply electrical grids, which in turn supply energy for homes, offices, and industry. In comparison to the enormous market for oil and natural gas which is the concern of this book and its effect on oil-rich MENA countries, currently the impact of all renewable energy, from whatever source, is yet quite small. Growth for renewables has been very rapid, but the base from which it is growing has been small. Figures 5.3, 5.4, and 5.5 illustrate this point: Renewables in 2018 were about 4% (BP 2019) of the global energy pie compared to about 85% for fossil fuels (oil, natural gas, and coal). So, it does not look as though renewables are a large threat to MENA’s pricing power, yet. Figure 5.4 has a logarithmic scale on the vertical axis, which compares growth better than a linear scale. However, the logarithmic scale distorts relative magnitudes, which are better compared with the linear scale on Fig. 5.5 or the pie chart of Fig. 5.3. If we take 1998 as the base starting point and think in terms of millions of tons27 of oil equivalent energy (Mtoe), then the total consumption of worldwide energy from wind, solar, and other renewables was a mere 42 Mtoe compared to the energy equivalent of oil and natural gas consumed then at 5529 Mtoe. The portion of the world’s energy consumption provided by wind, solar, and other renewables increased exponentially, to an estimated 420 Mtoe by 2016 (BP 2017). That is an increase of 27

 One metric ton is 1000 kg or about 2204.6 US pounds versus the US ton that is 2000 US pounds.

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Hydro Electric 6.9%

Renewables 3.2%

Nuclear Energy 4.5%

Oil 33%

Coal 28%

Natural Gas 24% Fig. 5.3  Global energy consumption 2016 by type (BP 2017)

Millions of tons oil equivalent

10,000

1,000

100

10 1998

2000

2002

2004

2006

2008

Oil

Natural Gas

Coal

Hydro Electric

Renewables

Total

2010

2012

Fig. 5.4  Global consumption by energy resource–logarithmic scale (BP 2017)

2014

2016

Nuclear Energy

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5  MENA and Alternative Sources of Energy 5,000

Millions of tons oil equivalent

4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 1998

2000

2002

2004

2006

2008

2010

2012

Oil

Natural Gas

Coal

Nuclear Energy

Hydro Electric

Renewables

2014

2016

Fig. 5.5  Global consumption by energy resources (BP 2017)

10 times or an order of magnitude and an annual growth rate of 13.6% per year. The International Energy Agency reported that in 2018, renewable energy was no longer growing exponentially but remained at, nevertheless, a very high level of annual growth. The added electrical generating capacity approximately equaled 2017’s 180 GW (gigawatts), which is, “… only around 60% of the net additions needed each year to meet long-term climate goals” (IEA 2019). It is, nevertheless, a small percentage of world energy consumption compared with oil and natural gas. Oil and natural gas use grew to 7622 Mtoe in 2016, or an increase of 38% over the same 18-year period (BP 2017; Clark 2017, p 3), a smaller percent increase, but a larger absolute increase. This does not mean, however, that renewables will not compete with energy from crude oil and natural gas in the future. If renewables were to grow at the same rate as they had over the period 1998–2016, their consumption would exceed the current consumption of oil by about 2035. Renewables are a major threat to oil-rich MENA countries if consumers switch from petroleum or even natural gas-powered vehicles to electrically powered vehicles that rely upon renewably supplied energy. But, as evidence seems to be increasing and as the discussion below indicates, solar and wind energy are beginning to show signs of too many external effects on wildlife to greatly impact the petroleum and natural gas pricing power of oil-rich MENA. Already increased production and use of electrical vehicles is beginning to occur at a rapid pace. As mentioned earlier, India is planning to allow only electric cars to be sold in the nation by 2030 (Watties 2017). This appears feasible due to India’s desire to reduce high levels of urban pollution, its burgeoning solar energy sector,

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and the expectations of increased energy availability from thorium molten salt reactors that should be available by then as well (see discussion in Sect. 3.3). Furthermore, hybrid cars and Tesla cars have already been on the auto market for years in the United States.28 Increasingly auto manufacturers are shifting their R & D towards an anticipated electrical car revolution (Clark 2017, pp 1–2). The modern city of Shenzen, China, boasts of having, “In just ten years, . . [electrified] 100 percent of its public buses—16,359, to be exact” (Poon 2018).29 Expanding China’s focus on electrical cars, it too is ramping up production of both electrical vehicles and hybrid vehicles, “Some of those goals include plans for total annual sales of 2 million electric and gasoline-electric hybrid vehicles by 2020 and for all manufacturers to have at least one electronic vehicle produced by 2019” (Harini 2018). The major question to be answered is given this sudden switch in consumer tastes towards electrical vehicles: Will renewable energy play much of a role in supplying the additional electrical energy that will be required? The answer seems to be no, at least in the short run, because there are significant constraints to most renewable energy sources. For instance, although TerraPower (discussed in Sect. 3.4) supports the pursuit of renewable sources of energy, it still believes that renewables cannot provide all the energy the world will require (Michal and Blake 2009). Since transportation plays such a big role in energy consumption, renewables are perhaps more suited to domestic provision of electricity, such as heating, cooling, and cooking. In 2018, Google itself became totally reliant on renewable energy, i.e, solar and wind (Hardawar 2018). Even so, Google concluded after an extensive study that renewable energy could never become price competitive with the energy provided by coal. The study also pointed out that a complete switch to adopting renewable energy would not necessarily save the earth from significant climate change. This was because, as mentioned at the beginning of this section, of renewable energy’s intermittency and its dependence on suitable geography which is sparse (Konigstein and Fork 2014).

 Perhaps a little caution would be wise about promoting electrical cars too much. A study released in April 2019, from the IFO think tank in Germany reported that “a popular electric car releases more carbon dioxide into the atmosphere than a comparable diesel engine.” The study involved accounting for the CO2 emissions associated with the production of batteries and the heavy use of coal in Germany to produce electrical energy to recharge the batteries used in the electrical vehicles. But this may not be a problem in countries highly dependent on nuclear power, such as France (Editorial Board WSJ 2019). 29  The author would like to thank Benjamin Binion for his reference to this source in his paper submitted to one of the authors of this book in senior environmental economics course. The original source found in his citations in his unpublished semester’s paper entitled, “Economic and Environmental Impacts of Electric Transportation in China,” submitted April 30, 2019. 28

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Another reason is the increasing concern about the renewable energy’s impact on wildlife. Dr. Fritz Vahrenholt,30 who was once a German Senator and Deputy Environmental Minister for Hamburg (Vahrenholt and Lünin 2012), has pointed out that, “Renewables are the most land hungry form of energy generation. To replace power generated by one typical coal-fired power station with renewable energy requires an area around 500 km2 [193 square miles or a square of 13.89 miles on each side]” (Vahrenholt 2017, p 11). Wind turbines, furthermore, have been accused of killing 240,000 bats in Germany (Vahrenholt 2017, p 12). Robert Bryce, energy journalist and fellow at the Manhattan Institute, wrote, “There is no logical reason to conclude renewables can or will replace hydrocarbons anytime soon … . The best renewables can ever hope for is to be bit players in America’s and the world’s overall energy mix” (Bryce 2017). From Bryce’s perspective, oil-­rich MENA countries have little to fear from renewable energy as a substitute for the hydrocarbon-based energy they provide. According to the energy expert Varclav Smil, “… there is no doubt that the combustion of fossil fuels—gradually becoming more efficient, cleaner, and less carbon-intensive—will dominate the global energy supply during the next two generations” (Smil 2017b). But he goes on to state that, “There is little doubt that our continued reliance on fossil fuels will be first augmented and then progressively supplanted by renewable energies: major hydro energy projects in Asia and Africa and by wind-­powered and solar-powered generation conversions on all continents” (Smil 2017). Coal, of course, is very indirectly a type of solar energy in that it is essentially the result of plants that have photosynthesized solar energy. Coal, then, is solar energy in the form of fossilized plants, that is, “fossil fuels”, stored for over billions of years. It is finally released by combustion into the atmosphere by humankind eons of time after its interment. Despite Bryce’s seeming belittlement of renewable energies as an important energy source now and Smil’s belief in the dominance of fossil fuels for the next couple generations, the renewable energy sector has gained popular appeal largely due to their recent extraordinary growth. And contrary to Bryce’s analysis, Financial Times journalist Pilita Clark  (2017, p  3) believes that clean renewable power’s recent growth acceleration has been so fast that clean energy is forcing the fossil fuel industry to contemplate the possibility the twenty-first century will be the industry’s last century of importance. Clark agreed, however, with Smil that for the next couple of generations, the world will continue to rely upon fossil fuels. The rising opposition by environmental groups, however, may slow the deployment of renewable energy’s potential, if not thwart it, altogether. In December 2013, the US Department of Interior weakened protections for eagles in exchange for  Fritz Vahrenholt was a founder of the environmental movement in Germany. He earned a Ph.D. in Chemistry and at the University of Hamburg, he holds the title of Honorary Professor in the Department of Chemistry. Also, he is chairman of the German Wildlife Foundation and member of its advisory council. He gave a  presentation titled, “Germany’s Energiewende a Disaster in the Making,” to the House of Commons in London on January 2017

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companies’ provision of wind energy by issuing 30-year permits to injure and kill eagles. This ruling provoked the opposition of the premiere US bird conservation association, the Audubon Society (n.d.). In Germany, the director of the German Wildlife Foundation (Deutsche Wildtier Stiftung), Michael Miersch, spoke out against wind power and biofuels. Of all places, he spoke before the House of Lords in London, stating, “The destruction of nature by the land-hungry wind and biogas industries is the opposite of what the environmental movement used to fight for … .[T]he Greens have destroyed our landscapes and killed millions of birds and bats” (Miersch 2017, p 1). Miersch further argued that Germany’s demand for biofuels is partly responsible for the destruction of forests in Sumatra. There, palm oil is increasingly cultivated to produce biodiesel fuel. Biodiesel is used to protect against climate change, and palm oil is used to meet Germany’s requirement of adding 7% biofuel to diesel fuel. Miersch explains that for biodiesel fuel, “Maize monocultures totaling 2.5 million hectares dominate the landscape in many German regions today. This is an area the size of Sicily. According to Torsten Reinwald from the German Hunting Association, ‘the past 30 years have seen a 22-fold increase in the area under maize cultivation’” (Miersch 2017, p 5). Michael Shellenberger, who was  a co-founder of the Breakthrough Institute and was named as one of a Time magazine’s Heroes of the Environment (2008), came out against wind and solar energy because of their threat to wildlife. He preferred nuclear power (Shellenberger 2019). In sum, the US Audubon Society, the German Hunting Association, and certainly the director of the German Wildlife Foundation and environmental advocate, Michael Shellenberg, all seem to believe that the total external costs of renewable energy to natural habitat have not been included in the market price of the use of such energy. If it were to be included, perhaps less quantity of it would be in demand.

4.2  The Cost of Renewables Besides the increasing environmentalist opposition to biogas and solar and wind energy, there are indications that the more reliant a country becomes on wind and solar energy, which are the most rapidly growing sources of renewable energy, the costlier those options become and thus less practical. Germany is a prime example of such limits. Further growth of energy from wind and solar energy sources appears to be considerably constrained in Germany. One reason is that further growth in wind and solar energy must be backed by conventional sources of energy, including coal-powered and natural gas-powered electrical plants since Germany plans to shut down all its nuclear power plants by 2032. This continued use of conventional energy sources is because of the energy intermittency associated with wind and solar energy. This has, ironically, meant that Germany was destined to emit more carbon dioxide by permitting the construction of already

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planned coal-fired power plants.31 Indeed, between 2011 and 2015, Germany had scheduled to open 10.7 GW (gigawatts) capacity of coal-powered energy. This will provide more electrical power than provided in Germany in the two decades after the fall of the Berlin Wall (Wilson 2014). Thus, to keep sufficient backup power for the wind and solar power and to provide the energy lost from the eight closed nuclear power stations, Germany actually was emitting more carbon dioxide than before the switch from nuclear power to renewable power continued (Wilson 2014). As of 2015, Germany has the third highest renewable energy consumption in the world following the United States in first place and China in second place (Worldatlas 2017). Furthermore, politicians in Germany are beginning to worry about the future of renewables especially since a recent study “by the RWI Leibniz Institute for Economic Research finds that 61% of Germans wouldn’t want to pay even one eurocent more per kilowatt-hour of electricity to fund more renewables” (Peiser 2017).32 What might be dissuading consumers from wanting renewables is likely the incremental costs per kilowatt hour as the percentage of total energy provided by renewables to consumers increases. This appears to be true across 28 members of the European Economic Union as Fig. 5.6 shows. Both the Germans and the Danish are at or near the top right part of the figure, showing that the citizens in these ­countries are paying the highest rates, at about 30 euro cents per kilowatt hour, or about 34 US cents per kwh in 2019 dollars (WSJ 2019). Denmark and Germany are shown as the two dots just off the line in the far upper right of the graph. Figure 5.6 also shows that these two countries have the largest renewable energy capacities in terms of watts per capita compared with the other 26 countries that are shown in the figure. The relationship between the percentage of kilowatts of wind capacity and solar electrical energy capacity per capita and total cost per kilowatt hour is quite strong and the regression line quite significant.33 Two elements might contribute to higher energy costs in countries that provide the greater percentage of their total electrical power from renewable power. First, since wind and solar are the fastest-growing renewable energy sources used for electricity, they are also the most intermittent and relatively disbursed compared to other sources of energy such as coal-fired power plants, natural gas, or nuclear power. This means that when the wind is not blowing and the sun is not shining, both renewables must be backed up by more conventional sources, that is,

 Fritz Vahrenholt, referred to earlier, wrote, “Carbon dioxide emissions have not reduced substantially since 2011  – in 2016, they even increased—and electricity consumption has not reduced either” (Varhenholt 2017, p 10). 32  RWI is the acronym for Rheinisch-Westfalisches Institute. 33  The coefficient of determination was 0.78 between the two variables, meaning that 78% of the total variation in Euros/kwh was associated with kw/capita of electricity from wind and solar sources. The relationship is quite significant, with a p-value less than 0.000001. This means that there is less that one in a million chances that we have falsely rejected the hypothesis that there is no linear relationship between the variables. 31

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0.35 0.30

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Fig. 5.6  Europe electricity prices vs installed wind and solar capacity per capita (Eurostat 2018; Eurobserv’er 2018; Wind Europe 2017) Euros per KWH are 1st Quarter 2018 household costs of energy per KWH in each of the 28 members of the EEU (European Economic Union). Installed solar energy capacity is for the EEU by end of 2017. Installed wind energy capacity is for the EEU by end of 2017.

non-­renewables. This means the conventional sources must often be powered-up to replace the missing renewable energy. This is similar to stop-and-go driving a non-­ hybrid car, the result of which is lower mileage efficiency for the non-hybrid cars and, analogously, more energy consumption from the more conventional electrical power sources. Those sources, in Germany, are coal-fired power plants as well as nuclear-powered plants. Using these conventional power plants as backup of renewable energy guarantees a steady flow of electricity. Once wind and solar  energy become a large proportion of a grid’s total energy supply in a country, this stop-and­go phenomenon comes into effect more often (Ritchie 2017). It should be mentioned that the above analogy does not hold for hybrid cars. Such cars are different than most conventionally powered vehicles, that is, non-­ hybrids. Hybrid cars are different in that they consume less energy from braking with stop-and-go driving than normally powered cars. Energy consumption has been reduced significantly in hybrid cars with regenerative braking resulting in higher mileage than conventional cars. As of 2017, Germany’s percentage of all cars produced that were together electrical and hybrid cars was nearing 2% and continuing to increase (Szymkowski 2017). Second, the increased existence of renewable energy sources adds to the capital costs of a nation’s energy infrastructure. This is because the maintenance and repair costs of both the renewables’ infrastructure and the conventional sources’

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infrastructure must routinely occur. Before the renewable sources existed, less redundancy was required since only conventional sources had to be repaired and maintained. Furthermore, the grid would have to be modernized to coordinate fluctuating sources of energy from both renewables and fossil fuels (Royal 2017). Similarly, the energy lost by the intermittent use of fossil fuels to back up renewables could be mitigated by storing the energy. Battery technology may help overcome this problem, but so far it has not been economical enough to apply at a scale needed to compete with fossil fuels. Until renewable energy can be economically stored, it will not be able to compete effectively with fossil fuels. Similar problems apply to other storage methods such as water that is converted into hydrogen energy via electrolysis. This could occur when the grid is oversupplied with energy. The excess energy could be used to create hydrogen, a pollution-free energy source. Despite these drawbacks, trends are in place that promise that solar and wind will play a larger part in supplying large corporations in the United States with renewable energy. This is so despite President Trump’s intention to withdraw from the Paris climate accord. Such companies as Amazon, Twitter, Target, and Nike are just a few of the 900 US businesses that have sent an open letter to inform the United Nations that they are pledging “to help reduce the country’s carbon emissions by 26% by 2025” (The Economist 2017). Finally, the Renewables 2018 Report indicated that in 2017, “Renewable power generation capacity saw its largest annual increase ever with an estimated 178 gigawatts [GW] added globally. New solar photovoltaic generating capacity alone was greater than additions in coal, natural gas and nuclear power combined … . China, Europe and the United States accounted for nearly 75% of the global investment in renewable power and fuels … ” (REN21 2018). The intermittency of renewables and the dual infrastructure required to use both renewables, wind and solar, have together increased the costs of energy in the United States. The six of the top ten states in the “Clean Technology Leadership Index” (CTLI) are among the top ten states where consumers must pay the most for their electricity. Washington and Oregon, also in the top 10 ranked CTLI states but have exceptionally inexpensive hydroelectric sources of power for residential use, are exceptions and excluded from Fig.  5.7.  Also excluded  are  Alaska and Hawaii. They are excluded as outliers given their uniquely high prices for residential electric use and their separate location from the other 48 contiguous states. Figure 5.7 shows a statistically significant  regression line with a moderately strong relationship—that is, slightly less than 50% of the total variation in cost per kilowatt hour (kwh) is associated with the variation in ranking on the CLTI once exceptional states are removed34—between the state ranking on the CTLI scale and  These are considered exception in the for the following reasons: Alaska and Hawaii both have extremely high electricity rates due to their locations and are quite remote from the contiguous 48 North American US states. Both Oregon and Washington are blessed with abundant hydroelectric sources of energy compared to the other 48 states. Certainly hydroelectric is a renewable source of electrical power, but those sources of hydroelectric were already in place before the recent pursuit of wind and solar power occurring in the other 48 states.

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US CTLI Ranking of 46 States vs Residenal Electricity Rates, 46 => Highest ranked, 1=>Lowest ranked vs cents/KWH (excluding Alaska, Hawaii, Oregon, Washington) 23 21

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Fig. 5.7  Electricity cost increasing with cleaner energy technology (EIA 2017 electric; USCTLI 2017) Regression is by the author.

the electrical prices in each of US states (the regressions statistics are shown in the footnote below).35 In decentralized remote areas off the grid, renewables are probably the most economical source of electricity. In these cases, limited battery storage may be cheaper than establishing a grid infrastructure. Moreover, VOX, an online news media, reported that “Wind power costs could drop by 50%. Solar PV (photovoltaic) could provide up to 50% of global power” (Roberts 2017). 35  The coefficient of determination of was 0.49, that is about 49% of the variation in cost per kwh was associated with variation in the ranking of states, where a score of 46 is best in terms of cleaner energy, i.e., a larger proportion of the total electrical energy in the state comes from renewables, according to the US Clean Tech Leadership Index. The equation indicates that as states rank higher, people in the state pay more per kwh, specifically, for each unit increment in rating, people of the state pay about 14% of a cent more for a kwh of electricity. The p-value