CHAPTER 4 THE MIDDLE EAST: CHANGES, OPPORTUNITIES, AND OUTLOOK

• Jurisdiction: United States

International Minerals Acquisition and Operations
(Oct-Nov 1974)
CHAPTER 4
THE MIDDLE EAST: CHANGES, OPPORTUNITIES, AND OUTLOOK
Harry M. Montgomery, JR.
Regional Economic Advisor & Commercial Coordinator for the Bureau of Near East and South Asian Affairs, Department of State.
Washington, D.C.

TABLE OF CONTENTS

SYNOPSIS

A. Political and Economic Changes

B. New Wealth

C. New U.S. Role

D. Economic Prospects

E. Economic Cooperation: Joint Commissions

F. Export Opportunities

G. Industry

H. Infrastructure

I. Military Sales

J. Resource Sector

K. American Business Response

L. The Competition

M. Trade Balance and Financial Flows

N. Cultural Relations

O. Outlook

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A. Political and Economic Changes

Twelve months have brought dramatic political changes in the Middle East. Just over a year ago war had broken out on Israel's frontiers with Egypt and Syria. Then, as we alone provided military aid to help sustain Israel, Arabs imposed an oil export embargo with consequent great strains on our relations. Today, while we maintain our relationship with Israel, Arabs too look to us as holding the key to peace in the Middle East — and as principal outside partners in national development. Diplomatic relations with Egypt and Syria, broken in 1967, have been restored. The Soviet role in the area, once large, has declined as the Egyptians and the Syrians turn more to us.

For the first time in history, Arabs and Israelis have begun seriously to negotiate about their future relations. The October War changed perceptions of the military balance in the Middle East, and of the viability of the post-67 situation. Following cease fires and limited troop withdrawals in Sinai and the Golan Heights, further negotiations, dealing with still more difficult questions on the basis of progress and perceptual changes to date, are soon to get underway.

The economic changes in this brief moment in the life of an ancient land have been equally dramatic, and perhaps even more profound. It is these which I will principally address today. Without in any way implying neglect for Israel, about which the American public is well-informed, my focus today will be on the Arab lands stretching 5,000 miles east from Morocco to Oman, and on Iran, these together comprising some 160 million people.

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The October War, in which the Arab oil producers used the most powerful economic weapon at their disposal — the export embargo — accelerated movement already underway towards a sellers' market, higher prices, and producer countries' full ownership and control of their oil. Rising consumption and declining domestic production have made the non-Communist world highly dependent on the Arabs and Iranians for their oil supply, these producers last year accounting for nearly 85 percent of European consumption, 10 percent of U.S. consumption, and over 30 percent of U.S. imports. Arab and Iranian oil revenues have risen from $18 billion in 1973 to over $85 billion this year. Per capita income in the sparcely populated oil producing countries has soared to dizzy heights — over $25,000 this year in the United Arab Emirates.

B. New Wealth

Chance and politics have shown oil producers the apparent benefits of joint action through OPEC, their cartel. The economic lesson has been learned. Whether or not there is some adjustment in the prices which have quadrupled since 1973, this is likely to be a permanent revolution, an historic shift in power and wealth to include Arabs and Iranians in the privileged circle of the world's high and mighty. That certainly is the intent of the leaders of these countries.

Given the newness of wealth and small populations of several major oil producers (Saudi Arabia, the United Arab Emirates, Kuwait, Libya, and Qatar together have scarcely 10 million people), total buying power in the Middle East is well beyond its present needs or capacity productively to employ capital. With revenues almost triple the value of current imports, large financial surpluses are accumulating. The deferred nature of this buying power means less inflationary demand for today's goods and services and potential capital to meet needs elsewhere, but also creates institutional problems of how to recycle the money to where it is needed, and how to treat with unfamiliar creditors whose financial reserves (potentially $300-650^* billion by 1980) are disproportionate to other economic indices and very large relative to present world reserves of less than $150 billion. Clearly, we need institutional changes

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to assign these states a larger voice and responsibility in world financial institutions, and in extending aid to the world's poor — people whose problems have been aggravated by higher prices for oil, food, and other commodities.

Already the new rich of the Middle East, in the ten months from the first major price rise a year ago to September 1 have committed $18 billion to foreign credits, bilaterally or multilaterally, $7.8 billion of this as grants or concessional loans. The peoples of the Middle East are by tradition generous. It will not take generations before this new wealth turns to philanthropy. However, both the American and the Middle East oil producer must change their views about the latter's role and responsibilities in the world economy. Formerly, the Middle Easterner's was the small country of international trade theory, the perfect competitor whose egotism was the mirror image of his impotence in the face of world market forces. Now the principals in the OPEC cartel must recognize that their market power means responsibility too. Similar to our own their actions impact on the world economy; they too must be solicitous of its health. (This is the serious concern to which President Ford and Secretaries Kissinger and Simon addressed themselves last month in calling for cooperation and restraint in oil pricing.)

Ultimately, this global argument will be persuasive — especially since the oil producers' surplus funds must be invested mainly in the economies of the developed world. However, acknowledgement of global interdependence will not be quick and easy. The oil producers have yet to see the limits on their bargaining power. They know their oil is a wasting asset, typically the only significant physical asset they have to assure their peoples' futures. Besides, despite what our economists have told them, they are convinced that they have been grossly underpaid for past oil exports (if bringing them nearly $10 today, could a barrel have been worth less than $2.50 only thirteen months ago?) With income already beyond current needs, it is not surprising they question what assets they can buy with oil dollars which are comparable in safety and real rate of return to oil kept in the ground.

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C. New U.S. Role

Most Middle East governments have now asked for American help in their national development. We have responded affirmatively because we believe it to be in our mutual interest. As a government, our paramount purpose in the Middle East is helping to achieve a just and durable peace, one that brings stability and well-being to an area which repeatedly has threatened to be an explosive element in world politics. We believe our growing economic role in the Middle East, as it encourages a turn from preoccupation with war to internal development, supports and complements our peace efforts.

One element is aid. The Administration has asked Congress for $250 million this...