• The Middle East Prepares for Economic Disruption
  • Alternatives for Germany

All cultures have the challenge of balancing the past and the present. But nowhere is the contrast between the two more apparent than in the Middle East. One is reminded of that five times daily, as a traditional call to prayer sounds across avenues lined with modern buildings and filled with pedestrians busy with their smart phones.

At present, the region is trying to balance historical sources of economic success with advancement into new avenues of growth. Blessed with immense reserves of high-quality crude oil, key producers are realizing that overreliance on petro-revenue may be dangerous. Amid new global dynamics, countries around the Gulf are seeking a new business mix.

In the years after World War II, the industrialized world became deeply dependent on petroleum. Factories were at peak production, and among their more prominent outputs were motor vehicles. People were driving more, and overland shipping advanced. Substantial investments in highways facilitated all of this; heavy equipment also used lots of gasoline.

Progress on all of these fronts was fueled by cheap oil. Prices per barrel remained within a range of $20 to $25 from the mid-1950s to the early 1970s, thanks to the control exerted by the world’s largest oil companies (known as the “Seven Sisters”). Governments in the Middle East retained close colonial-era alignments with western nations.

That all began to change 45 years ago, as kingdoms and emirates in the region established an increasing level of independence. The Organization of Petroleum Exporting Countries (OPEC) was formed in 1960, but rose to prominence in the following decade. Supply restrictions and outright embargos led oil prices to double in 1973, and double again in 1979. The dual shocks created immense wealth in the Middle East and immense inflation in the West. Heavy industry in the United States, and the factory towns they spawned, never fully recovered.

Oil revenue has allowed producing countries to provide employment and generous social benefits to their populations. Public payrolls as a fraction of total employment in the Middle East are four times the level seen in developed economies. For citizens, life is very comfortable.