Oil and democracy: The uneasy link Wednesday, 09 March 2011 01:19

By: Tofol Jassim Al-Nasr

Middle Eastern unrest is sending shockwaves across the globe, spiking commodities markets and reflecting on consumer prices. Ironically, the scenario that ensues is beneficial to oil-exporting countries, many of which are situated in the Middle East. In the Arabian Gulf alone, the predominantly energy fuelled monarchies sit over over 60 percent of the world’s proven energy reserves, confirms the International Economic Bulletin. According to the Energy Information Administration (EIA), the Gulf Co-operation Council (GCC) countries and Iran are ranked amongst the world’s top ten oil reserves.

While Egypt’s oil production isn’t enough to meet its domestic demand, its dominance over the critical maritime route – the Suez Canal – amplified speculators’ fears. Every day, about 2.5 million barrels (bbls) of oil pass through the Canal, which represents approximately 5.5 percent of world exports, according to official forecast figures. As for Libya, the next domino that fell after Egypt, Bloomberg assesses that the nation is a “sizeable producer”, pumping about 1.6 million bbls per day.

Analysts are quick to point out, however, that despite these hindrances, there is plenty of spare production capacity to cover Libya’s losses. Spare capacity refers to the amount of oil that can be pumped within 30 days and sustained for a period not less than 90 days. The Organization of Petroleum Exporting Countries (OPEC), for example, has an estimated 5 million barrels per day (bpd) of spare capacity. Most of that spare capacity is owed to Saudi Arabia, which, according to Reuters, has 3.5 million bpd. Not to mention non-OPEC spare capacity of about 1.6 million bpd from the Organization of Economic Co-operation and Development (OECD), as reported by their latest report.

What is truly driving oil prices higher and higher are what Citigroup Inc. refer to as the “fear premium”. Speculators are feeding off the fear that the domino effect of unrest will continue toppling one regime after another in the Middle East. Reading the newspaper headlines over the past few weeks is reason enough to believe those fears.

Bahrain and Yemen, although small, are influencing oil markets in proportionally unexpected ways. Sandwiched between two heavyweights, Saudi Arabia and Iran, these two otherwise inconspicuous countries find themselves at the pulse of the region’s turmoil. After all, Saudi Arabia, the Middle East’s most sizeable economy, and the world’s largest oil exporter, houses wide disparities within its borders. Most significantly, Saudi Arabia’s Shiite minority, which many analysts claim are a larger number than Saudi figures show, may be encouraged by neighboring Bahrain’s dissent.

After over 100 Saudi political activists and intellectuals called for reform last month, a series of protests broke out in the Kingdom last week. Considering the Saudi government’s tight grip over the media, the only sources lending to the number and nature of the protests are YouTube videos claiming that about 2,000 people participated. Chanting “peaceful, peaceful”, the protestors’ demands are not really outrageous. They asked for the Kingdom to rule as a constitutional monarchy, much like its fellow neighbours such as Qatar. King Abdullah responded by lavishing his citizens with spending – and it is not petty change; $36 billion in social welfare. According to the Centre for Economics and Business Research, oil could hit $200 per barrel if political unrest spread to Saudi Arabia.

Will Saudi Arabia soon see the same political unrest as Tunisia, Egypt, and its OPEC-brother Libya? That remains to be seen. What is ironic is that the more violent the unrest, and the closer it is to the oil wells, the higher that it sends prices. As prices rise, so do the contested autocrats’ paychecks. Meanwhile, their bank accounts swell and they are enabled to pacify their citizens by loosening the strings on public spending. It is like brainwashing citizens into oblivion by keeping their stomachs full and their minds numb.

In a previous article entitled, “Where Oil Fuels, not Hinders, Democracy”, I discussed the relationship between oil and democracy as defined by the scholar Michael L. Ross. He concludes that the “oil does hurt democracy”, with supporting quantitative evidence. In his study, Ross emphasizes the “rentier effect”, which is found in a country that receives “substantial rents” from foreign investors, both private and governmental. Ross identifies the “rentier effect” as a component of the “taxation effect”, which implies that oil-rich states have the ability to adhere to state budgets without heavily taxing their citizens. This, in turn, creates satisfaction amongst the citizens, who are less likely to demand accountability from their respective governments.

Saudi Arabia’s recent rationale falls squarely within the parameters of the “rentier effect”. As Ross reflects in a later study (2008), “the link between oil and monarchy may be no coincidence…oil rents may have helped royal families remain in power while their counterparts in oil-poor states were swept aside”. While this statement may be perceived in the context of coercive power, the “taxation effect” plays a great role in protecting leaders of oil-rich countries and is vital to the dominance of their respective regimes. Moreover, by funneling oil revenues to lower – or complete do away with – taxes and increase social benefits, leaders within oil-rich countries ensure the overall satisfaction of their citizens.

Democracy is a phenomenon that is created out of necessity. It is a grassroots operation that must come from the down-up, rather than the top-down, to be successful. Marina Ottoway argues that changes in a states’ political structure are “introduced from the top by an incumbent political elite”, however, that is a reaction to demands of social groups that would be “costly and dangerous” to ignore. The paradox is that in oil-rich autocracies, stifling of citizens’ political will is possible through heightened oil rents. Unless all of the Saudi Arabias out there are capable of staying ahead of their citizens’ expectations, they will not be able to effectively suppress dissent for prolonged periods.

| More...