Middle Earth (Part Two of Economist's survey of the Gulf States)

EVERY day some 16m barrels of oil leave the Gulf through the Strait of Hormuz. That is enough to fill a soft-drink can for everyone on earth, or to power every motor vehicle on the planet for 25 miles (40km). Gulf oil (including that from Iran and Iraq) accounts for 40% of global trade in the sticky stuff. More important, it makes up two-thirds of known deposits. Whereas at present production rates the rest of the world's oil reserves will last for a mere 25 years, the Gulf's will last for 100. In other words, the region's strategic importance is set to grow and grow.

Or at least so goes the conventional wisdom, which is usually rounded out with scary talk of unstable, spendthrift regimes and a lurking fundamentalist menace. Yet all those numbers come with caveats. A great deal of oil is consumed by the countries that produce it rather than traded, so in reality the Gulf accounts for less than a quarter of the world's daily consumption. As for reserves, the figures are as changeable as a mirage in the desert. The most comprehensive research available, conducted by the US Geological Survey (USGS World Petroleum Assessment 2000), refers to an “expected” total volume for global hydrocarbon deposits that is about double current known reserves. Using that figure, and throwing in natural gas along with oil (which makes sense because the use of gas is increasing far more rapidly), it appears that the Gulf contains a more moderate 30% or so of the planet's future fossil-fuel supplies, excluding coal, oil shale and everything else. Leaving out the two Gulf states that are not covered in this survey—Iran, with its immense gas holdings, and oil-rich Iraq—the remaining six between them hold something like 20% of world hydrocarbon reserves, not much more than Russia.

All the same, it is still a hefty chunk; enough, you might think, to keep the people living atop the wells in comfort for the foreseeable future. But you might be wrong. At present, the nations of the Gulf Co-operation Council have a combined national income roughly equal to Switzerland's, but a population which, at around 30m, is more than four times as big. It is also the fastest-growing on earth, having increased at nine times the Swiss rate over the past quarter-century. Meanwhile the region's share of world oil trade has fallen, as has the average price per barrel (amid much volatility). In real terms that price is not much higher now than when OPEC started pushing it up in 1973.

As a result, the income per person generated by GCC oil exports has been dwindling since the 1970s, precipitously in some countries: Saudi Arabia's GDP per head is now half of its 1980 peak. True, surging demand from America and Asia has recently boosted the Gulf's share of trade, but the medium-term outlook for oil prices remains weak. In the longer term, though, that could change. Twenty years from now, the rest of the world's reserves are likely to start declining fast. Combined with continued growth in oil consumption, this should create sustained upward pressure on prices. According to current predictions, by 2020 the Gulf will be supplying over half the world's oil needs. But by that time the Arab Gulf states' population will have doubled. And high oil prices will speed the search for alternatives. Who knows, in 20 years' time fuel cells and hydrogen power may have started to become commercial propositions.

GCC countries are doing their best to reduce their reliance on crude oil by building up sectors such as petrochemicals, banking and tourism. Even Saudi Arabia, the region's lumbering giant, has seen the contribution of crude exports to its economy shrink from an estimated 70% in the 1970s to around 35% today. Bahrain and the semi-autonomous emirate of Dubai remain solidly prosperous with oil exports that account for less than 15% of their GDP. Kuwait, Qatar and Dubai's sister emirate of Abu Dhabi have such small populations relative to their hydrocarbon resources, and such hoards of overseas assets, that they can depend on oil to sustain them for some time to come, even at half today's prices.

And while the oil keeps flowing, the Arab Gulf remains a lucrative market for exporters of food, consumer goods, weapons and technologies associated with such things as power generation and waterworks. The region's merchandise imports add up to nearly the same as Russia's and India's combined. Its ports and airports, capitalising on their location between Europe and Asia, have gained a growing share of global shipping. Gulf Arabs play an important part in foreign markets, too, holding an estimated $1.3 trillion in overseas investments, including perhaps $400 billion-worth of American shares. And the 11m expatriate workers the region employs send home $25 billion in remittances every year, improving the economic lot of countries such as Egypt, Pakistan, Sri Lanka, Syria, India, Bangladesh and the Philippines.

Given the GCC countries' economic importance, there is reason to be concerned about their military weakness and their proximity to trouble. Some of the world's most bothersome hotspots are within Scud range: the Horn of Africa, Israel and Palestine, India and Pakistan, and Iraq. The closest neighbours are particularly worrying. Iraq's leader, Saddam Hussein, has invaded Iran, gassed Kurds, stamped on Kuwait, lobbed ordnance at the Saudis and kept hidden chemical weapons. Iran, despite reformist currents, behaves erratically, is armed with missiles, harbours nuclear ambitions, occupies two strategic islands that are claimed by the United Arab Emirates and has rejected offers to settle the matter in the World Court.

Nor is the Gulf Arabs' record of self-defence encouraging. Throughout the 1980s they lavished an average of 15% of GDP on arms, and billions more on financing Iraq's war against Iran. That did not stop their northern neighbour from trashing Kuwait in 1990. They had no option but to call for outside help.

Tighter budgets throughout the 1990s have reduced the GCC countries' defence spending to around 9% of GDP, but the region's armies remain heavy on hardware and light on skill and manpower. Plans to integrate their defence planning have produced feeble results, though the countries have recently committed themselves to enlarging their existing joint strike force from a puny 5,000 men to 20,000. They have made a poor fist of co-ordinating arms purchases, which has precluded standardisation of weapons for the foreseeable future, and they have failed to create unified air defences. Two decades after the formation of the Gulf Co-operation Council, all six members co-operate more closely with America on defence matters than with each other.

Given the overwhelming dominance of America's forces, that may not be surprising. There are occasional moans about American hegemony, but the superpower has tried to keep a low profile. The number of American troops in the Gulf—currently around 25,000—belies the scale of the commitment. The 5,000 American soldiers in Kuwait, for example, have access to stocks that could equip a combat force several times the size. A similar number of American troops man the Prince Sultan airbase near Riyadh, a fancy facility the size of the entire Kingdom of Bahrain—which itself houses American airbases, as well as the headquarters of America's 5th Fleet. Another great stash of American weaponry sits in Qatar, and the airbase facilities America enjoys there, as well as in Oman and in the UAE, could probably be upgraded should anything go wrong with the Prince Sultan base.

The Americans found access to an archipelago of Gulf facilities indispensable in their Afghan campaign, and have since added further to their presence in the region. All four of their armed services now have advance headquarters there, and are likely to stay as long as the Pentagon has its sights set on “regime change” in Iraq, despite rumblings about pulling out of Saudi Arabia that have echoed both in Congress and in the Gulf. On Congress's side, the rumbles reflect disquiet about what has been perceived as a lame Saudi response to America's declaration of war on terror. It did not help that most of the September 11th hijackers, as well as their alleged paymaster, were Saudis. These concerns have revived older doubts about the nature of the Saudi regime, and particularly about its links with religious extremism.

The Saudis, for their part, have bristled at the suggestion that they might be indirectly responsible for an attack on their most important ally. Most of them think of Osama bin Laden as a heretic, which makes them all the more cross about being accused of fanaticism. Moreover, they are dismayed that the hostile noises coming from America, gleefully amplified in the local press, have actually increased the appeal of jihad-minded extremists.

The contrast between the kingdom's haughty secretiveness and America's preference for openness has always produced strains. Until the end of the cold war, a clear common interest helped to minimise the tension. But the past decade has seen growing Saudi ire at America's failure to “contain” Israel, and rising American irritation at the kingdom's friendliness towards Iran and Syria, which the Americans consider regional baddies. Crown Prince Abdullah, in effect Saudi Arabia's ruler, had even sent an anguished letter to George Bush only weeks before last September's attacks, decrying American indifference to the Palestinians and hinting that it was time to rethink the relationship.

Even so, the strength of American anger and Saudi indignation after September surprised both sides. The hurt will surely linger for some time. Healing it will require unusual tact from both, and there remains a danger that either American belligerence or Saudi obduracy could spark a real crisis. Yet America's long-term role in the region is not really in doubt. In private diwans, people do voice suspicions that the Americans are seeking control over the energy resources, not just of the Gulf but of the Caspian Sea and beyond. The region's leaders, however, recognise that what America wants is not physical possession but simply security—of oil supplies, trade routes and markets. That is something they can all agree on.

Saudi leaders may feel constrained about saying so at a time when America is flexing its muscles so openly, but the smaller Gulf states remain outspokenly pro-American. They share an ardent desire for “regime change” in Iraq, if not the will to risk bringing it about themselves. They quietly share hopes for a further cooling of Iran's revolutionary fervour. And they wholeheartedly agree on the need to bring jihadist militants to heel, even if they are wincing at the blunt instruments sometimes used for the task. Last but not least, the region's smaller monarchies appreciate America because they know that its presence keeps them safe from the ever-lurking fear that their Saudi big brother might try to push them around.

A great article and should be a must-read!

I was surprised to read that Haj-related Islamic Tourism to Saudi Arabia is the second largest source of income and is expected to grow to $20 Bn by 2020! Also that their oil will last another 100 years!

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