Oil Rents in the Middle East

Introduction

The journey to The Middle East was a tough one. Our group, comprising Faith Tammy Wong, Gaw Ban Siang and Tammy Low, faced many challenges throughout this entire process of data collection, cleaning our data and presenting it in a graphical form.

Initially, we went to Kaggle to find datasets for The Middle East but there was very limited data available. Then we wondered what would interest our audience and searched for what the general public discussed on Reddit and what types of posts they upvoted. It wasn’t long before we stumbled upon a post titled “The Middle East has *oil*”. It had 38.7K upvotes and 238 comments, catching our attention and inspiring us to investigate oil in the Middle East.

We had already known that the idea of oil was central to the economies in the Middle East and further developed on this idea by looking in the direction of how oil revenue impacted specific countries and on the people.

Our initial hypothesis was that countries with higher profits from oil were richer in terms of GDP per capita, and hence its people would benefit in terms of increased quality of life. We proceeded to look for datasets that could test our hypothesis, to find out if oil profits were associated with a higher standard of living among the population.

Our Data Analysis

Unfortunately, a stumbling block that we found was the lack of sufficient data that encapsulates the entire Middle East region. Even when we looked into the World Bank’s database, which was more comprehensive and reliable than other data sources, many countries had missing data points, or that the data spanned over a small range of years. This could be due to the ongoing conflicts in the Middle Eastern countries which led to difficulties in data collection. For instance, many indicators lacked data in Syria from 2014 onwards due to the civil war and unrest.

For our independent variable, we operationalised our variable of interest by looking at Oil Rents, obtained from the World Bank. Oil Rents are the difference between the value of crude oil production at world prices and the total costs of production within the country. In other words, oil rents represent the profit per barrel gained after subtracting costs of production.

For our dependent variable, we started off graphing Human Development Index (HDI) against Oil Rents from 2011 to 2017. HDI is a composite indicator of life expectancy, education and per capita income. We drew 2 graphs, with trendlines for (1) different countries in the same year and (2) the same country across different years. The two graphs are shown below.

We had faced many difficulties in trying to make sense while juggling 4 variables — time, countries, HDI and oil rent. At first, we felt that we had obtained some insightful results as there seemed to be a general downward trend between the two variables.

However, after looking at the trend line model as shown below, with a really high SSE and a really low R-squared value, we established that there was a minimal linear relationship between the HDI and Oil Rents.

Moving forward, we were not deterred and decided to narrow our focus further by examining how oil rents have changed over time from 2011–2017 amongst the Middle Eastern countries. We plotted a graph of Oil Rent against time in each Middle Eastern country, leading to some interesting results.

It is insightful to note that the general trends in all the Middle Eastern countries are generally the same, indicative of the fact that oil rents are generally affected by systematic fluctuations in world oil prices. At the same time, we could see that there was a significant grouping of the countries in oil rent (Iraq and Kuwait, Saudi Arabia and Oman, etc.).

Furthermore, we plotted another graph of Cost of Production against time, as shown below.

You would expect the cost of production to be flat lines, given that Oil Rents move in the same direction as the World Price. However, the graph shows that the changes in the cost of production also change proportionately to the world price. As such, we can infer that World Price changes due to fluctuations in the cost of production (a supply factor).

We did some further research on the topic and found that there were 3 key determinants of oil prices, which are:

  1. Supply — how much the oil-producing countries are producing. Not quite relevant to the amount of oil reserves in the ground, rather how much crude oil is being harvested and on the market

Another insight we were able to derive was that apart from Oman as an anomaly, the OPEC countries in the Middle East have the highest Oil Rents and lowest Costs of Production!

Members: United Arab Emirates, Iran, Iraq, Kuwait, Saudi Arabia

Non-Members: Bahrain, Egypt, Israel, Jordan, Lebanon, Oman, Qatar, Turkey, Yemen

We were curious as to why Oman was an anomaly and looked into why they were not part of the OPEC, given that Oman is the biggest non-OPEC producer in the Middle East. We were unable to find a definitive answer, but a few contributions on Quora hinted that it might have to do with not wanting to be subjected to OPEC restrictions on production, religious reasons, or not wanting to be pulled into the political squabbles of the region.

On a side note, we did find out that Oman is part of the GCC, and also works closely with the US on military and industrial fronts — the USA is an increasingly relevant player in the industry due to its production of shale gas. We also read that “Even though it is not a member of OPEC, in 2016, Oman agreed to cut production by 45,000 barrels as part of the OPEC agreement reached in Vienna, Austria on 10 December 2016. Oman was also appointed to the high-level monitoring committee set up by OPEC to oversee the implementation and compliance of the oil production cuts.”. We can thus likely infer that it is still part of an unofficial inner circle, and on good terms with the OPEC!

Even though our attempt at drawing a relationship between oil rents and HDI were futile, we were still interested in investigating whether there was any association between oil rents and other standards of living indicators.

We were particularly interested in the Resource Curse, which refers to the paradox that countries with an abundance of natural resources (such as fossil fuels and certain minerals), tend to have less economic growth, less democracy, and worse development outcomes than countries with fewer natural resources. As such, we attempted to compare GDP per capita between 2005 and 2017 between the OPEC and non-OPEC countries.

We were able to observe that the Resource Curse was somewhat true. Qatar and Bahrain, non-OPEC, low oil-producing countries, were among the richest in terms of GDP per capita. However, there are also large oil-producing OPEC countries such as UAE and Kuwait that rank high on GDP per capita as well.

Another area that we were interested in was to see if the profits made from exporting oil had a direct bearing on some of the macroeconomic indicators and government expenditure of a country. We thus proceeded to select five variables that we thought were more salient to our discussion; namely:

  • Military expenditure — the increase in the no. of oil fields or barrels that these fields produce could attract insurgents, which could result in an increase in government expenditure in armament to fight against these rebels.

Our scatter plots showed that there was a weak correlation between these indicators with oil rent, implying that there are other factors such as rampant political corruption that could play a role in hindering the allocation of finances into the appropriate development channels.

Conclusion

Our study on the relationships between oil rents and indicators of standard of living admittedly yielded limited direct linear results. However, we can say with certainty that there is a multitude of other factors still unaccounted for that affect the standard of living and GDP per capita as well.

On the other hand, plotting Oil Rents and GDP per capita against time, together with World Oil Prices, yield far more insightful results. We were able to glean that there was a huge difference between the OPEC and non-OPEC countries in terms of oil production in the region. The presence of such an oligopoly points to us a fragile balance in the world’s oil supply, given the reliance that we still have on oil resources. These countries alone directly affect World Oil Prices and by extension the world’s economy.