Middle East Production, Distribution, & Consumption

Economics is the science of the production, distribution, and consumption of goods and services. In many Middle Eastern nations, oil became the ultimate good in which to specialize. This was because the region possessed an economic advantage in oil which was due to the abundance of easily obtainable oil in the region. Those nations with the oil needed to decide how to produce, distribute, and consume this precious commodity found just beneath the surface.

During the time of mandates, when European nations-controlled areas of the Middle East, the decision of production, distribution, and consumption of oil was determined by European nations or companies. These Europeans invested their money in locating and extracting oil from the ground. However, as you learned in the last module, nationalists in the Middle East fought to gain political control of the Middle East, and eventually, the European powers left the region and sovereign Middle Eastern nations emerged. For those nations with access to oil, it became very important to answer the questions of how much oil to produce and to whom to distribute it. Oil forced many of these nations to turn away from a traditional economic system and adopt a more modern one. For many, this was not an easy transition.

Economic Systems

There are certain factors that most economists agree to help a nation with economic growth. Click on the titles below to learn about these factors

As the Middle Eastern nations changed from a traditional economic system to a more modern one, they worked to improve the circumstances related to the factors that are associated with economic growth. When an economy experiences growth, the leaders of that economy should put protections into place to ensure the economy’s success. One protection might be to encourage specialization- whereby a nation focuses on an element that is unique to itself and works to make that element more profitable for its economy. Other protections exist as well and include trade barriers. Look over the information below to learn more about trade barriers.

Another action that a nation can take to protect its economy is to form economic agreements with other nations. In 1960, five oil-producing nations got together to form an organization that would help each of them answer oil production and distribution questions. Four of the five nations were located in the Middle East and one was located in South America. The Organization of the Petroleum Exporting Countries, known as OPEC, included Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela . Together, they practiced "price fixing ", whereby they set agreements on how much to sell their oil to the world. This agreement not only helped guide their decisions regarding oil commerce but also protected OPEC members from the competition with each other. Currently, OPEC has twelve member nations, half of which come from the Middle East.

OPEC Countries

Factors Affecting Economic Growth:

Let's now apply what you have learned about the different economic systems and their variations on how to grow an economy in three different nations located in the Middle East.

ISREAL

Market/ Mixed Economy - which means it allows the market to drive economic decisions
Considered a very highly developed economy
A long history of international trade

SAUDI ARABIA

Command Economy based on oil but the government is encouraging private businesses to expand to industries outside of oil
Considered a developing economy
They have improved their trade relationship and ease of business with the international community vastly in the last ten years

TURKEY

Transitioning to a Market/Mixed Economy
Considered a largely developed economy
Turkey joined the trading faction of the European Union in 1995- which opened up the number of nations it traded with internationally

Throughout history, nations around the world have kept an eye on the Middle East - either as the home of the world's three major religions or as the crossroads of travel between three of the world's continents. You can imagine how much the discovery of oil in the Middle East and the world's increasing demand for more oil affected the world's interest in the region. In 1945, several Middle Eastern nations agreed to form the League of Arab States to protect their independence and sovereignty. Despite these attempts by Middle Eastern nations to maintain control of their fates, the outside world has involved itself in their affairs.

Oil Refinery In the previous module, you learned how the United Nations created the nation of Israel in the Middle East in 1948. You should know that for many decades foreign businesses based in Europe and America ran the production of oil within the Middle East. However, it was not long before the same sentiments that inspired nationalists to create sovereign Middle Eastern nations spread to the desire to end American and European controls over natural resources in the Middle East. The 1960 formation of OPEC helped the Middle Eastern nations gain more control of oil production within their own boundaries.

Eventually, the oil-producing nations in the Middle East nationalized the business of oil production bringing it under state control. In an effort to increase economic growth, many of these nations still welcomed private, foreign businesses to work (invest their money into the development of foreign oil companies) alongside their state-owned local oil companies. As a result, several nations around the world have a strong financial interest in the Middle East.

One nation in particular that has paid close attention to the activities in the Middle East is the United States of America. At the end of World War II, the United States of America emerged as an international superpower. It was one of the few developed nations that had emerged from the war physically unscathed and financially stable. As a result, the United States played a more powerful role than ever before in world economics and politics. This new role included an increase in American involvement in the Middle East. The reasons for this expanded role included America's growing need for oil, support for the creation and existence of Israel, and (at first) the containment of the Soviet Union's influence on other nations.

Scroll through the timeline below to learn more about America's involvement in the Middle East.

Challenge

Take Away

If one country has something another country wants, the opportunities for trade begin to unfold. Specialization encourages trade among countries because no country produces everything it needs. In Southwest Asia, if a country has oil to sell (export), there are plenty of customers to buy it. Saudi Arabia, Iran, Iraq, and Kuwait export millions of barrels of oil every day.

The U.S. buys (imports) oil from them because it does not have enough readily available oil to meet the country’s needs. In turn, the U.S. sells (exports) food, medicines, and raw materials to Southwest Asia countries. In this way, trade is promoted as a way for the people in both parts of the world to have the goods they desire.

In order to take full economic advantage of their oil resources, the Organization of Petroleum Exporting Countries (OPEC) was created in 1960. Through the organization, countries with large oil supplies worked together to try and regulate the world’s supply of oil in order to receive large revenues (profits) for the oil they exported. The first five countries to join OPEC were Kuwait, Iraq, Saudi Arabia, Iran, and Venezuela. OPEC greatly influences the availability and price of oil today.

IMAGES CREATED BY GAVS OR OPENSOURCE