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  • 1. THE OIL CRISIS and the Khilafah Solution A paper addressing the current oil crisis: its causes, consequences and some solutions from an Islamic perspective. Hizb ut-Tahrir Britain July 2008 Rajab 1429 www.hizb.org.uk
  • 2. ‫ا ر ن ا رح م‬ ‫م‬ Introduction A Crisis Caused by Capitalism And when your Lord said to the angels: Lo! I am about to place a viceroy in the earth, they said: Will thou place therein one who will do harm therein and will shed blood, while we, we hymn thy praise and sanctify Thee? He said: Surely I know that which you know not. Translated meaning of Quran: Al-Baqarah - 30 The current oil crisis has transfixed the entire world both with its severity and its volatility. Demonstrations in Western Europe and riots in countries as far apart as Haiti, Egypt and Bangladesh have brought home the human cost. Ten years ago in December 1998 oil was priced at less than $10 per barrel. Today oil is nearer $150 per barrel with some analysts believing that it could reach $200 by the end of the year. With oil at record highs, people in every country are now faced with not just higher fuel prices but increasing uncertainty as economies teeter into recession. Western politicians who until recently were passive about this steep rise now desperately try to find scapegoats and excuses. From Washington to London, politicians point the finger anywhere but at their own policies. Most prominently they have blamed the Muslim oil producing world for a lack of supply. However the lack of supply is a mirage, with more fundamental reasons behind the rise in the dollar price of oil: 1. Firstly, the depreciating dollar has driven the price up as oil is denominated in the US currency. Since 2002 the US dollar has depreciated almost 40% against other world currencies as the US Federal Reserve continues to print money at an alarming pace. The US economy is a basket case with respect to economic fundamentals: a weak dollar, high trade deficits and a $9 trillion dollar fiscal deficit. It is little wonder that the rest of the world is retreating fast from the declining greenback. 2. Secondly, demand for all commodities has risen sharply due to strong economic growth in many parts of the world especially in China. For instance Chinese steelmakers have just negotiated a 90% rise in the cost of iron ore with western mining companies. The costs of copper, zinc, and aluminum have all risen as have other fuels such as coal and natural gas. Demands are not made that western countries and companies mine more coal or extract more iron or smelt more aluminium to compensate for these rising prices. 1 www.hizb.org.uk
  • 3. 3. Thirdly, according to statistical data the US has almost 30 billion barrels of proven yet untapped oil reserves, with other experts believing the figure could rise to about 75 billion if the offshore continental shelf and the Arctic National Wildlife Reserve (ANWR) are included. In addition the US hoards over 700 million barrels of oil in its Strategic Petroleum Reserve (SPR). Yet the US refuses point blank to drill either off its coastal waters or in the ANWR, or release oil from its SPR hypocritically preferring to blame others for not increasing their supply. 4. Fourthly, the US’s consumption of oil is a tale of excess. The US has fewer than 5% of the world’s population yet consumes almost a quarter of the world’s oil. To put this into perspective the US consumes more oil than the whole of Europe, Russia and the former members of the Soviet Union combined. Yet despite having the largest proven coal reserves and being the largest consumer of nuclear energy, the US still lectures the Muslim world on not producting sufficient oil. 5. Fifthly, as well as criticising others for not drilling enough oil, politicians have begun to blame the high oil price on greedy speculators. This has contributed to some extent, for speculation has massively increased volatility in the markets. However, it is surprising to hear speculation is coming under criticism. It is the lifeblood of capitalist financial markets and when speculators nearly destroyed the economies of South East Asia in the late 90’s, western politicians defended them extolling their virtues. 6. Sixthly, though oil prices have risen sharply and undoubtedly caused misery for millions, the price of oil relative to other commodities is not that high. The price of an untaxed litre of petrol is cheaper than a litre of mineral water. Much of the high price of petrol is driven by high levels of government taxation; in the UK this contributes over 70% of the price at the pump. Add the margins of the refineries, transportation and retail profit and it can be seen why petrol is so high. It obviously suits capitalist governments in the west to blame the Muslim world, yet they choose to levy highly regressive taxes on motorists while minimising the burden on the rich and powerful. In Britain fuel taxes contribute £23 billion to the exchequer, yet the corporation taxes paid by the banking and oil sectors only total £15 billion. It is as if the regimes in The Complicity of the Rulers in the Muslim world the Muslim world steal from the poor and However it is not just the myths spun by western hungry to give to these politicians in the oil debate that require exposing, rich banks! the leaders of the Muslim world have also failed the leadership test. A. They have squandered the benefit from the high oil price. Instead of investing the money in long term industrial projects and education they have been busy building opulent 7 star hotels and bailing out investment banks on Wall Street 2 www.hizb.org.uk
  • 4. (at a massive paper loss). While the poor are forced to the brink of starvation, government investment bodies like the Sovereign Wealth Funds are using oil revenues to bail out Western banks (CitiBank, Merryll Lynch and Barclays). It is as if the regimes in the Muslim world steal from the poor and hungry to give to these rich banks! B. Despite the Muslim world having nearly 70% of the world’s proven oil reserves and almost 55% of natural gas reserves, successive leaders in the Muslim oil producing countries have failed to invest sufficiently in oil and gas infrastructure such as refining capacity. The Muslim world may enjoy a dominant position in the oil reserves league table but it is in a poor position in refining capacity, enjoying less than 10% of world production. A lack of refining capacity is not only financially stupid but jeopardises national security as critical products such as petrol, heating oil and aviation fuel have to be imported. C. Thirdly instead of adhering to the saying of The Prophet (saw) said the Prophet (saw) who stated that “the people that share in three things water, green pastures and fire “The people share in (energy)” the rulers in the Muslim world have failed three things water, to redistribute the wealth coming from oil and gas. green pastures and Massive inequality and poverty remains with many fire (energy)” even in the middle classes suffering from not just high energy costs but increasing prices for food and housing. This has been exacerbated by the stupendously foolish decision by certain Muslim rulers to peg their currencies to the US dollar rather than to the gold standard as Islam requires. As the paper dollar depreciates, imports have become more expensive causing not just misery for the ordinary population but a massive outsourcing of control over monetary policy to the US Federal Reserve. However, what the Muslim world really requires to successfully compete with the dominance of the US, the EU, China, Russia and India in the 21st century is to realign politically under the Islamic system. Not only is unity an Islamic obligation, it makes sense politically as well. Merging the oil and gas wealth of the Middle East, with educated labour forces in Malaysia and Egypt, alongside fertile agricultural lands in Bangladesh and Indonesia allied with strong military forces in Pakistan and Turkey would make a powerful combination. Though some will dismiss this as a dream, a pan-national Caliphate was a reality before and geo-political trends favour its imminent restoration. If the EU can become a 27 strong organisation after the ashes of World War 2, then the Muslim world with its shared faith and values can once again take its position at the top table of international politics. Unlike the emergence of China and India who are intent on mimicking the failed capitalist model which presides over grotesque levels of poverty, malnourishment and preventable disease, under the banner of delivering economic prosperity, the Caliphate will offer a new model. Redistribution of wealth, tackling poverty, investing for the long term and sharing the proceeds of oil amongst all the people (not just the 3 www.hizb.org.uk
  • 5. elite) will be key objectives of the new state. The absence of It has been the absence of the Islamic way of life in the Islamic way of the Muslim world which has led to this instability, poverty and injustice. And it is only its resumption life in the Muslim which gives any hope of economic progress, and the world which has fair management and utilisation of this incredible led to this resource. For under the Islamic system, oil will be instability, utilised by the State on behalf of its citizens. In addition, a stable currency based on the gold/silver poverty and standard would be protected from the devalued injustice - and it is dollar, and hence inflation would not be the only its destabilising factor it is now. resumption which There is no doubting the importance of oil to the gives any hope of global economy, an importance that is likely to grow economic as its true value is recognised. But the greatest progress, and the threat to global stability is the fact that western fair management superpowers continue to dominate its extraction and and utilisation of distribution. For them, the value of corporate share prices outweighs economic stability for poorer this incredible nations, affordable food for the ordinary man and resource. any sense of economic justice across the world. This is how things will remain as long as global capitalism remains unchallenged in the world. It is often said of the modern world that we know the price of everything and the value of nothing. There can be no truer statement when it comes to the matter of oil, where people worry over the price but ignore the huge cost in human life in running a global economy for the interests of fat super-wealthy corporations of the west. This paper seeks to address the true facts behind the current crisis and asks at what cost, whilst arguing the case for an Islamic alternative, which would ensure oil for all but not at the expense of human life and abject misery for millions. Allah (swt) says ““And when it is said to them, ‘make not mischief in the earth’, they say: ‘we are only peace-makers’. Verily, they are the ones who make mischief but they perceive not” Translated Meaning Qur’an al-Baqarah: 11-12 Hizb ut-Tahrir Britain 13th Rajab 1429 17th July 2008 4 www.hizb.org.uk
  • 6. The Reasons for the High and Rising Price of Oil At the time of writing oil has reached $146 per barrel, twice as high as one year ago and over 10 times higher than a decade ago with many projecting further increases. British Prime Minister Gordon Brown said recently that the sharply rising oil price is "the most worrying situation in the world" after it hit a new record high. The sharp run up in its price along with most commodities has left commentators aghast and motorists flummoxed. When will these increases end and what will be the eventual level that it reaches? Or is the time of low petrol pump prices never to return? But what is in the price? Since World War II the US dollar has been the defacto world currency. Reflecting its status as the currency of the main superpower, with the greatest circulation, and backed by the most essential of characteristics – economic stability. Yet events of the recent past have brought the dollar's pre-eminence into question. The dollar is in serious decline. Over the past 5 years it has more than halved in value compared to the Euro (Figure 1) 5 www.hizb.org.uk
  • 7. Similarly against the main basket of world currencies it has also steadily declined (Figure 2) 6 www.hizb.org.uk
  • 8. This precipitate decline in value is largely due to the American policy of printing more money. Arguably the strongest factor in the dollar woes is the dramatic increase in the US money supply brought about by the Federal Reserve policies of cheap and available credit (a factor in the housing boom then subsequent credit contraction from the sub prime fallout), a policy of spending to “keep the economy out of recession”. This policy is directly related to several other effects. Chief amongst them has been the decline in the value of the dollar, a burgeoning balance of payments deficit ($816 billion per annum), and the growth of the US as the largest debtor nation on the planet (with US government debt in 2007 of $8.9 trillion – US Treasury Department statistics). *The US department of statistics officially stopped publishing M3 money supply figures in 2006, but the trend is clear from the above chart. US Money supply grew at 17% in 2007 after several years of double digit growth. When money supply soars, so too does inflation and this is now beginning to be felt in western economies. With respect to oil there is an inverse relationship between the value of the dollar and the price of oil. As the dollar declines in value, oil increases in price. However, this increase strongly reflects the decline in the value of the dollar first and foremost. 7 www.hizb.org.uk
  • 9. The price of 100 barrels of oil measured in ounces of gold has remained fairly stable between 5 and 10 ounces of gold for the last 100 years. Whereas, from just 1973 to 2008, the price of a barrel of oil in US Dollars increased by 3,300%. Over the same period the number of ounces of gold required to buy 100 barrels of oil rose by only 18%. It is not oil prices that so dramatically fluctuate but the value of the US dollar, in which oil prices are quoted. This is why some nations are calling for oil to be priced in Euros. Although the Euro and other currencies also suffer from the chronic weaknesses of fiat currencies (currencies which are not backed by tangible assets like gold or silver), the Europeans have managed to control their increases in money supply to an extent. The importance of the early 1970’s in this analysis must be stressed. In 1971 then President Richard Nixon took the US, and by default, the rest of the world off the gold standard. The US flooded the world with dollars and a period of high inflation ensued. Those factors of high money supply growth, economic uncertainty and high oil prices are now being repeated, yet most commentators then (as now) focus on the price of oil. A comparison of the price of oil in gold over this period: Date Gold per ounce Oil per barrel Gold: Oil Year 1971 $35 $3 11.6 : 1 July 2008 $943 $145 6.5 : 1 8 www.hizb.org.uk
  • 10. In general the trend since 1971 (off gold convertibility) shows a high correlation in the gold and oil prices. However in recent years, the increase in gold prices (in USD) have started to lag the increase in oil prices (in USD). The dramatic increase in gold (in USD) from $35 to $943 over those years also reflects the decline in value of the dollar. Due to the absence of the gold standard, where paper based currencies must be fully backed by bullion, the US and other governments of the world are free to inflate their money supply with the consequent decline in the value of goods and services vis-à-vis their currency. Official inflation and consumer price index figures have to an extent been masked by careful selection of the basket of goods and services making up the measure. Yet inflation is now recognised as a growing problem and figures in the UK and US are well above target levels. The response of the investment community has been entirely predictable. With the dollar dropping in value and interest rates in the US now at 2%, investors have moved to commodities seeking real assets which are not subject to the whim of central bank policies. The wholesale move of speculative traders into commodities has also exacerbated this trend. Oil is but one of the many commodities experiencing this boom in price (vis-à-vis the rapidly deteriorating US dollar). The Dollar Price of Food Jose Graziano, FAO representative for Latin America and the Caribbean recently pointed out that “loss of confidence in the dollar has pushed the investment funds to look for higher returns in the basic goods… first of all in metals and then in foodstuffs”. A number of speculators have in the past years switched their investments to the commodity markets in search "There's a risk that more of higher returns than they would earn in shares people won't be able to and bonds markets. Again foodstuffs are mostly afford basic foods anymore, assessed in US dollars, and governments are increasing malnutrition in keeping control over wage increases which the region" squeeze consumers who are caught between Fernando Soto, regional policy rapidly increasing prices and restrictions on wage head for the U.N. Food and growth. Agriculture Organization (FAO) (Reuters 15th April, 2008). “Low-income, food-importing countries mostly in Central America were most vulnerable”, Soto said at the sidelines of an FAO conference on Latin America and the Caribbean in Brasilia. Food riots in Haiti over high prices for rice, beans and other food staples led to the ouster of its government in April of this year. 9 www.hizb.org.uk
  • 11. The Demand for Oil Another key factor impacting oil prices is the continuing growing demand for oil in the emerging economies. China has increased its consumption of oil by 50% over the past 5 years and now accounts for 9.3% of world consumption; rapidly growing, but still behind the US at 24%. World consumption of oil grew by 10% in that same 5 year period to 2007. China and India’s per capita oil consumption is still only a fraction of the OECD nations. OECD countries account for 56% of global crude oil consumption yet account for a mere 18% of global population. The International Energy Agency foresees an oil supply crunch within 5 years forcing up prices even further and greatly increasing western dependence on OPEC production. The oil industry in its own report “Facing the Hard Truths about Energy”, [ http://www.npchardtruthsreport.org/ ] produced by the National Petroleum Council including the heads of the world's largest oil companies, for the first time predicted that oil and gas may not be meeting demand by 2015. Others argue that recession and the economic downturn will curb demand in coming years. The Speculative market in Oil The US Federal Reserve’s lax monetary policy of lowering interest rates to stimulate growth and the issuance of more US$ debt instruments is also fuelling speculative trading. With excess liquidity flooding the market and the Consumer Price Index above 4%, savings fast lose value – so Commodity markets have become highly attractive. Although with high levels of cash available for investment coupled with a willingness to trade on futures markets with leverage (loans), this has also exacerbated price increases. The desire for high speculative returns by hedge funds 10 www.hizb.org.uk
  • 12. and investors alike leads to volatility in trading and high daily movements in the futures price of oil results. The price of oil moved by $11 US dollars ( or 8%) in a day recently (6/6/2008) - market fundamentals do not change that fast or significantly in the oil market with relatively fixed supply - thus speculation or the trading of paper oil stocks is undoubtedly an important factor in the rise and trading volatility in oil prices. The growth in the commodities markets including oil have also provided the main creditor nations of the world (China, Japan, and Germany) with an opportunity to make strategic moves out of the US$ into these commodities. With rising commodity prices and the dropping US$ they have started to reduce their large but depreciating US$ reserves, many of which were virtually forced upon them by the large debtor position the US has taken with these nations – as the creditor in the balance of payments trade imbalance. When a creditor does not feel confident that they will be repaid in full because the asset they hold (US treasury bills) is rapidly dropping in value they will naturally reduce that exposure. Chinese percentage exposure is already projected to decline over the next 2 years, although as the following table highlights Chinese exposure to the US$ is very high. China’s Foreign Exchange Reserves: 2001-2006 and Estimates for 2007 and 2010 Year Billions of U.S. Dollars As a % of Chinese GDP 2001 215.6 18.1% 2002 291.1 22.1% 2003 403.3 28.1% 2004 609.9 31.5% 2005 818.9 35.5% 2006 1,068.5 38.6% September 2007 1,433.6 /A Projection for 2007 1,539.9 47.3% Projection for 2010 1,865.0 32.1% [fpc.state.gov/documents/organization/99496.pdf] As a result of the US lax policies in not protecting the value of the dollar, despite many protestations to the contrary by the Federal Reserve Chairman Ben Bernanke and George Bush, there is no policy to defend the value of the US$. "The Fed's commitment to price stability is a key factor, insuring that the Dollar remains a strong and stable currency. The possibility that commodity prices will continue to rise, and lift inflation expectations, are significant risks that might ultimately become self-confirming." Ben Bernanke, 3rd June, 2008 But when it comes to the supply of oil the US holds the upper hand with the greatest influence and control over the vital Middle East region, a matter that China cannot ignore, and which acts as a lever upon China to continue to hold US treasury bills despite their obvious unattractiveness. 11 www.hizb.org.uk
  • 13. UK Government Exploits High Oil Prices for revenue With over 60% of world oil reserves residing in the Middle East, the Muslim world is often under pressure to maintain and meet expectations for abundant and cheap oil. Yet there is another important factor that should be considered in the make up of the price at the pump: Taxation. In defence of high petrol prices King Abdullah of Saudi Arabia recently mentioned in an interview with Kuwait’s Assiyassah Arabic newspaper, “Consuming countries should reduce taxes of petroleum products if they really wanted to soften the burden on consumers”. He went on to point out that the current oil price was cheap compared to prices of alternative energy products available in the world and called upon people in consuming countries to adapt to rising oil prices. The British government has repeatedly responded to the price of oil (irrespective of whether the price is at an all time low or high) by imposing ever increasing levels of fuel duty including Value Added Tax (VAT). For the British motorist a full 70.3% of the pump price of petrol or diesel amounts to taxes and duties. Official arguments cite the need to discourage energy use on environmental and conservation grounds, but little if anything of the tax is dedicated to these issues. Oil is arguably under priced given that the government can get away with such punishing levels of tax. The imposition of such taxes also fly in the face of so-called principles of progressive taxation as the duties applied to fuel are most severely felt by the lower paid. Compare the levels of tax the consumer pays on fuel in the UK (£23 billion) to that paid by all Corporations in corporation tax (£51 billion). [HMRC 2007] When one also takes into account the level of revenues that US Oil companies are generating from what used to be a public resource the greater concern there is over the way the oil market is being used to generate exorbitant profits for a privileged few. Company 2007 Net Income Exxon Mobil (NYSE: XOM) $40.6 billion Chevron (NYSE: CVX) $18.7 billion ConocoPhillips (NYSE: COP) $11.9 billion Valero (NYSE: VLO) $5.2 billion Marathon Oil (NYSE: MRO) $4.0 billion 12 www.hizb.org.uk
  • 14. Any Alternatives to Oil? There are alternative energy initiatives progressing in all developed economies, including the US and UK. However, doubts still remain over whether there is a cost effective solution which can compete with oil and coal. While the reduction of oil dependence has been a key objective, and is often given lip service by US Presidents, investments in alternative technologies (renewable and non-renewable energy such as nuclear) have so far failed to make an impression on overall energy supply patterns. However, these investments will become more cost effective if the price of oil continues to rise. Furthermore, global climate change movements have also been long pressing for alternatives and a change away from fossil fuels. Other options include unconventional oil – the Athabascan tar sands (from Alberta, Canada), extra-heavy oil (Venezuela), or oil shale. However, there are severe problems in recoverability with poor quality oil, or reservoirs. Or worse, production may be uneconomical because of the very low net energy gain, through using more energy to extract the oil than the output. If there is serious concern about the depleting supplies of oil reserves, then there appears to be little urgency on the part of the major powers to do something about it. There is simply very little indication of a serious and sustained move towards alternative renewable sources. Moreover, the major powers are intensifying their competitive struggle over the existing oil reserves. On the other hand, experimentation in alternatives such as bio-fuels are also having very negative side affects as has recently been demonstrated in places like South America. Simply put the world has become accustomed to cheap oil prices and is not interested in seriously seeking alternatives - that is, at least for now. Bio-Fuels – Cure or Killer? An interesting case study can be found in how bio-fuel usage is increasing Since April 2008, all petrol and diesel in Britain has had to include 2.5% from biofuels. The EU has been considering raising that target to 10% by 2020, but is faced with mounting evidence that this will only push food prices higher. Additionally biofuels are not efficiently generated, they consume more energy in their conversion than that provided, which is hardly a good advertisement for saving the environment. Bio-fuels depend on agriculture production, and during recent years many of the industrialised countries have exploited agriculture produce and agricultural land for the production of bio fuels in order to reduce their dependence on petro-oil. This is leading to increased demand for bio fuel and also for food grains. 13 www.hizb.org.uk
  • 15. In the United States and Brazil, agricultural land is being converted for the production of maize and soybeans required for producing ethanol. Global production of biofuels rose from less than 8 million gallons in 2004 to approximately 18 million gallons in 2008. The most rapid increase has been in the production of ethanol derived from corn in the US, rising from about 3.5m gallons in 2004 to an estimated 9m in 2008. This year ethanol production is forecast to consume 30% or more of the entire US corn crop. The careful balance between production and the associated demand for food grains has been upset and is having a direct affect via increasing food prices. There have been food riots and protests in over 15 developing countries including Bangladesh and Egypt. The president of the World Bank, Robert Zoellick in World Bank report recent unpublished forecasts reported by the suggests that: Guardian 4th July, 2008 is reported to have said that as many as 100 million people in the world have been forced into poverty and hunger because of the - Up to 100 million sudden and high increases in food prices. In the people in the World Bank report they suggest that the impact of world have been biofuels has been to force global food prices up by forced into 75%. poverty and hunger because of Jean Zeigler, UN’s Special Rapporteur on the ‘Right to the sudden and Food’ mentioned in a recent statement aired on high increases in German Radio that intensive bio-fuel production now food prices represents a ‘crime against humanity’ because it pushes food grain prices up across the world. - The impact of For the full 2008 year, it is expected that out of 2.1 bio- fuels has billion tons of food grains produced globally, 100 been to force million tons will be used to extract bio fuels, in other global food prices words, this 100 million tons will be used for feeding up by 75%. cars instead of human beings in a time of global food shortages. 14 www.hizb.org.uk
  • 16. The Colonial Thirst for Oil Britain and the US have a history of rivalry over control of the key Middle Eastern oil resources. Coups and countercoups characterised Middle East politics and superpower rivalries immediately after the Second World War. America installed Husni Zaim in Syria on March 30, 1949. Miles Copeland who led many CIA operations in the region reflected in his 1968 book The Game of Nations’, ‘If you can’t change the board, change the players’. In 1958 America intervened in Lebanon sending her naval fleet and marines to preserve what she called, ‘stability’, a euphemism for preserving American influence in the region. Indeed she would again intervene in Lebanese affairs in 1983, sending her marines to a conflict that was precipitated by imperial rivalries. The Gulf war of 1991 would however see the largest military conquest undertaken by America in the Middle East. Indeed it facilitated a military occupation in everything but name as she further strengthened existing military bases as well as securing new establishments in Saudi Arabia, Qatar and Kuwait. Anthony Cordesman, Chair for Strategy at the Centre for Strategic and International Studies, revelled in America’s colonial fundamentalism, when he wrote ‘Iraq and America’s Foreign Policy Crisis in the Middle East’ in March 2001 “A decade ago, under a different President Bush, we emerged out of a major foreign policy crisis in the Middle East with the most advantageous position we had had since World War II”. American military leaders also celebrated in their success in securing the region to their plans, as Brigadier General William Looney made no hesitation in pointing out, “They know we own their country…we “Oil in the next war will dictate the way they live and talk. And occupy the place of coal in that’s the great thing about America right the present war, or at now. It’s a good thing, especially when least a parallel place to there’s a lot of oil out there we need”. [Dr. coal. The only big Eric Herring, ‘Iraq: the Realities of potential supply that we Sanctions and the Prospects for War’, can get under British October 2002] control is the Persian (now Iran) supply and American imperialists therefore echo the Mesopotamian (now Iraq) strategic concerns of their British cousins supply… Control over in the nineteenth century as they, like these oil supplies becomes Britain, seek to preserve their leadership in a first class British war the world and control of the Middle East is aim” pivotal in this end. Since the British Sir Maurice Hankey, First government realised the control of oil was Secretary of the War “a vital prize for any power interested in Cabinet, 1918 world influence or domination” [‘Introductory Paper on the Middle East’, 15 www.hizb.org.uk
  • 17. FRUS, 1947, Vol. V, p 569], then British Foreign Secretary Selwyn Lloyd wrote in 1956, “We must at all costs maintain control of this oil” [Message from British Foreign Secretary Lloyd to Secretary of State Dulles, 23 January 1956, FRUS, 1955- 1957, Vo. XIII, p323.]. The US was not far behind in realising its significance - the National Security Council stated in 1953, ‘United States policy is to keep the sources of oil in the Middle East in American hands’ [Mohammed Heikal, ‘Cutting the Lions Tail; Suez Through Egyptian Eyes’, 1986, p38] and in 1945 the US State Department declared, ‘These resources constituted a stupendous source of strategic power, and one of the greatest material prizes in world history . . . probably the richest economic prize in the world in the field of foreign investment’ [US State Department History, 1945, Vol. 8 p45]. America therefore seeks to guarantee her leadership in the world by securing control of the region’s oil wealth, thereby ‘preventing the emergence of a hostile regional coalition or hegemony’ [Conetta and Knight, ‘Military Strategy Under Review, Foreign Policy in Focus’ Vol. IV No. 3, January 1999], as described in the Quadrennial Defence Review submitted by former Defence Secretary William Cohen to the US Congress in May 1997. The invasion and occupation of Iraq, and the intention to maintain a long term presence in the region was therefore a continuation of the struggle between the Western powers. In the early twentieth century the European nations quarrelled over how the lands of the “By 2010 we will need Khilafah would be divided amongst them culminating in of the order of an the Anglo-French Sykes-Picot agreement. A century later additional fifty million barrels a day. So where they quarrel over how the region’s resources should be is the oil going to come divided amongst them, with America seeking to secure the from?... While many majority share. Paul Sanders, Director of the Nixon regions of the world Institute noted, “The oil is the main thing…there is offer great oil widespread nervousness in Russia that if the US changes opportunities, the regimes in Iraq, then all the oil contracts will come to the Middle East with two United States and Russia will be left out” [Eric Boehlert, ‘At thirds of the world’s oil the UN its all about the Money’, 14 October 2002]. and the lowest cost, is still where the prize It is in this context that we see the Western nations vie for ultimately lies” power, scrambling to secure their interests in the Middle East, a scramble that rekindles memories of Europe’s Dick Cheney, CEO of Oil colonisation of Africa in the nineteenth century. US policy services company therefore seeks to attenuate any European influence and Halliburton, in a speech to control in Iraq, Michael O’Hanlon from the Brookings the Institute of Petroleum Institute told the House Armed Services Committee, “The in London, in 1999 region that Iraq inhabits is so critical to U.S. interests that we cannot just go in, remove Saddam, and leave the clean- up to others… Iraq, unlike Afghanistan, is located in the heartland of Arabia, a region whose stability is a critical 16 www.hizb.org.uk
  • 18. U.S. interest” [Michael O'Hanlon, Senior Fellow, Brookings, Testimony before the House Armed Services Committee, 2 October 2002]. Regime change in Iraq was therefore predicated upon realising her aims in ‘environment shaping’ the Middle East according to her viewpoint [Carl Conetta and Charles Knight, ‘Military Strategy Under Review’, Foreign Policy in Focus Vol. IV No. 3, January 1999]. Indeed regime change may ultimately entail the division of Iraq, which the US has unsuccessfully pursued since the end of the Gulf war in 1991. Deputy Secretary of Defence, Paul Wolfowitz elucidated upon the American stratagem for Iraqi control in September 1998 before the House National Security Committee. He said, “Establish a safe protected zone in the South, where opposition to Saddam could rally and organize, would make it possible…For that provisional government to control the largest oil field in Iraq and make available to it, under some kind of international supervision, enormous financial resources for political, humanitarian and eventually military purposes” [Paul Wolfowitz’s statement on US Policy toward Iraq, 18 September 1998]. Invasion for Oil Clear from Earliest Days of the Bush Administration Despite protestations to the contrary by George Bush and Tony Blair, an invasion to control the vast oil resources of Iraq was always dominant in their planning. Furthermore popular public opinion in the Muslim world does not believe the rhetoric of nation building or establishing representative rule in the region. A 2007 Zogby/University of Maryland poll of citizens in The consistent picture portrayed above of the struggle six Middle Eastern states for the “ultimate prize” is confirmed in more recent found that the main objectives of America in the analysis. Middle East were cited as: US Treasury Secretary Paul O’Neill has stated that an invasion of Iraq was on the agenda since the very first Oil (76%) Bush National Security Council meeting [The Price of Protecting Israel (68%) Loyalty, Ron Suskind, 2004]. A map for a post-war occupation, marking out how Iraq’s oil fields would be Domination of the carved up was also discussed. O’Neill said even at that region (63%) early date, the message from Bush was “find a way to do this,” according to O’Neill, a critic of the Iraq invasion Weakening the Muslim who was forced out of his job in December 2002. world (59%) The New Yorker’s Jane Mayer has highlighted a secret NSC document dated Feb. 3, 2001 – only two weeks Only 6% agreed with Bush after Bush took office – instructing NSC officials to and Blair's view that their cooperate with Dick Cheney’s task force, which was objectives are to merely melding together two previously unrelated areas of spread human rights and democracy. policy: “the review of operational policies towards rogue states” and “actions regarding the capture of new and 17 www.hizb.org.uk
  • 19. existing oil and gas fields.” [The New Yorker, Feb. 16, 2004] By March 2001, Cheney’s task force had prepared a set of documents with a map of Iraqi oilfields, pipelines, refineries and terminals, as well as two charts detailing Iraqi oil and gas projects, and a list titled “Foreign Suitors for Iraqi Oilfield Contracts,” according to information released in July 2003 under a Freedom of Information Act lawsuit filed by the conservative watchdog group, Judicial Watch. The prosecution of the war in 2003, subsequent establishment of an administration supportive of the occupation and various revisions of the Iraqi constitution and laws have all supported the plans to control Iraqi oil. The Return of the Western Oil Giants to Iraq Some media sources reported on 30th June, 2008 that "a group of American advisers led by a small State Department team played an integral part in drawing up contracts between the Iraqi government and five major Western oil companies to develop some of the largest fields in Iraq". This is no less than the first step in the de facto de-nationalisation of the Iraqi oil industry. James Paul, director of the Global Policy Forum, has summarised it, “... a new round of immensely profitable oil deals ... announced by Iraqi Oil Minister Sharistani, in which giants like Exxon Mobil can nail down long-term contracts and take away a large share of the oil from several key operating fields, like the massive Rumaila and West Qurna, some of the world's largest.” Oil can be produced in these fields for about one dollar a barrel, while its value on world markets at the time of writing is in excess of US$145. The oil giants are making their move, seeking to bypass opposition in the Iraqi parliament and ignoring suspicion and anger amongst the Iraqi public. With world oil supplies visibly running short and oil prices skyrocketing, this is a desperate gamble to control some of the world's largest and most lucrative fields, at huge humanitarian and environmental cost. At stake are production sharing agreements (PSAs) and, Technical support agreements - TSA’s. At this early stage it's still about TSAs which are simple consultancy contracts to help Iraq raise its oil production by 500,000 barrels day, not long-term contracts to develop the oil and gas fields. However, at a press conference in Baghdad on Monday 30th June 2008, Shahristani (Oil Iraqi minister) had to admit, "We did not finalize any agreement ... because they refused to offer consultancy based on fees, as they wanted a share of the oil.” What’s at stake at the current stage are "nine-year risk service contracts for six oilfields, which are halfway between TSAs and PSAs. Bids are due by March 2009, with signing in June 2009. As for the technical service contracts for five of the same 18 www.hizb.org.uk
  • 20. oilfields, these are "no-bid contracts whose terms were dictated by the oil companies themselves. In other words oil companies are dictating their terms and conditions to the Iraqi government. While ostensibly under the control of the Iraq National Oil Company, foreign corporations will keep 75% of the value of the contracts, leaving just 25% for their Iraqi partners. That kind of ratio is unheard of in oil-rich Arab and Middle Eastern states, where access to the oil is relatively straightforward and does not require deep or offshore drilling. According to Greg Muttitt, a London-based oil expert, the assumption up until now was that foreign multinationals would be brought in to develop new fields in Iraq - not to take over those which are already in production and therefore require minimal technical support. "The policy was always to allocate these fields to the Iraq National Oil Company. This is a total reversal of that policy, giving the Iraq National Oil Company a mere 25% instead of the planned 100%." The US all along really wanted the extra-profitable 30-year PSAs once the new, International Monetary Fund redacted Iraqi oil law is forced through the Iraqi parliament. This seals a major US-European takeover - the whole thing, of course, protected by a Status of Forces Agreement with its 58 US military bases, total control of Iraqi airspace, total legal immunity for US soldiers and the right for the Pentagon to turn Iraq upside down without even asking the hosts. The American justification for such lucrative oil deals runs roughly as follows: Iraq's oil industry needs foreign expertise because of the years of punishing sanctions which starved it of new technology - a position exacerbated by the invasion and ongoing violence. Furthermore Iraq needs to start producing more oil urgently, not to improve the overall supply position (and to lower the cost of oil) but because of the war. The country is in complete disarray and the billions handed over in no-bid contracts to western firms have failed to rebuild it. For invading countries to seize the natural resources of the country invaded is illegal under the Geneva conventions. This means that the huge task of rebuilding Iraq's infrastructure - including its oil infrastructure - remains the financial responsibility of Iraq's invaders. They should be forced to pay reparations, just as Saddam Hussein's regime paid $9bn to Kuwait in reparations for its 1990 annexation of Kuwait. Instead, Iraq is being forced to sell 75% of its national wealth to pay the bills for its own illegal invasion and occupation. Strategic Direction of the US in the Region While the fall of the dollar has persisted the US has taken no economic steps to rectify the situation. In fact it has exploited this low-cost dollar to politically blackmail countries that have huge dollar reserves such as China, which has dollar reserves in excess of a thousand billion dollars. This has caused China to lose colossal sums as their dollar assets depreciate. Despite these losses China has little choice over accepting US terms for oil, which include continued acceptance of US debt instruments due to American control of the main oil region of the Middle East. 19 www.hizb.org.uk
  • 21. The US will not hold back in denying China open access to oil and gas in the Caspian Sea and Middle East regions. We are witnessing only the beginning of the unannounced global resource struggle between the US and China, the world's largest importers of oil (China overtook Japan in 2003). China is seen as an economic threat, which would worry the US if it became as active in its foreign policy as it is on the economic front. Its population is over 1 billion strong and growing while its greedy pursuit of energy resources to feed its insatiable production line and strong trade position worries Washington. The second threat to American supremacy is via the Muslim world if and when it unifies politically. Although the Muslim majority region is volatile, The US maintains 737 military the historical roots of Islamic rule mean an bases in 130 countries under occupied and colonised Muslim populace will cover of the "war on terror" to always have an alternative narrative to fall back defend American economic on. Since the idea of Islamic unity has never been interests, particularly access dispelled it lingers on as a strong political aspiration whenever questions of government and to oil. governance emerge. The University of Maryland’s April 2007 survey (worldpublicopinion.org) reported two thirds support for unification of all Islamic countries into a single Caliphate (Khilafah). The Muslim population is even larger than China’s and it already has the energy resources and strategic superiority. The US understands the viability of both perceived threats as the National Intelligence Council of the CIA reported in December 2004 on both China and a resurgent Islamic Caliphate in its report on the possibilities for the year 2020 (‘Mapping the global future’ (2004). Report of the CIA National Intelligence Council December 2004. From http://www.foia.cia.gov/2020/2020.pdf). The US maintains 737 military bases in 130 countries under cover of the "war on terror" to defend American economic interests, particularly access to oil. It remains unafraid to use its military in pursuit of its material and strategic aims. The ambitious desire of America and the West is not only about the resources of the Muslim lands, motivated by Capitalist greed; the geographic and strategic advantages of these lands; and the fact that they constitute a huge market for the products of the West and are a source for the raw materials necessary for its industries. In truth the West’s war is about Islam and not about terror. For they realise Islam offers a potential threat to their hegemony over these precious interests, as well as their international standing. 20 www.hizb.org.uk
  • 22. The Development and Use of Oil by Muslim Countries The question needs to be asked: Why have Muslim countries failed to industrialise thereby attaining a political economy independent of the West and able to sustain itself? A Catalogue of Disasters (Iraq) Iraq's economy is characterised by an extreme dependence on oil exports and an emphasis on development through central planning. Prior to the outbreak of the war with Iran in September 1980, Iraq's economic prospects were bright. Oil production had reached a level of 3.5 million barrels per day, and oil revenues were $21 billion in 1979 and $27 billion in 1980. Iraq had amassed an estimated $35 billion in foreign exchange reserves; it had well-developed medical and educational facilities, with high literacy rates. However, the destructive war with Iran which mainly benefited the US, Britain, and Russia depleted Iraq's foreign exchange reserves, devastated its economy, and left the country saddled with a foreign debt of more than $40 billion. After hostilities ceased, oil exports gradually increased with the construction of new pipelines and the restoration of damaged facilities. Similarly Iraq's annexation of Kuwait in August 1990, subsequent swingeing international sanctions, and damage from international military action in January 1991 drastically reduced economic activity. Government policies of diverting income to key supporters of the Saddam regime while sustaining a large military and internal security force further impaired finances, leaving the average Iraqi citizen facing desperate hardships. A position that hardly improved through the harsh sanctions regime imposed on Iraq post the first Gulf war. Now five years post the most recent US led invasion, the country is barely returning to oil production levels of 3 decades ago, the countries infrastructure is in tatters and the occupiers have been unable to provide security to the population let alone development of the resources, which are now earmarked for western oil companies. In retrospect the wars and conflicts waged by the US and UK and supposedly about Saddam, succeeded in softening up Iraq for takeover. With 10% of the worlds known oil reserves and much more in un-tapped potential the motivation for invasion was clear. Yet the pre-war period also provided an indication of what is possible with some independence and political motivation backed by the oil resources. Lessons to be learnt from the 1970’s Large debts were incurred in the 1970s when the first oil shock sparked great flows of dollars from oil consumers in the West to oil producers of the Middle East and elsewhere. The oil producers unable, or without the political will, to invest the newfound wealth at home “recycled” their petrodollars by making investments in the Western industrial nations who were the largest consumers of oil. In the process, 21 www.hizb.org.uk
  • 23. the funds available to Western banks for lending to others increased substantially. They became flush with petrodollars. Many of the non-oil producing countries like Egypt, Sudan, Bangladesh, and Mexico became willing consumers of the private banks investment funds. The banks were eager to lend billions of dollars to the so-called developing countries. These countries borrowed large sums of money at low but floating interest rates. Later a fourfold rise in oil prices induced by the US decision to drop the gold standard and to flood markets with a free floating dollar led to sharp increases in interest rates and high inflation (a portend for today’s rapid run up in US$ money supply). Under these extreme conditions to pay for the sharp increase in oil prices along with other imports, many chose to borrow from the Western banks to sustain their economic growth and pay for needed imports. The Western banks actively encouraged Third World countries to borrow, and the seeds of the international debt crisis were sown. Part of the policy of these loans was to use targeted loans to instigate a better connection between Third World economies and the world market dominated by the Western nations. It also involved securing the supply of raw materials and fuel to the Western economies. By encouraging Third World countries to focus on exports and to compete with each other, industrialised countries induced a drop in the prices of exported products, leading to a reduction in production costs in the Western industrial nations and thus to increased profits. As a consequence of the high levels of indebtedness western banks, the IMF and World Bank have been able to dictate and impose economic conditions or structural adjustment policies onto the indebted nations. These have included currency devaluations, raising interest rates, imposition of cash crop farming (e.g. cotton or tobacco), liberalising trade including privatisation of key public utilities and resources, balancing trade, abolishing subsidies or provision of basic necessities to the poor, and increasing exports of commodities in order to pay back loans. The adjustment policies have implied the steady loss of key elements of national sovereignty, leading to increased dependency of the countries concerned on the Western industrialised countries and their multinational corporations. Not one of the countries applying structural adjustment has been able to sustain a high rate of growth. Everywhere, social inequalities have increased: no "adjusted" country has escaped this rule. From the Islamic perspective the most glaring matter highlighted by this cycle of decline is that it was thoroughly avoidable had the Muslim world been united as it had been historically under the Caliphate. Natural surpluses in one area of the state, for example in oil would naturally merge well with manpower, land and agricultural surpluses elsewhere. All without the costly middleman in the form of the Western banker and without the interference in economic policy and indeed sovereignty demanded from the Western nations. 22 www.hizb.org.uk
  • 24. Where has the Oil Wealth Gone? Of all proven oil reserves 60% are in the Middle East. If the known oil reserves of • Despite the abundance of oil the Islamic Muslim Africa are included – world at the most basic level is unable to the proportion of the independently cater for the basic needs its world’s oil reserves that lie people. in Islamic lands rises to over • Despite still possessing huge oil reserves 70%. Furthermore 50% of many of these economies have large public natural gas reserves reside sector debt and all face huge challenges in in the Islamic world, of the near term. which 40% lie in the Middle • Population growth rates in the Arab world East. are among the highest in the world and the demand for health care and education is Given that much of the oil in expanding rapidly. the Middle East was • The young who make up a significant, in discovered in the 1960s and some cases a majority, of the population will that since then there has soon need jobs and homes. been almost uninterrupted • Despite being endowed with huge amounts production averaging several of arable land, most Arab nations are not million barrels a day, the self-sufficient in food and many import large nations of the Arab world amounts of staple and basic foodstuff. would be expected to be • Poverty - unheard of in some rich Arab leaders in the region if not countries a decade ago - is rising, with the the world. As an example proportions of people living on less than $2 a since 1965 Saudi Arabia day growing. alone has pumped over 117 • Regional underemployment is high despite billion barrels of oil. This is high educational achievement in some equivalent to Kuwait’s countries. Actual unemployment is also current total oil reserves. At growing. a conservative $20 a barrel • In the so called ‘rich’ Arab countries this amounts to revenues of infrastructure built in the wake of the oil nearly $2.3 trillion. price boom in the 1970s and 1980s is in However, the generated disrepair at a time when demand for public wealth does not appear to services such as health and education have have resulted in never been as great. development and progress • Nationalist and territorial disputes threaten when one looks at the water supplies in the Middle East - one of the region’s statistics: its lack of most arid regions of the world. food self sufficiency, high poverty levels, growing • None of the countries can be considered unemployment and among the industrial nations. crumbling state infrastructure. 23 www.hizb.org.uk
  • 25. The veneer of city-states like Dubai, with its high-rise apartment blocks, 7 star international hotels and the new Internet-city conceal fundamental and major structural problems facing the Arab world. Failed States Due to short-termism on the part of the oil companies as well as the desire by the Western oil companies to control the refining of crude and through it their hold over oil production and oil producing countries, the Arab countries are starved of manufacturing industries even in the oil sector. 2007 production data shows that while the Middle East produced 31% of the world’s crude oil, a mere 8.3% was actually refined within the region. Without manufacturing there is no value added which means that there is no wealth creation, which is critical to build an industrial base and develop a modern self-sustaining economy. Through Capitalist macroeconomic policy management, much of it inspired by the IMF, the Arab countries have neglected the agricultural sector and the fertile arable land over several decades. As a result countries that were once self sufficient in food now import much of their basic staple food requirement. For example Egypt currently imports over 50% of its 13m ton per annum wheat requirements when once it was able to supply its people from domestic production alone. Part of the reason for this is the desperate need to conserve water – by importing virtual water – through food imports. The drive by the IMF to repay loans via cash crops has also depleted high value land usually used for wheat. The by-product of much of the macroeconomic management – principally the structural adjustment programmes - which have cut public expenditure, has been increased poverty. Poverty once unheard of in the region’s rich nations has grown in the last decade or so. According to the UN’s Arab Human Development Report, one out of every five Arabs lives on less than $2 per day. According to the same report, open unemployment in the region was estimated to be no less than 15% of the labour force. Egypt – with one of the most educated workforces in the Arab world – derives most of its export revenue from oil (raw material), Suez Canal dues and tourism. Thus, human talent is wasted on a huge scale with PhD students acting as tourist guides as opposed to being part of the wealth creating, dynamic economy. In the 1970s and 1980s hundreds of billions of dollars were spent - via five-year plans in the case of Saudi Arabia – to build public infrastructure. Extravagant sums were spent building the Jeddah and Riyadh airports alone. However, much of this is now in disrepair. This, at a time when demands for school, hospitals, roads, airports and ports has never been as great. The region’s water supplies – particularly important due to the arid climate – are under threat. According to the UN Arab Human Development report fifteen Arab countries are below the water “poverty line” with less than 1,000 cubic metres per person per year. National leaders acting on short-term ‘national interest’ have exacerbated the situation. 24 www.hizb.org.uk
  • 26. Many of the Gulf countries are in reality large cities and are not modern states at all. Many do not have the capacity or capability – standing army, agriculture and industry – for self-sustaining growth. The makeup of the Gulf region reflects the design of the colonist powers to break-up the Muslim Ummah. The make-up does not reflect any productive bond between the people. Indeed, were it not for the oil, many of the states of the GCC would find it difficult to achieve self-sustaining growth. Despite several decades of oil production including the hike in prices in 1973, which generated hundreds of billions of dollars of revenue for Gulf exporters, most of the economic activity remains dependent on the governments’ spending of oil revenues. While government planners have developed infrastructure, roads, airports, hospitals and schools particularly in the Gulf, there has not really been an imperative – until recently – to diversify economies away from oil. Consequently many of the economies remain precariously dependent for much of their economic growth – and much needed export earnings - on the international price of crude. A number of reasons are presented for the current state of affairs including: • Theocratic ‘Pseduo-Islamic’ regimes – which know little about economics, let alone modern day demands from globalisation, technological change and international money markets. • Cradle to grave welfare systems particularly in the rich Gulf states, which produce unproductive labour and budget deficits. This in turn leads to foreign borrowing. • Lack of a free market. High tariffs, nationalised industry and food and fuel subsidies which create inefficient protected industries. • The Arab/ Israeli conflict. This creates political instability and deters foreign investment in the region, which is seen as a major contributor to economic growth. • Over reliance on oil and a lack of industrial diversification exposes the economies to external shocks in oil prices. • The freedom factor. Women lack ‘rights and freedom’ and so it is thought that half the economic potential of a nation is unused. • No new creative thoughts due to closed authoritarian societies. No free press and the like. The above reasons can be characterised as wholly incorrect, politically and ideologically motivated, and for sure do not address the root cause. Myth from Reality Islam is not to blame because none of the countries in the region are actually implementing it comprehensively within any of their governance systems. Indeed, if we look historically at what has been implemented in the region: 25 www.hizb.org.uk
  • 27. • 1970s: Nationalisation and state subsidies. After independence, oil companies throughout the region were nationalised in some way or form - Iraq in the 1960s and Saudi in the 1970s as an example. • 1980s: IMF restructuring policies. Many countries adopted advice from IMF economists of balanced budgets. The insistence by the IMF on Egypt to remove subsidies of stable foodstuffs led to food riots in Egypt in 1977 as an example. • 1990s: Free-market policies. The IMF and World Bank prescription was to liberalise economies, which meant privatisations – particularly the lucrative energy sector. Other initiatives included the removal of state subsidies, reform of banking, including charging real interest rates to encourage savings and foreign direct investment. Saudi Arabia is an example here with deregulation and free market policies being pursued in order to encourage foreign direct investment. Thus, the macroeconomic management of the economies has clearly been capitalist and most of the time; policies have been directly prescribed by the IMF or the World Bank and its agencies. Even when there has not been any need for IMF funds the Gulf and Arab country governments have sought the capitalist institutions’ advice. When these governments have nationalised and given subsidies it has not been inspired on any ideological grounds but based on pragmatism and to benefit the ruling elite who have gained directly from state procurement programmes. Nationalisation has also been used to keep the most profitable businesses under the control of the political elite. Privatisation does not remove the potential for political corruption. Much has been written about the over dependence of the Arab economies on oil. Commentators write that the decline in industrial nation dependence on oil compared to the 1970s, the variability in the price of crude and the fall in OPEC’s share of trade in crude oil have impacted negatively on Arab countries. Diversification has been seen as the solution. However, this misses the point or the root cause. Oil in itself is not the core issue. Dependence wholly on the external market is. Thus diversification into tourism and international banking as in the case of Dubai or the exporting of cash crops such as cotton as in the case of Egypt or deregulation of telecommunications to encourage foreign investment as in the case of Saudi Arabia will in no way reduce or remove the dependence on external markets. An export growth strategy also has to be combined with a competitive exchange rate policy. Such a policy involves maintaining high currency reserves and its associated costs. The currency reserves that need to be held could alternatively be used in a productive way to bolster the economy. A competitive or devalued exchange rate tends to result in higher inflation and higher costs of basic and staple foods for the nation’s people and as a result hardship. At the same time inflation is likely to cause higher unemployment in export sectors and industries. Unemployment in turn causes problems for government finances as it reduces public revenues and increases demand on public finances. Accordingly the fact that most Gulf countries 26 www.hizb.org.uk
  • 28. peg their currencies to the rapidly declining US$ has meant a high and “imported” level of inflation. The lack of sustainable growth in the Arab world is directly the result of export orientated policies. Growth never becomes broad based or self-sustaining because either there are external shocks like floods or poor harvests that reduce the exporting country’s potential to sell goods abroad and/or recessions in the developed countries - usually every 5-7 years – hit the countries export demand. 27 www.hizb.org.uk
  • 29. Looking for Answers Flawed Solutions - Capitalist Contradictions On many issues the agenda presented by the Western nations, as solutions are not that at all. This is exemplified by the fact that on many occasions especially related to a countries vital interest these are not the policies and systems that the Western countries implement for themselves. Firstly, if we look at the issue of focusing development or growth strategies on exports. As has been illustrated earlier in the paper this is not a root to self- sustaining growth because fundamentally the country is extremely vulnerable to factors outside its control. Moreover, if one looks at the composition of GDP among Western economies, exports play a relatively insignificant role. In the USA, the world’s largest economy, exports represented less than 10% of GDP in 2002. These figures can be compared to the Arab countries where exports sometimes total as high as 50% of their GDP – as in the case of Kuwait. In Saudi Arabia exports account for a significant 30% of GDP. In both cases exports are dominated by just the one type of commodity – petroleum derived products. Secondly, a cornerstone of the IMF’s policy proposals to Arab countries throughout the 1980s was to achieve balanced budgets – for annual expenditure to equal income. This involved cutting public spending on education, health and infrastructure. However, this had a direct inverse impact on human development in the region as was identified in the UN Human Development Report 2002. As an example the case of Egypt cited above, which experienced food riots in 1977. The IMF, Western economists and bankers continue to handout this prescription, with Argentina the most recent casualty. On the other hand as argued earlier, by contrast these are not the policies pursued by Western nations when their own economies are facing difficulties. As an example post September 11 2001 both the USA and Europe eased monetary policy considerably with interest rates falling to 40 year lows. At the same time public expenditure rose massively – particularly in the UK – with the aim being to ease the impact of recession. This is in stark contrast to the policy stance adopted against the people in the developing world – high interest rates and public expenditure cuts – who face an even more desperate situation with many already living in poverty and without social security handouts as in the Western countries. 28 www.hizb.org.uk
  • 30. The Khilafah Solution The Khilafah (Caliphate) State represents the dominant ruling system throughout Islamic history, an institution of governance which existed for 94% of Islamic history dating back to the first Islamic state established by the Prophet Muhammad (Peace be upon him) over 1400 years ago. The State is characterised by a popularly appointed ruler (Caliph), an independent judiciary, political parties and an elected representative assembly which accounts the executive. With respect to the oil and related (food/commodity) crisis there are several key principles of the Islamic system which we put forward as a solution. • The distinctive view towards energy resources which are treated as public property and are for the benefit of all citizens under the stewardship of the state • A policy of self sufficiency over vital food and industrial/energy production shifting emphasis away from dependence on Western nations, coupled with the absolute commitment to providing the basic necessities for all citizens (food, shelter, clothing, education and healthcare). • A secure and stable monetary policy with the gold and silver standard. • Wealth based taxation according to the productive capacity of lands and unused personal wealth rather than regressive taxation of the masses via income and user taxes. • Independence from OPEC and any forms of price manipulation. Islam’s View towards the Economy and Economic Growth The Khilafah State maintains a different view towards how the economy is run and how the needs of the people are met. This is of paramount importance. The State has as a primary objective the meeting of all its citizens basic needs, absolutely and without fail. Accordingly the oil wealth and related assets will form an important factor in the meeting of this objective. In Islam, Oil and related resources are treated as public property and as such cannot be privatised. It is managed by the State on behalf of all the people and accordingly the revenues from the oil wealth will be available for meeting public needs. Unlike free market systems rules regarding the possession and gaining of wealth, together with guidance on how it should be distributed, and how it should be spent form a central tenet of economic management for the state. In this unique approach and understanding Islam places the need and reality of the human being at the forefront, as the economic problem is related to man and solving his basic needs 29 www.hizb.org.uk
  • 31. (food, shelter, clothing, education and health care). This system is based on a unique viewpoint that Islam has towards ownership, which is different from Capitalism and Socialism. Property and human effort are components of wealth and they are the means, which produce benefit. Islam interferes directly in the question of utilising some properties – so it prohibits the use of some commodities such as wine, and pork. Similarly, it prohibits benefiting from some of man’s actions such as gambling, cheating or deception, the commercialisation of a woman’s sexuality. Additionally, regarding the method of possessing property and man’s effort Islam has defined numerous laws regulating ownership, such as laws defining land reclamation, leasing, manufacturing, inheritance, donations and wills. Islam views wealth ownership and wealth utilisation differently from the subject of increasing production, and treats the two differently. Accordingly the Khilafah State will adhere to the ownership fundamentals, respecting the categorisation of assets as either public, state or private, whilst encouraging high levels of efficiency and productivity in the development of assets whether managed by the State (public and state property) or that which the individual owns. Increasing production is treated as an economic science, which every nation seeks to explore, develop and excel to attain proficiency and optimal levels of growth, and the Khilafah State is no different in this regard. To allow most of the refining of the oil reserves to be taken outside of the Muslim world is an issue of great neglect and will be reversed along with the general requirement to develop a true industrial base in the Muslim world. This is in stark contrast to Capitalist states, which treat both economic science and the economic system as one subject, one problem with one solution. The belief that the solution to all economic problems is merely to keep on increasing production i.e. economic growth. As a result of this over-emphasis on production, principles of ownership such as maintaining the core wealth of the nation – its vital utilities and resources – to the benefit of the nation and its peoples, are being lost to manipulative corporations who monopolise the wealth and the profits derived from it. Islam’s View towards Oil and Gas Crude oil is considered a Public Utility (Al-Milkiyyah Al-Ammah) in the Khilafah State. Assets, which are The Prophet (saw) said that public property, are those, which the Shariah ascribes ownership to the whole community and the “The people share in individual is prevented from possessing/controlling three things water, them. green pastures and fire (energy)” Ibn Abbas narrated that the Prophet (peace be upon him) said: “Muslims are partners (associates) in [Abu Dawud] three things: in water, pastures and fire,” reported by Abu Dawud. 30 www.hizb.org.uk
  • 32. Anas narrated from Ibn ‘Abbas adding. “And its price is haram (forbidden)”. Ibn Majah narrated from Abu Hurairah (ra) that the Prophet (pbuh) said: “Three things are not prevented from (the people); the water, the pastures and the fire”. The “fire” as mentioned in the ahadith includes energy resources such as oil, gas, and others. Also within this category of public property are the uncountable stores of mineral reserves. These will all be managed by the State on behalf of all the people. Individual or corporate ownership is prevented, as is widespread privatisation of energy, mineral and other public resources. However, regarding production of wealth, Islam encourages this by praising and motivating the people generally to earn. Islam did not interfere in defining the technical manner of increasing production or the quantity of production, rather it left that to the people to explore, advance and excel. This falls in the realm of economic science and as with other sciences is universal to all nations and it is not associated with a particular ideology. This encourages innovation and technical development to increase efficiency and output. This could fall within the private business sphere or public property sphere such as the oil production techniques. Ownership of Oil and Derivative Industries In the 1960’s and 1970 most Arab countries nationalised their oil sectors reversing past generous concession to a number of Western oil companies. As an example, in Iraq the Oil Ministry was assigned the task of overseeing the oil industry through the Iraq National Oil Company (INCO). This included oil exploration, engineering, design and all upstream and downstream operations. Nationalised property is neither public property nor state property. Under capitalism, nationalised industry is generally assets owned, run and managed by the state. In the Khilafah State public property cannot be owned by the state as all individuals have a right to the property. State property such as the Kharaj (land) and Jizya (non- Muslim tax) can be allocated to some individuals to the exclusion of others depending on the opinion of the Khalifah. However, with regard to public property, the State has no right to assign or give it to anyone. On the other hand the whole community derives benefit from such property. The State has to manage the oil resources and related products together with the related industries used to produce those products for the benefit of all Muslims. These factories can be under private ownership, and the state may choose to lease them for the benefit of the community. However, the ownership by individuals, of the tools and factories does not allow them to use them in producing oil for themselves because oil is a public property belonging to all Muslims. Accordingly the production sharing agreements currently being foisted upon Iraq violate these principles and rather than providing technical assistance in the extraction and refining of oil act to put the ownership and monopoly of oil in the hands of private multinationals and corporates benefiting the few ‘fat cats’ at the expense of the community as a whole. 31 www.hizb.org.uk
  • 33. In the Khilafah Public Ownership is not Nationalisation In Islam public ownership equates to responsibility and accountability. Liberal capitalist economies believe that individuals primarily seek material interest whereas Islam motivates the Muslims to worship their Creator in all of life’s actions. With respect to public ownership this concept is epitomised by the Khalifah Umar Abdual Aziz who when a man came to him to discuss some personal matter turned out the candle he used when dealing with public affairs and instead lit his personal candle in order to deal with the man’s issues. Islam does not deny that individuals need incentives. This incentive is the same in the private and public sector – above all the Muslim seeks to worship his Creator and that is his foremost motivation in all actions. Such a mentality should ensure that the Muslim does not waste public resources. Indeed it will motivate him to look after the public resources to the best of his ability – reduce costs and raise efficiency - because the resources, wealth and property is an amanah (trust), which Allah (SWT) will account him for. The role of the Islamic State is therefore to ensure that the issue of responsibility and accountability is at the forefront of the individuals’ mind whether he is a worker or manager in the publicly owned oil sector. Competition is arguably as important an incentive as ownership. Excessive profits in water, gas and the telecoms sectors in the UK resulted largely due to an absence of effective competition, which is particularly detrimental when the companies are privately owned, as there is little consideration of public interest. Thus the Khilafah State – while keeping oil assets under public ownership – will encourage competition between its different oil producing and refining units using pay and rewards linked to productivity and efficiency. The Khilafah State while keeping oil assets under public ownership may hire or lease rigs, platforms, pipelines, tankers and refining plant and machinery to process the oil and get it to the market. Consequently, as long as there is competition within these industries, the State should produce oil and oil products competitively and efficiently. Public ownership of assets also does not preclude the State from clearly and precisely defining a service or an output that it wants to achieve – say the testing of oil samples – and contracting it to private enterprise or asking private enterprise to bid for such a contract. Indeed, any activity that can be clearly and precisely defined can be contracted to the private sector, which will have the incentive to innovate and be efficient for a market rate fee. The State can also establish bench marking between its various oil producing units to spread best practice (efficient) operations and processes amongst all. In effect this will remove inefficiency among the low performing operations. Public ownership of oil will ensure that long term investment and planning is devoted to a most valuable resource so that waste is minimised and oil is preserved 32 www.hizb.org.uk
  • 34. for future generations. This is particularly important as short-termism in the private sector has led to waste and inefficiency. A pertinent example here is the flaring of gas that occurs in Nigeria. Oil companies in Nigeria – many of which are household names in the West – have for decades flared natural gases which are a by-product of the oil production in the region. The companies justify the wholesale wasting of this gas – not to mention the health and environmental damage it causes – by arguing that this is the cheapest option as it would cost too much to capture, store and transport the gas to the market. This short sighted view has led to an enormous waste of resources given that Nigeria has an estimated 180 billion cubic feet of proven natural gas making it the ninth largest concentration in the world. In 2002, with more than 1,000 oil fields located in the Nigerian delta, the country’s oil producing operations were flaring 75% of the gas produced – that’s equivalent to 2bn standard cubic feet of gas. Public ownership of oil resources will also mean that the revenue generated is invested in the public interest and can be used for development. If the profits of the private oil companies are anything to go by this could provide significant funds for useful and productive public investment. To illustrate this, oil producers are among the largest companies in the world1 with Exxon Mobil at number 2, Royal Dutch/Shell at number 3, and BP at number 4. An immense amount of development could be possible if this wealth is reinvested in the countries from which much of it is taken. The Nigerian delta is among the least developed regions in the world with desperate residents lacking in basic schooling and health care despite over a decade of oil exports from the region. Oil produces many by-products such as synthetic rubbers, fibres, polystyrene, adhesives, road building material and most importantly plastics (it is estimated that 90% of all consumer goods use plastic). The Khilafah State can assist businesses with easy and inexpensive access to oil in order to nurture and develop petrochemical industries. The State can also aim to be at the forefront (cutting edge) of new research and development into petrochemicals and gasses. A stable monetary system in the Khilafah State Most business people lament the problems they face with unstable foreign exchange markets and the scourge of inflation. The Khilafah State policy is to maintain the gold and silver standard for its currency. As the issued currency of dinars and dirhams will be gold and silver, or if a paper based system is adopted then the paper currency will be 100% backed by gold and silver reserves, there is no room for the state to inflate its currency by wantonly printing more money, as exercised in the fiat currency economies. Accordingly commodity prices will be more stable, but will still naturally fluctuate up and down based on market supply and demand. Taxation Policy 1 2001 Financial Times 500 largest companies in the world table 33 www.hizb.org.uk
  • 35. The Khilafah State is not free to apply taxes as it decides. The Shariah has set out clearly the tax policy of the state and citizens will not be burdened with fuel duty, VAT, Corporation tax, income taxes and the plethora of other taxes now commonplace throughout the western economies. Tax in the Khilafah is centred around unused wealth (Zakat) and land taxes based on the productive capacity of the land (Zharaj and Ushr). Non-Muslims who are exempt from military service and Zakat pay a Jizya (head tax) if they are male and can afford it. Compared to western taxes the Jizya is a nominal amount. Oil and gas cannot be used as a lever upon which the masses are burdened with tax. The Khilafah will not be part of OPEC OPEC's twelve members (9 of which are Muslim countries) collectively supply about 43 per cent of the world's oil output, and possess more than three-quarters of the world's total proven crude oil reserves. OPEC under the leadership of Saudi Arabia manipulates the world oil market by assigning each member country a production quota – in Prophet Mohammad reality fixing output. In fact, OPEC has been politically manipulated through Saudi Arabia to (saw) forbade practices generally serve the interests of capitalist (oil like hoarding which consuming) nations. Saudi Arabia has acted as a manipulates the market. ‘swing’ supplier increasing or decreasing output to stabilise world prices to serve the interests of industrial nations. Prophet Mohammad (saw) forbade practices like hoarding which manipulates the market. Narrated from Ma’akal ibn Yasar that he said the Messenger of Allah (SWT) said: “Whosoever was involved in any of the prices of the Muslims, so as to increase it for them it would be due on Allah to place him in a great fire at the Day of Judgement”. Thus, the practices of OPEC are contrary to the Shar’iah. Actions aimed at fixing prices arbitrarily at high or low levels are not acceptable in Islam. Enabling commodities to trade freely on markets without government interference contributes to economic stability and provides businesses and consumers with a higher level of predictability over prices. 34 www.hizb.org.uk
  • 36. Conclusion Meyrav Wurmser, the director of Middle East Studies at the Hudson Institute, characterised the Muslim world as having failing or failed autocracies, repression, weak and deteriorating economies, and double-digit unemployment. The problems, Wurmser cited, are the regimes in the region – unpopular with their constituent populations and overwhelmingly viewed as backed by western powers. The alternative to this failed political architecture has increasingly centred on a greater role for Islam in the politics of the Muslim world. Elections in the Muslim world now invariably go to Islamic parties, despite many obstacles to Islamic political representation, like rigidly secular constitutions such as in Turkey, external interference fixing the criteria for candidates such as in Iraq and Afghanistan, or the overt restrictions placed on Islamic parties such as arrests and strict quotas from the Mubarak regime in Egypt. Economically, the Arab world specifically and the Muslim countries generally are at a cross-road: Do they continue to fumble with pragmatic, inconsistent capitalist – IMF and World Bank – inspired policies and systems or do they embark on a radical solution consistent with their belief? The latter was a solution that was applied and worked for 1300 years – the Khilafah (Caliphate) State. The thoughts and systems that applied in the Caliphate brought the glory, honour, development and progress ranging from science and medicine to architecture and culture that this noble Ummah presently yearns for. As we said at the outset, it has been the absence of the Islamic way of life in the Muslim world which has led to this instability, poverty and injustice; and it is only its resumption which gives any hope of change and progress. In the Muslim world (and other developing countries) the impact of this crisis is unfolding into something truly horrific. The price of basic foodstuffs such as rice and flour has soared and in Pakistan, people have killed themselves in hunger and desperation. The paradox is that Muslim lands are blessed with oil wealth, human resources, and rich agricultural lands, to such an extent that there should be the potential to take a lead in the fight against global poverty. Yet the lack of political will and leadership is such that there is no help for their own citizens, never mind lead such a global struggle. The Khilafah State is the manifestation of political unity for Muslims so they can be harnessed in a united and effective way. The strengths in one area can provide solutions to the deficiencies in other areas. The Gulf States have oil, financial wealth but few people. Countries like Indonesia, Pakistan and Bangladesh have huge human resource, manpower and skills, but are poor. 35 www.hizb.org.uk
  • 37. The Khilafah state is a system of government that puts the interests of the weak foremost in direct contrast to the criminal neglect of the current regimes, whose track record shows they serve western interests, their own or those of a tiny elite - but not the millions who struggle and suffer. Only when we see a system based upon the values, beliefs and historic tradition that the people respect, and that deals with the problems according to the needs of its people will the cycle of oppression, exploitation and instability end. We believe that as people increasingly realise this, the current general trust and desire for Islam that the masses feel – knowing it is revealed by Allah and witnessing the failure of other models - will translate into a conviction for the Khilafah, the Shariah and the detailed solutions they offer. But it is, more importantly, the confidence in Islam, the trust in the promise of Allah, the adherence to Islam in every facet of life, the good deeds and sacrifices of those who work to re-establish this way of life that are all elements needed to fulfil the promise of Allah for the inevitable return of the Khilafah. We pray that Allah accepts this paper from us, as a small effort in this direction. He is truly As-Sami (the One who Hears all) and Al-Mujeeb (the One who Responds). "Allah has promised those among you who believe, and do deeds of righteousness, that He will certainly grant them succession to in the earth, as He granted it to those before them, and He will grant them the authority to practice their deen, that which He has chosen for them. And He will surly give them in exchange a safe security after their fear…" Translated meaning Surah An-Noor Verse 55 36 www.hizb.org.uk
  • 38. Hizb ut-Tahrir (the Liberation Party) is a global Islamic political organisation established in 1953 under the leadership of its founder - the honourable scholar, thinker, politician, and judge in the Court of Appeals in Al-Quds (Jerusalem) - Taqiuddin an-Nabhani. The current leader of the organisation is Ata ibn Khaleel Abu Rushta. In the Muslim world, Hizb ut-Tahrir works at all levels of society to restore to the Muslims a means of living an Islamic way of life under the shade of the Khilafah State (Caliphate) following a solely intellectual and political method. Exclusive to the Muslim world, our political aim is the re- establishment of the Islamic Caliphate as an independent state - having an elected and accountable ruler, an independent judiciary, political parties, the rule of law and equal rights for minority groups. Citizens of the Caliphate have every right to be involved in politics and accounting the ruler - as the role of the ruler (Khalifah) is that of a servant to the masses, governing them with justice. In the West, Hizb ut-Tahrir works to cultivate a Muslim community that lives by Islam in thought and deed, whereby adhering to the rules of Islam and preserving a strong Islamic identity. The party does not work in the West to change the system of government, but works to project a positive image of Islam to Western society and engages in dialogue with Western thinkers, policymakers and academics. The party is active throughout the Middle East, Central Asia, South- East Asia, Africa, and the Indian subcontinent, Europe, Australasia and the Americas. 37 www.hizb.org.uk

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