23 February, 2016

National Budgets & the Productive Use of the Petrodollar

Jamal Fuad,
Ph.D., Retiree, FAO and the World Bank, International Consultant
February 20, 2016

Oil is an important international commodity. Its supply and demand is also internationally manipulated. The industrial countries have the largest demand for this commodity, not only for use as fuel, but also as a mother commodity for the manufacture of hundreds of other essential items and accessories. Actually, less than 20% of oil imported is used for transport and energy generation; the remainder is being used for the production of a variety of products, from ladies perfume to auto bodies, musical instruments, house and health furniture, fertilizers, and much more. That is why the industrial countries are in such a high competition to acquire concession for its production and pricing.

Oil is also a political commodity. Its supply and demand can easily be manipulated to set its international pricing. Being a major source of energy and of high demand worldwide, oil can also easily damage economies of nations that depend solely on oil for their annual budgetary needs.Further, small oil producers have no role in deciding the price of oil they pour into the market. Even OPEC, the Organization of Oil Producing Countries, headquartered in Geneva, supposedly set up to regulate the production and the price of oil, is limited in its power as to how much oil is to be marketed and at what price.

The conclusion is that while the supply and demand levels have a major impact on the oil market price, likewise, the world political environment is also a factor in setting oil production levels and its pricing. Oil is a major player in the ongoing cold war between the great powers of the world, Such as the current situation between the United States and its allies on one hand, and Russia, China, and their allies on the other.

Further, Petrodollar plays a role in the East/West conflict, the USA wanting continued use of the dollar as the currency in all world oil transactions. Thus, USA has signed special agreements with other major oil producing countries to keep using the dollar in exchange for the United States’ commitment to protect such countries from outside aggression.

Oil politics is in action in the existing conflicts in Yemen, and to some extent in Syria, between the Russians and the United States, as they have divergent viewpoints. The recent decline of oil prices is directly attributed to differences of opinion between Saudi Arabia and Iran regarding the ongoing conflict in Yemen. The Saudis, being a major world oil producer, have inundated the market with oil, with the results of bringing its global price down, targeting mainly the Iranian and the Russian economies. The United States has also decreased its demand for foreign oil, which has kept the supply of oil at an all time high, forcing oil prices down.

The industrial countries are also working hard on decreasing their dependence on oil. They are expanding their research at developing energy sources other than that from oil, such as the use of Solar, Wind, Ocean, energies, including what comes from the nuclear fusion.

These international efforts to decrease the need for oil will eventually increases oil supply levels, and would eventually drive prices down. With such price fluctuations, setting national budgets solely on oil revenues becomes problematic and unwise.

Here, I would like to summarize the risks involved in depending solely on oil for annual national budgets, and strongly suggest that we must look at other sources where we can have control over sources of our revenues. To repeat:

1.      The volatile nature of the oil market is such that, making price predictions difficult, and revenues uncertain.
2.      We have no control over Oil world markets and its pricing mechanism.
3.      Its use as a political tool, both by the large oil producers, and also by the great political powers of the world, makes the oil sector vulnerable. 
4.      Future global use of oil as the main source of energy is in doubt. Researchers around the world are busy at finding alternatives to oil, predicting lower prices.
5.      Then again, oil reserves are finite and cannot continue forever. Every well has the possibility to eventually dry up, some sooner and some later.

These reasons must be convincing enough to compel us to diversify the sources of our annual revenue.

Alternatives Sources of Revenue?

Having said this, I am not advocating shunning entirely the use of our major source of funds from the sale of oil. Monies received from the sale of oil should be put in a special fund, to be possibly named Kurdistan Development Fund, to be used mainly for addressing the sector that brings us the most revenues and creates work for our citizens. Then, development of our human resources is of utmost importance, followed by the rehabilitation of our basic infra-structure, especially the supply of electricity and water, construction of major roads, building housing settlements, schools, educational and training facilities, fully equipped hospitals, construction of small industrial outlets, and developing modern tourist facilities, etc.

However, the most important sector guaranteeing a stable revenue is the agricultural sector. We need to utilize our God-given natural resources of fertile lands, water, and a fairly favorable climate, to ensure food security for our nation. The agricultural sector must receive the lion’s share of the petrodollar to become viable again.

Here some may comment: “Here we go again,” but yes, I am an agricultural activist, and firmly believe that rejuvenating our agricultural sector will have a great impact on increasing our national wealth, putting our young generation to work, and insure our food security.

Perhaps the recent budgetary crunch was a wakeup call for all. First, for the authorities to realize that we urgently need a revival of the agricultural sector. It is our economic priority number one. It is quite risky to rely on the import of our daily food from abroad. As the world population is on the rise, currently standing at 7.4 billion, a day will come when no matter how much money we may have, the food market would be too tight to provide us with our food requirements. Is it not a shame to bring carrots from Australia and USA, vegetables and fruits from our neighbors, poultry, beef, and fish from South America, and dairy products from a country that has not even one free flowing river. Why are we not utilizing our God-given fertile land and water, and a favorable climate that allow for the production of just about every food and feed items that we need. It is not only that we must insure our daily food, but most importantly is that the sector creates work, and our young generation

doesn’t have to risk their lives to emigrate and drown in the

distant seas. The sad joke is that the fish in those oceans have started learning Kurdish for having met so many of them.

And second, we seem to have a very short memory of our very recent economic past. It was only in the 1990s that people were on the verge of a famine, as a result of sanctions imposed by Baghdad. People in those years used to sell their furniture, dismantle their houses, pulling out doors and windows and offer such for sale to insure a meager living for their families. It is very sad to see that soon after the end of such difficulties people wasting so much food, throwing away items received from the oil for food program, and even using wheat flour, instead of gypsum, to draw construction sketches on the ground for their homes. Truckloads of spoiled bread are being thrown away daily by our citizens. We are also wasteful of the use of our water and electricity, whenever it is supplied, with minimum consideration for our neighbors.

Taking a look at our neighbors, we find that our nation has been endowed with the most of the water and sufficient fertile land, not available for other people in the region. So let us develop our fertile land and water resources for the production of most of our agricultural needs. Sufficient budget from the oil money should be allocated for this sector. Without food security there is no national security. This sector has been very much damaged and requires proper attention to re-educate our farmers to prepare them and move them to the modern age and to bring farming production up to the modern times. We must become self-sufficient in our needs for all food and feed items.

We need also to make the agricultural profession attractive to our young generation and to many others who are still young enough and can be part of a variety of agricultural programs. Many of these middle- aged men are tied up to mostly sedentary, non-productive jobs (Guards, policemen, janitors, drivers, watchmen), most of which are not needed. I am sure that with proper training they can become active modern farmers. The current practice of having so many idle employees is a great waste of human resources that need to be seriously addressed.

Another important waste is the use of good agricultural lands for settlements, or for airports, where more suitable areas could have been found for both needs. I also hear talks about amateur activities for refining crude oil in some areas of Kurdistan that must immediately come to a halt. In this operation, waste from crude refining activities is being dumped on fertile agricultural land, making it useless for agricultural production.

Oil money should actively address building up our human resources. Qualified candidates should be awarded scholarships to attend accredited institutes/universities, on all aspects of technical, administrative, and managerial subjects required by our young emerging nation. If we intend to be a sovereign nation, then preparing the human resource is an important priority.

Our environment has already suffered a great deal: From chemical bombardment, building military roads, or digging defense trenches by the army’s earlier combat units in Kurdistan. It is about time we showed love of our country and stopped hurting our motherland any further.

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