Corruption still hinders Arab energy sector

Article Summary
While the Arab energy sector continues to play an important role in the region’s economies, it is facing a number of challenges.

The Arab oil industry continues to play the leading role in the region’s economy. However, this industry is facing significant challenges that will adversely affect economies and performance if current problems are not solved.

The first challenge is the deterioration the oil industry is witnessing due to wars, armed conflicts and international blockade. Wars and blockades have been ongoing since the 1980s, with different repercussions on one country or the other. The subsequent chaos has taken a toll on no less than eight countries. There are, for example, the long wars, blockade and occupation Iraq went through and the blazing of oil wells in Kuwait during the occupation, in addition to the blockade in Libya, and the destruction of oil industry in Sudan and South Sudan due to the wars.

Also, the militias of the Arab Spring have taken over oil facilities in Syria and Libya, resulting in the disruption of production and the sabotage of some oil fields. Algeria suffered destruction due to the terrorist attack on the In Amenas gas factory, which caused the death of scores of employees and workers. The two foreign companies working in the field, British BP and Norwegian Statoil, put work on hold for months until they made sure facilities were secure. International oil companies had concerns about working in Algeria, raising the ceiling of their contractual demands.

The failure of Arab regimes in establishing social peace and adopting democracy was a leading reason behind foreign adventures and the wide spread of terrorist organizations wreaking havoc and causing deaths of innocent people. It is very difficult to protect oil production amid such insecurity, and this is unfortunate. National oil companies, whose staff has been comprised of nationals only since the 1950s, were able to compete with giant foreign companies amid hard conditions. Militias are trying to fight the regimes by halting production and destroying facilities to cut the state short of money. They are also trying in vain to export oil for their own accounts, or for the accounts of some leaders working with them, to gain quick and large amounts of money at the expense of the country.

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The second challenge is the widespread culture of corruption in Arab countries. The types of oil corruption vary, starting with influential figures obtaining proxies from foreign companies. Of course, in this case, agents only provide personal services that are limited to facilitating the dealings of the company with competent authorities. The scope of corruption extends to include tenders of logistic and engineering service contracts, construction work and sales contracts for international companies.

Corruption is rampant in the Arab world among officials of all ranks. As long as this epidemic prevails, the lucrative oil sector can be no exception. Certain national oil companies were able to take necessary measures against corruption. However, this is just an exception, despite some valuable experiences of Arab national oil companies in fighting corruption. These experiences were difficult and are internationally renowned. The result of this epidemic is self-destruction. The problem that we are facing is that those who ousted the corrupt were even more corrupt.

Third, there is the way oil proceeds are dealt with and distributed in the annual budget items. The majority of money is allocated to salaries and pensions and herein lies the danger: the heavy reliance on high production levels and high prices to fund spending — which can equal the country’s whole production capability sometimes — at a time when production levels or high prices are not guaranteed. Due to the way a country is governed and the absence of taxation, some rulers cannot keep on ruling without buying off the conscience of people through useless appointments.

Spending huge amounts of money on non-productive sectors at the expense of development, modern education, services and infrastructure, in general, is an easy decision, but has many disadvantages. Non-productive or rather obstructive bureaucracy hampers the affairs of citizens. Overblown bureaucracy also impedes economic life and increases bribery to facilitate transactions.

Fourth, the increasing rates of consumption are critical due to increasing population and high levels of urban growth, as well as the increasing need for energy. Organization of Arab Petroleum Exporting Countries (OAPEC) data indicates that the Arab rate of energy consumption increased from the equivalent of about 11.6 million barrels of oil per day to about 13.5 million between 2009 and 2012. Average annual growth reached about 5.2%, which is much higher than growth rates in industrial countries. The average annual increase in China in recent years reached about 8%. Evidently, there is a big difference between Arab states and industrial productive countries and China. Arab experts are concerned about the steadily increasing consumption rates. If this trend continues, which is likely, export rates will plummet, negatively affecting local economies and the global oil trade.

There are several ways to address this challenge through complementary steps, including: increasing the use of alternative energies in electricity generation; raising fuel prices to be in line with their global rates, or at least not go below the cost of production as is currently the case; educating citizens about the rationalization of consumption; and increasing the use of natural gas or even crude oil (like in some Arab countries) instead of petroleum products to generate electricity.

It is very difficult to separate the health and safety of the oil industry from the deteriorating political and social situations in countries. However, it is possible to introduce some reforms and policies that allow the rationalization of the industry’s work and that maintain its competitiveness compared with similar industries in other countries.

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Found in: oil, global trade, economy, corruption, arab world
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