ECONOMIC AND FINANCIAL COMMITTEE
(ECOFIN)
Topic A: The Impact of Instability in the Middle East on
Global Economic Trends
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Introduction
Instability in the Middle East spans several key issues, including the rise of the Islamic State
in Iraq and Syria (ISIS) in the summer of 2014, the Syrian crisis, as well as the ongoing conflict
between Israel and Palestine. The Middle East holds a significant stake in global oil production, with
66% of the Organization of the Petroleum Exporting Countries’ (OPEC) total oil reserves
originating from the region. Considering the importance of oil in primary and secondary economic
sectors coupled with the general depletion of energy resources, the Middle East plays an important
role in the world economy. As such, recent and ongoing instabilities are a cause for concern.
Iraq is home to the fifth largest oil reserve in the word. The “Medium Term Oil Report
2014” of the International Energy Agency (IEA) forecasted that Iraq’s increase in oil production
would constitute three-fifths of growth in OPEC’s oil production until 2019. ISIS has recently taken
control of small crude oil fields in order to finance its operations, making it an economically selfsufficient entity. The self-proclaimed state sells steeply discounted oil through smuggling networks,
creating additional competition for Iraqi oil companies.
Although ISIS’s presence is relatively new, since the 1973 Arab-Israeli War, crude oil prices
have risen and fallen in conjunction with tensions of the Israel-Palestine conflict. As conflict
between the two sides reaches a tipping point, so does investor and producer confidence resulting in
an equivalent response reflected in oil prices, with one notable example occurring during Israel’s war
against Hamas in 2009 sharply increasing the price of oil. Conversely however, in times of low
turmoil, prices have seen less volatility. These dynamics have played a key role in price stability over
the course of the past few decades.
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Historically, Organization for Economic Co-operation and Development (OECD) countries
have often been most impacted by rising oil prices. Yet, this has not been the case in recent years. In
1992, OECD countries consumed about 72% of the world’s oil production. However, in 2014, the
consumption had fallen down to 49% with non-OECD countries consuming the remaining 51%.
Hence, developing countries, whose economies are predominantly driven by primary and secondary
sectors, will find increased restraints and stunted economic growth as a result of increasing oil prices.
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Background
The Middle East has brimmed with religious, economic, and political conflicts throughout
the centuries. These clashes not only impacted the immediate region and the countries contained
within, but have had a massive global impact as well. However, because of the number of conflicts
that have occurred in the region over the past fifty years alone, there exist many examples of the farreaching consequences conflicts in the region inflict, and continue to have, on the global economy.
A few key examples are highlighted below.
1973 Oil Crisis
OPEC was founded in 1960 as a response to growing international pressure
on least developed countries (LDCs) to provide a larger voice against these pressures, with notable
members including Iran, Iraq, and Saudi Arabia. The organization remained largely dormant in its
influence until the aftermath of the 1967 Arab-Israeli War, when OPEC through the creation of the
Organization of Arab Petroleum Exporting Countries began applying pressure on Western countries
that supported Israel. This group, in conjunction with OPEC, showed its true strength in October
1973 during the Yom Kippur War, when it set an oil embargo against allies of Israel, which included
the United States, Japan, and much of Western Europe. Although the war was the paramount reason
behind igniting the conflict, years of steady oil prices, rising energy needs, and increasing export
costs played an equally important part.
The consequences of this embargo were immediately felt worldwide. Oil producing nations
experienced an economic windfall as oil barrel prices quadrupled in less than one year. This massive
price shock forced oil and gas conservation measures by many countries, including the United States
who implemented Daylight Savings Time and gas purchase restrictions among many other policies.
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Other countries affected by the price increase saw the implementation of similar procedures. These
strong restrictions lasted well beyond the embargo’s official end date in March of 1974, as countries
struggled to recover from the oil shock.
There were a number of long-lasting effects that brewed from this crisis. Worldwide stock
markets saw a large devaluation, with the most affected being the oil-producing companies who at
the time figured amongst the largest companies in the world. Several economies lowered interest
rates to spur growth, which only led to a deepening of the stagflation period. Energy conservation
and research took on a new importance across the world, including using alternative energy methods
to meet the world’s energy demand. All of these effects created massive change throughout the
world marketplace, the remnants of which are still being felt today.
Israel-Palestine Conflict
The Israel-Palestine conflict originates in 1948, when Palestine was
partitioned during British colonization into two newly independent states – one Arab and the other
Jewish. Although Jews accounted for less than one third of the collective population, UN resolution
181 allotted a greater amount of land for Jews over Arabs, sparking conflict among Jewish forces
and local Palestinian militants. Once Israel declared its independence as a sovereign state, war
erupted among Israeli forces and adjacent Arab countries. The economic and social costs suffered
by Palestinians have been enormous since the conflict’s breakout.
By 1967, Israeli forces occupied a significant portion of Palestinian territory – West Bank,
Gaza, East Jerusalem and the Syrian Golan Heights. Amidst increasing tension, Palestinians initiated
a popular uprising in 1987. Hamas, a Palestinian Islamic organization, was established during the
uprising, comprising of both a political and military wing; it is recognized as a terrorist organization
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by numerous Western powers. During the last decade, particularly since Israeli forces withdrew from
the Gaza Strip in 2005, Hamas has grown into a well-funded entity withstanding sanctions as well as
other political and economic measures raised by opposing nations. Western efforts to cripple Hamas
have ultimately failed due to its loyal funding sources as well as significant trade conducted through
Egypt’s over 800 underground tunnels. While this began many years prior, trade has expanded
drastically.
2003 Iraq Invasion Starting in the middle of 2002, the United States (US) began advocating for
the nuclear disarmament of Iraq due to its alleged involvement in the September 11 attacks and
possession of weapons of mass destruction. The US formed an alliance with countries from Western
Europe; the formation of a coalition coupled with the non-compliance of Iraq to the coalition’s
demands, led to a combined invasion into the country in March of 2003.
As a result of this invasion, global oil prices jumped significantly. By July 30th 2004, the price
of an oil barrel had reached $43, which corresponded to a higher real price as compared to previous
oil price shocks. The rate at which the price of oil was climbing was such a concern for most
countries that a lot of them ended up reducing their GDP growth forecasts by upwards of 1%. Due
to the recent nature of the invasion, the full long-term impact is still unknown. However, sustained
oil price increases are thought to have contributed to the 2008 global financial crisis due to less
money being available for domestic spending. Through these impacts, the invasion was seen to have
a large impact on the global economy.
While the invasion of Iraq had immediate economic impacts, it also paved the path for a
significant future economic impact. It is believed that ISIS arose as a result of the Iraq invasion.
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Former US President George W. Bush recently stated that his only regret of the Iraq invasion is the
uprising of ISIS. The economic impact of their presence in Syria and Iraq is massive, particularly
through their occupation of numerous oil fields.
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Current Situation
Israel-Palestine Conflict
The recent conflict between Hamas and Israel has its roots in the
economic insecurity of the Gaza strip and, more specifically, threats to the solvency of Hamas’
government. Because Hamas is designated as a terrorist organization, most foreign aid is directed
towards either the Palestine Liberation Organization (PLO) or the West Bank. Hamas, in order to
maintain their bureaucracy, relies on cash given by donors that is smuggled through the tunnels
along the border with Egypt. In the past, this money has been mostly Iranian or Qatari in origin,
although the brief reign of Mohammed Morsi in Egypt in 2012-13 saw an increase in cross border
support between the Egyptian Muslim Brotherhood and Hamas.
In 2010, Hamas’ budget was reported to be $540 million, with $100 million estimated to be
coming from Iran and an indeterminate but significant percentage coming from taxation involving
smuggling operations on the Egyptian border - a trade which peaked at $850 million that year.
However, this funding dried up considerably in the lead up to the conflict. The rise of
Islamist groups in Syria put Hamas’ Sunni Islamist ideologies in direct conflict with Iran and Syria’s
attempt to defend their Shiite axis. Similarly, the rise of the Al-Sisi regime in Egypt and the
subsequent crackdown on cross-border smuggling cut into Hamas’ finances, putting them in an
untenable position going into reconciliation negotiations with Fatah (a leading Palestinian political
party).
As seen in the first Gaza War in 2008, times of financial insecurity often manifest themselves
in the form of increased provocation of Israeli security forces. In the midst of potential budgetary
shortfalls and a new unity government, Hamas launched unprecedented amounts of rockets at Israeli
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cities, drawing a response in the form of airstrikes and an eventual ground invasion by the Israel
Defense Forces. The conflict resulted in over 2000 dead civilians in Gaza and a noted uptick in
support for Hamas’ government alongside the collapse of the unity deal.
Since the second Gaza War, over $5.4 billion worth of aid has been pledged to help rebuild
Gaza, which has precipitated into a period of relative calm on the strip. However, concerns over the
use of this money have led to an imposition of a series of conditions. The challenge that faces the
international community is to provide the funding required to keep Gaza’s economy afloat without
allowing any international aid to be diverted to designated terrorist groups, which include Hamas.
The military coup in Egypt and the crackdown on cross-border smuggling by the al-Sisi
regime has fueled the creation of a new, escalating conflict in the Sinai Peninsula. Islamist groups,
some with connections to Hamas and some with allegiance to ISIS, have been conducting attacks in
the peninsula. These groups already pose a significant threat to global oil supplies —they have
repeatedly carried out bombings of pipelines in Egypt and Jordan but increased government
intervention and the rise of ISIS has emboldened these rebels to escalate their campaign. Currently,
the insurgency consists of hit-and-run attacks on Egyptian police and military personnel, with
occasional retaliatory attacks through airstrikes by the Egyptian government.
The Sinai insurgents, in an interesting reversal of history, get their weapons by smuggling
small arms out of Gaza through the tunnels into Egypt. The economic impact of this fight on the
globe could be much greater, as the Sinai Peninsula is bordered on one side by the Suez Canal,
which is directly involved with 8% of all global trade. The canal is also the main passageway for oil
exports from the Gulf States. As of now, the Suez has been safe from the insurgency, but any
escalation of the conflict would put the key trade route within possible range of attacks.
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Islamic State (ISIS) In April 2013, an offshoot of Al-Qaeda along with other small rebel groups
in Syria formed a more official and united group. The name varies from ISIL (Islamic State of Iraq
and the Levant) to ISI (Islamic State of Iraq) to ISIS (Islamic State of Syria). However, the group
officially started calling itself ISIS (Islamic State) from June 2014, in a bid to create a caliphate.
In the summer of 2014, ISIS
strengthened its appearance, causing
spillover effects in global economic
relations. They announced control of
vast regions in Syria and Iraq, while
continuing
to
expand
surrounding
territories,
into
including
Turkey. They have also released
videos
involving
beheadings
of
western citizens in response to Western-led coalitions, prompting a serious military engagement
from countries such as the US, France and United Kingdom. Countries that have publicly pledged
support in quelling ISIS have invested a significant amount in defense spending. An increase in
government spending for many of these countries contributes to a domestic deficit, potentially
weakening their economies. But this is unlikely to have a sizeable effect on a global scale.
ISIS’s control of oil-producing territories also poses a threat to oil production and global oil
prices. It is most certainly a test for global markets though, so far, production has not been
particularly impacted. The World Bank estimates that Iraqi oil production has gone down from 3.4
million barrels per day in May to 3.1 million in August. Financial markets have also remained largely
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impervious to politically generated turmoil. This is helped by the fact that the general trend is for
countries to reduce reliance on foreign oil due to surging energy production. ISIS currently operates
an oil smuggling system, which provides them with a stable income flow. Captured territory includes
Iraq’s largest refinery in Baiji, as well as a number of other gas and oil fields.
If ISIS cannot be effectively contained or combated, growth in oil-producing regions and
commodity importers could slow sharply, causing a spike in prices of oil; the International Monetary
Fund (IMF) estimates that the increase in prices could reach upwards of 20%. High oil prices are
also likely to put pressure on fuel subsidies, potentially widening fiscal deficits in many regions,
including the Middle East and East Asia.
Internally, ISIS is trying to create a country in every sense. It has its own economic system
for expenses, and is attempting to create its own independent currency system, distancing itself from
the US dollar. It plans to print its own currency - the Islamic dinar; the seven coins will be made
from copper, silver, and gold with only physical value, which is very similar to the gold standard.
There would be no intangible value backing the dinar. It can be safely stated that ISIS is one of the
wealthiest terrorist groups in recent history, which is one of the reasons that has prompted the
group to inject it’s money back into the global economy instead of simply hoarding. Among other
impacts, there are several depreciation effects that could occur if ISIS is successful with the
enforcement of its currency.
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Bloc Positions
Oil-Producing Nations
This bloc would comprise of oil-producing nations, whose
economies depend heavily on oil exports. ISIS has been exporting oil at prices significantly lower
than the global oil price, thereby making it difficult for OPEC nations and other oil producers to
balance their budgets. Additionally, the IMF has warned that the massive surpluses enjoyed by oil
exporters are nearing to an end due to heavy spending as well as growing populations. This makes
the oil-producing nations increasingly vulnerable to oil prices, which have fallen more than a third in
2014. Some economies heavily dependent on oil production, especially those in the Middle East,
need oil to be priced around $80 per barrel in order to break even. Similarly, countries with offshore
oil reserves in Latin America need oil prices to hover around $120 per barrel to attract sizeable
foreign investment.
Countries: Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United
Arab Emirates, Venezuela
Western Nations
This bloc would comprise of Western nations that highly depend on oil
imports. At current oil prices, countries in this bloc that depend significantly on oil imports from the
Middle East to meet their energy requirements are benefiting deeply by the fall in global prices of oil.
Any conflict in the Middle East that has the potential to impact the price of oil always puts these
countries at an edge. Countries in this bloc have also formed a coalition to fight ISIS; they have
pledged military support, which is costly and is likely to negatively affect their economies that have
already been weakened by the 2008 Economic Crisis and the ongoing sovereign debt crisis in
Europe. Another conflict associated with this bloc is the one involving Israel and Palestine. Though
this bloc favors neither Israel nor Palestine in entirety, it must be noted that most of these countries
have historically supported Israel in its conflict with Palestine.
Countries: United States, United Kingdom, Canada, France, Germany, Denmark, Poland, Australia,
Turkey, Italy
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Questions to Consider
1. What will be the repercussions of volatility in oil prices on your country’s economy?
2. What can be done to minimize the impact of oil prices on the international economy?
3. What is your country’s stance on issues involving Israel/Palestine and ISIS?
4. How can the impacts of military engagement in Iraq/Syria on the economies of neighboring
Middle Eastern countries be minimized?
5. What are some ways in which oil-producing nations in Latin America can attract foreign
investment?
6. In the past few months, there has been a spike in refugees from Syria and Iraq. Has your country
been affected by this cross-border movement?
7. What can be done to prevent the occurring of a global recession driven by oil prices?
8. How do religious differences directly impact economic policies in Middle Eastern countries as
compared to Western countries?
These questions simply serve as a guide to aid you in your research. Please do not let them pose any
sort of restrictions on what you can address.
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Recommended Sources
Here is a list of sources to further your research.
The United Nations:
http://www.un.org/en/
Organization of Petroleum Exporting Countries (OPEC):
http://www.opec.org/opec_web/en/index.htm
Migration Policy Center:
http://syrianrefugees.eu/
Council on Foreign Relations:
http://www.cfr.org/iraq/islamic-state-iraq-syria/p14811
Human Rights Watch:
http://www.hrw.org/world-report/2014/country-chapters/israel-and-palestine
Oil Crisis:
http://www.wtrg.com/prices.html
Oil Prices:
http://www.bp.com/content/dam/bp/pdf/Energy-economics/statistical-review-2014/BPstatistical-review-of-world-energy-2014-full-report.pdf
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