Friday, May 26, 2006

The Power Of Money


Judith Apter Klinghoffer has written a thought-provoking piece on the threat posed by Islamic Banking. The article briefly considers the threat posed when companies and nations are unaware of the possibility that subversive interests may be influencing, even controlling the company with which they deal.

For me, however, it’s actually a bit of good news. You see, Islamic Law is called “Sharia”, and whatever its technical definition from place to place, in actual practice it generally amounts to whatever the regime in place wants to do. For example, even before the rise of the Ayatollah Khomeini in Iran, Shah Rezi Pahlavi was in the habit of having friendly mullahs issue fatwas supporting his actions, be it Land Reform or additional Police forces. One of the ironies of Islam, is that if you are powerful enough, you can get the backing of a mullah or five, and it is not at all uncommon to find fatwas in contradiction of one another. So I am not inordinately worried about someone getting a fatwa in order to enable a finance deal.

What intrigues me about the finance fatwas, however, is that they risk severe consequences. What I mean is, traditional Sharia does not allow Muslims to charge interest – at all. I think the way they get around it now, is the notion that Muslims would be charging interest from non-Muslims, a sort of way to enforce the Jizya on non-Muslim companies and countries. But what really got me thinking, is something I noticed while researching the political transition of countries in the region; the Middle East, with a few notable exceptions, is about 50 years away from being bankrupt.

It works like this; the Middle East first became important to the known world, because trade routes between Africa, Asia, and Europe had to run through it. This created two economic classes; the merchant and the bureaucrat, each benefiting from the traffic of goods through their countries. This led to the development of roads and a network of market towns and the precursors of consulates, as nations found it useful to put emissaries and representatives in places where they could gain an advantage for their nation’s goods ahead of another nation. When Islam came to power, shortly after seizing towns which made fortified and defensible positions, the Jihadists in short order took over trade towns, specifically for the economic strength of such possessions. A major reason why the Islamist invasion of Europe began through Portugal and Spain, rather than the other way around the shores of the Mediterranean Sea, was the lure of claiming the Western ports. The nations of the Middle East have always sought to gain a sound economic base through control of shipping by land and sea. This was based on the acknowledgment that the Middle East produced little in the way of finished goods, and could barely subsist on its raw resources. For this reason, the Middle East was of little concern to the Ottoman Empire, save that the roads and ports should be secure.

Then came oil. Oil was a critical element in the advance of the Industrial Revolution, and both Europe and America grew on the nourishment of petroleum. Discovery of Oil in Arabia in 1859 began a rush for exploration, as this coincided neatly with strong growth in the use of oil for engines and factories. By the start of World War One the Middle East was a catalyst for contention and bargaining. This condition only grew in strength and priority through the 1970s, at which time the Middle East played its trump card, the OPEC Embargo. Unfortunately for OPEC, the card was badly played, and instead of its desired effect, only changed world conditions to counter Middle East aspirations for power – the Soviet Union in particular took a hard-line approach to ensuring the continued flow of oil.

Oil, at least as it is traded today, is running out, and especially the “light sweet” crude from the Gulf. That is to say, the oil reserves known to exist in the Middle East have about 40-50 years before their production will drop off precipitously. The problem is simple geography; there is only so much oil which can exist in one place, especially where exploration and new drilling development has been curtailed for a variety of reasons. The West, especially the United States, has the advantage that they have large regions of probable fields which are as yet untouched; at the moment they are financially unprofitable for drilling, but in a few decades that may well change, depending on both economic and technological conditions. Therefore, the U.S. has long-term options unavailable in the Middle East.

And given the massive expenditures of Middle East nations in the past 50 years, the drop in production around 2050-2060 will effectively cause an immediate collapse in both GDP and government revenue for countries in the region. This will destabilize all of the extant governments in oil-based economy countries, leading to revolt regardless of the character of the regime in place, unless a replacement source of revenue is developed and stabilized.

So here we are in 2006. On the surface, first-world nations are far too dependent on the Middle East for their energy needs, but in context they are in far better shape than the Middle East. The Middle East still offers little more than oil, and that oil is running out. There is development in the West of alternative energy sources, albeit not fast enough, but in four decades there is reason to expect demand for oil to be reduced as functional alternatives to be developed. This claim can be and should be considered and critically weighed, but in another place. For now, the significant point is that Middle Eastern nations are beginning to see the end of the road on the revenue from oil, and it is approaching faster than they have expected, or for which they are in any way prepared. The question to be considered is what, precisely, the region will do when the oil money is gone.

For the Islamic nations, this explains the interest in banking. Historically, many nations with poor resources and little marketable material have turned to banking to make their living. The legacy of “swiss banks” and such have long fed the imagination of fiduciary minds, the fantasy of people paying you a fee to hold their money for them. While they have monies in their vaults to invest, setting up banking arrangements seems a wise long-term pursuit for these nations. International Banking today is in many ways the modern version of merchant shipping in the past.

There are, however, significant problems for the Islamic Bankers. As Ms. Klinghoffer has mentioned, there is and should be serious concern about the security of deals brokered through nations hostile to Occidental customs and policies. And on the flip side, one can hardly imagine the radical Jihadists approving the procurement of interest-bearing investments, however they are carefully worded. Banking is inherently a secular pursuit, and as such must find itself continually in opposition to Sharia.


Cynical Observer said...

DJ, thanks for another insightful and thought-provoking article.

So, to expand on your thesis, it's interesting that the more fundamentalist the Middle East regime, the more likely it is that all expertise - particularly anything related to technology - is imported from other countries. Expertise, technology, and innovation all seem to be anathema to fundamental Islamism and Sharia. When the oil runs out, they will become consumers with ever-decreasing ability to buy anything, and producers of nothing except religious dogma. And that, to me, is the paradox of fundamental Islam.

The Macker said...

DJ, good article.

And a democratized Middle East will do much to ensure its future.

Dallas said...

You continue to inspire me and to teach me...I hope many, many people find this blog. It is a jewel.


Rich said...

Based on the information from a petroleum geologist friend of mine that the Middle East could run out of oil much earlier than projected by our government. IIRC, the largest oil field is Ghawar in Saudi Arabia, then Bergen in Kuwait, and then Canterell in Mexico. The last two fields have already peaked. The first one is hard to gauge because the Saudis keep things close to the vest. But, there is one way to get a closer look. When oil fields get long in the tooth water needs to be pumped into the field in order to keep the pressure up. How much water comes back up is known as the cut. The cut for the Saudi field is 40-50% water. The geologist also said that despite what other might say there really is not any new location in Saudi Arabia to be discovered. Technology introduced in the 80s allow the geologists to have a good guess whether there is oil just from satellites and seismic studies.

Reza Bagheri said...