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THE OIL

CRISIS aanndd tthhee KKhhiillaaffaahh

SSoolluuttiioonn

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

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بس������م � ال������رحمن ال������رح ي����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.

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It is as if the regimes in

the Muslim world steal

from the poor and

hungry to give to these

rich banks!

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.

The Complicity of the Rulers in the Muslim world

However it is not just the myths spun by western

politicians in the oil debate that require exposing,

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

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(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) who stated that “the people

share in three things water, green pastures and fire

(energy)” the rulers in the Muslim world have failed

to redistribute the wealth coming from oil and gas.

Massive inequality and poverty remains with many

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

The Prophet (saw) said

that

“The people share in

three things water,

green pastures and

fire (energy)”

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elite) will be key objectives of the new state.

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 economic progress, and the

fair management and utilisation of this incredible

resource. For under the Islamic system, oil will be

utilised by the State on behalf of its citizens. In

addition, a stable currency based on the gold/silver

standard would be protected from the devalued

dollar, and hence inflation would not be the

destabilising factor it is now.

There is no doubting the importance of oil to the

global economy, an importance that is likely to grow

as its true value is recognised. But the greatest

threat to global stability is the fact that western

superpowers continue to dominate its extraction and

distribution. For them, the value of corporate share

prices outweighs economic stability for poorer

nations, affordable food for the ordinary man and

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

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

economic

progress, and the

fair management

and utilisation of

this incredible

resource.

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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)

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Similarly against the main basket of world currencies it has also steadily declined

(Figure 2)

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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.

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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

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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

of higher returns than they would earn in shares

and bonds markets. Again foodstuffs are mostly

assessed in US dollars, and governments are

keeping control over wage increases which

squeeze consumers who are caught between

rapidly increasing prices and restrictions on wage

growth.

“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.

"There's a risk that more

people won't be able to

afford basic foods anymore,

increasing malnutrition in

the region"

Fernando Soto, regional policy

head for the U.N. Food and

Agriculture Organization (FAO)

(Reuters 15th April, 2008).

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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

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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.

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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

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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.

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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

recent unpublished forecasts reported by the

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

sudden and high increases in food prices. In the

World Bank report they suggest that the impact of

biofuels has been to force global food prices up by

75%.

Jean Zeigler, UN’s Special Rapporteur on the ‘Right to

Food’ mentioned in a recent statement aired on

German Radio that intensive bio-fuel production now

represents a ‘crime against humanity’ because it

pushes food grain prices up across the world.

For the full 2008 year, it is expected that out of 2.1

billion tons of food grains produced globally, 100

million tons will be used to extract bio fuels, in other

words, this 100 million tons will be used for feeding

cars instead of human beings in a time of global food

shortages.

World Bank report

suggests that:

- Up to 100 million people in the world have been forced into poverty and hunger because of the sudden and high increases in food prices

- The impact of bio- fuels has been to force global food prices up by 75%.

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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

dictate the way they live and talk. And

that’s the great thing about America right

now. It’s a good thing, especially when

there’s a lot of oil out there we need”. [Dr.

Eric Herring, ‘Iraq: the Realities of

Sanctions and the Prospects for War’,

October 2002]

American imperialists therefore echo the

strategic concerns of their British cousins

in the nineteenth century as they, like

Britain, seek to preserve their leadership in

the world and control of the Middle East is

pivotal in this end. Since the British

government realised the control of oil was

“a vital prize for any power interested in

world influence or domination”

[‘Introductory Paper on the Middle East’,

“Oil in the next war will

occupy the place of coal in

the present war, or at

least a parallel place to

coal. The only big

potential supply that we

can get under British

control is the Persian

(now Iran) supply and

Mesopotamian (now Iraq)

supply… Control over

these oil supplies becomes

a first class British war

aim”

Sir Maurice Hankey, First

Secretary of the War

Cabinet, 1918

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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

Khilafah would be divided amongst them culminating in

the Anglo-French Sykes-Picot agreement. A century later

they quarrel over how the region’s resources should be

divided amongst them, with America seeking to secure the

majority share. Paul Sanders, Director of the Nixon

Institute noted, “The oil is the main thing…there is

widespread nervousness in Russia that if the US changes

regimes in Iraq, then all the oil contracts will come to the

United States and Russia will be left out” [Eric Boehlert, ‘At

the UN its all about the Money’, 14 October 2002].

It is in this context that we see the Western nations vie for

power, scrambling to secure their interests in the Middle

East, a scramble that rekindles memories of Europe’s

colonisation of Africa in the nineteenth century. US policy

therefore seeks to attenuate any European influence and

control in Iraq, Michael O’Hanlon from the Brookings

Institute told the House Armed Services Committee, “The

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

“By 2010 we will need

of the order of an

additional fifty million

barrels a day. So where

is the oil going to come

from?... While many

regions of the world

offer great oil

opportunities, the

Middle East with two

thirds of the world’s oil

and the lowest cost, is

still where the prize

ultimately lies”

Dick Cheney, CEO of Oil services company Halliburton, in a speech to the Institute of Petroleum in London, in 1999

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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.

The consistent picture portrayed above of the struggle

for the “ultimate prize” is confirmed in more recent

analysis.

US Treasury Secretary Paul O’Neill has stated that an

invasion of Iraq was on the agenda since the very first

Bush National Security Council meeting [The Price of

Loyalty, Ron Suskind, 2004]. A map for a post-war

occupation, marking out how Iraq’s oil fields would be

carved up was also discussed. O’Neill said even at that

early date, the message from Bush was “find a way to do

this,” according to O’Neill, a critic of the Iraq invasion

who was forced out of his job in December 2002.

The New Yorker’s Jane Mayer has highlighted a secret

NSC document dated Feb. 3, 2001 – only two weeks

after Bush took office – instructing NSC officials to

cooperate with Dick Cheney’s task force, which was

melding together two previously unrelated areas of

policy: “the review of operational policies towards rogue

states” and “actions regarding the capture of new and

A 2007 Zogby/University of

Maryland poll of citizens in

six Middle Eastern states

found that the main

objectives of America in the

Middle East were cited as:

Oil (76%)

Protecting Israel (68%)

Domination of the

region (63%)

Weakening the Muslim

world (59%)

Only 6% agreed with Bush

and Blair's view that their

objectives are to merely

spread human rights and

democracy.

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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

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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.

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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 historical roots of Islamic rule mean an

occupied and colonised Muslim populace will

always have an alternative narrative to fall back

on. Since the idea of Islamic unity has never been

dispelled it lingers on as a strong political

aspiration whenever questions of government and

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.

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.

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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,

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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.

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Where has the Oil Wealth Gone?

Of all proven oil reserves

60% are in the Middle East.

If the known oil reserves of

Muslim Africa are included –

the proportion of the

world’s oil reserves that lie

in Islamic lands rises to over

70%. Furthermore 50% of

natural gas reserves reside

in the Islamic world, of

which 40% lie in the Middle

East.

Given that much of the oil in

the Middle East was

discovered in the 1960s and

that since then there has

been almost uninterrupted

production averaging several

million barrels a day, the

nations of the Arab world

would be expected to be

leaders in the region if not

the world. As an example

since 1965 Saudi Arabia

alone has pumped over 117

billion barrels of oil. This is

equivalent to Kuwait’s

current total oil reserves. At

a conservative $20 a barrel

this amounts to revenues of

nearly $2.3 trillion.

However, the generated

wealth does not appear to

have resulted in

development and progress

when one looks at the

region’s statistics: its lack of

food self sufficiency, high

poverty levels, growing

unemployment and

crumbling state

infrastructure.

• Despite the abundance of oil the Islamic

world at the most basic level is unable to

independently cater for the basic needs its

people.

• Despite still possessing huge oil reserves

many of these economies have large public

sector debt and all face huge challenges in

the near term.

• Population growth rates in the Arab world

are among the highest in the world and the

demand for health care and education is

expanding rapidly.

• The young who make up a significant, in

some cases a majority, of the population will

soon need jobs and homes.

• Despite being endowed with huge amounts

of arable land, most Arab nations are not

self-sufficient in food and many import large

amounts of staple and basic foodstuff.

• Poverty - unheard of in some rich Arab

countries a decade ago - is rising, with the

proportions of people living on less than $2 a

day growing.

• Regional underemployment is high despite

high educational achievement in some

countries. Actual unemployment is also

growing.

• In the so called ‘rich’ Arab countries

infrastructure built in the wake of the oil

price boom in the 1970s and 1980s is in

disrepair at a time when demand for public

services such as health and education have

never been as great.

• Nationalist and territorial disputes threaten

water supplies in the Middle East - one of the

most arid regions of the world.

• None of the countries can be considered

among the industrial nations.

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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.

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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:

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• 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

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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.

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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.

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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

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(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

public property, are those, which the Shariah

ascribes ownership to the whole community and the

individual is prevented from possessing/controlling

them.

Ibn Abbas narrated that the Prophet (peace be upon

him) said: “Muslims are partners (associates) in

three things: in water, pastures and fire,” reported

by Abu Dawud.

The Prophet (saw) said that

“The people share in

three things water,

green pastures and

fire (energy)”

[Abu Dawud]

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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.

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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

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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

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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

reality fixing output. In fact, OPEC has been

politically manipulated through Saudi Arabia to

generally serve the interests of capitalist (oil

consuming) nations. Saudi Arabia has acted as a

‘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.

Prophet Mohammad

(saw) forbade practices

like hoarding which

manipulates the market.

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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.

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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

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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.