Abstract
Without the discovery of oil, it is inconceivable that Kuwait could have existed as a modern sovereign state. Lacking any significant agriculture or water resources of its own, Kuwait survived into the twentieth century by dint of shrewd diplomatic manoeuvring and managed to feed its modest population by trading, fishing and pearling. The introduction of cultured pearls in Japan during the 1930s could very well have killed off any prospects for a Kuwaiti state independent of British interests, however, had it not been for the Anglo-Persian Oil Company’s discovery of oil in 1938. Even then, it was a close-run thing. Anglo-Persian (later British Petroleum) spent years wrangling over Kuwait in a turf battle with American oil companies that forced it to give an equal stake to Gulf Oil.1 Then, having won the concession, it was unwilling to explore for and develop oil because it already had huge reserves in nearby Iran and because the oil market was glutted. It took fifteen years for oil to be discovered, a further ten years for production to begin in 1948, and it was only after Mohammed Mossadeq’s nationalization of Iranian oil in 1951 that Kuwaiti oil production exceeded half a million barrels a day. Thereafter, development was rapid, with output doubling by 1954 and redoubling in 1962.2
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Notes
See A. H. T. Chisholm, The First Kuwait Oil Concession (London: Frank Cass, 1975) for a detailed description of the early oil negotiations in Kuwait.
According to Hotelling, natural resources will be left in the ground if their value is growing at an average annual rate exceeding the rate of interest. In the Kuwaiti case, with oil prices rising faster than interest rates between 1972 and 1981, production continued, albeit at a much reduced rate, and large financial surpluses were accumulated. See H. Hotelling, ‘The Economics of Exhaustible Resources’, Journal of Political Economy, 39 (1931) pp. 137–75.
EIU, Kuwait Country Report (1990) p. 11.
See J. F. Seznec, The Financial Markets of the Arabian Gulf (London: Croom Helm, 1987) pp. 55–67.
See I. Seymour, OPEC: An Instrument of Change (New York: St Martin’s Press, 1980) for a detailed account of OPEC politics and the byzantine negotiations leading up to the participation agreements.
For the story of Sheikh Yamani’s sacking, see J. Robinson, Yamani: The Inside Story (London: Simon & Schuster, 1988). His sudden departure left Kuwait’s Oil Minister, Sheikh Ali Khalifah al-Sabah, as the most influential and prominent proponent of the view that oil prices must not be allowed to increase sharply for fear of further stimulating non-OPEC production and encouraging the substitution of oil by other forms of energy. Together with his dismissive personal style, this meant he was unable to pick up Yamani’s mantle as OPEC’s peacemaker.
See Mehran Nakhjavani, Arab Banks and the International Financial Markets (Nicosia: MEPEP, 1983) pp. 67–80.
National Bank of Kuwait, Economic and Financial Bulletin (Fall 1987) p. 10.
Economist Intelligence Unit (EIU), Kuwait Country Report (London: EIU, 1986) p. 7.
EIU, Kuwait in the 1990s: A Society Under Siege, EIU Special Report 2035 (London: Economist Intelligence Unit, July 1990) p. 13.
After treasury bills and bonds were introduced in 1987, retail investors and commercial banks quickly lost their appetite for buying them in sufficient volume to finance the deficit. Consequently the KIA itself (via the Central Bank) had to buy some US$3 billion of its own government’s paper. See EIU, Kuwait Country Report (London: EIU, 1989) pp. 8–9. Under the terms of economic reforms introduced in late 1989, Kuwaiti banks who received cheap government deposits to help them cope with bad debts were obliged to use these funds to purchase T-bills.
EIU, Kuwait Country Report (London: EIU, 1988) p. 15.
EIU, Kuwait Country Report (London: EIU, 1990) p. 16.
For a discussion of Iraq’s Arab allies, see Mehran Nakhjavani, Iraq: What if Sanctions Fail? EIU Special Report 2080 (London: Economist Intelligence Unit, October 1990) pp. 26–9. All Iraq’s sympathizers were also substantial recipients of Kuwaiti aid and investment, particularly the PLO, Jordan and Tunisia. The alternative explanation, that Kuwait believed its oil policy, its war loans and the border question could be treated as three unrelated bilateral issues, would be tantamount to an admission of incompetence and is entirely untypical of Kuwait’s foreign policy track record. Iraq had given ample notice of its displeasure prior to August 1990: during a visit to Baghdad by the Kuwaiti Prime Minister in February 1989, over a soccer competition in Kuwait in March 1990 and again during the Baghdad Arab Summit in May 1990.
In the wake of the Gulf War, Kuwait’s strategic options have been significantly reduced. The country’s external security policy is subject to the effective vetoes of Saudi Arabia and the USA (and to a lesser extent Syria and Egypt). Its foreign policy is emasculated by the need to curry favour in Riyadh, the intense animosity with respect to Iraq and the latter’s wartime supporters, and the effective rupture with the Palestinian cause. These factors make it difficult to play the traditional Kuwaiti ‘friend of all’ role or even to aggressively play regional interests against each other. On the internal front, the Al Sabah family has maintained its grip on power, but at the cost of alienating a previously passive and apolitical segment of the population. The quarter of the Kuwaiti population which remained under occupation have little to be grateful to the Al Sabahs for. Stateless Kuwaiti residents have ample reason to feel bitter at their exclusion from state largesse. Palestinian residents have been made scapegoats for the calamities of the invasion, and face a bleak and uncertain future. One of the world’s most prolific low-cost oil industries was all but destroyed during the war, largely as a result of Iraq’s scorched-earth withdrawal from Kuwait during the last week of February 1991. Iraqi forces mined the oil fields and set explosive charges at most of Kuwait’s wells, which triggered uncontrolled fires at an estimated 600–700 of Kuwait’s 1080 oil wells. Kuwait’s estimated losses of crude oil from these fires were estimated at 6–7 million b/d during the first six post-war months. Although damage to Neutral Zone production was not catastrophic and production there resumed in June 1991, Kuwait was able to produce only 50 000 b/d from its own oilfields by June, less than 3 per cent of its output a year previous. While repairs to Kuwaiti production facilities allowed output to increase during the second half of 1991, extensive damage to Kuwait’s export terminals meant that significant exports could not begin until the end of the year. Moreover, it is a measure of the decline in Kuwait’s influence within the GCC that its request to activate a 1987 oil-sharing agreement was rejected by the Council’s oil ministers in May 1991. Kuwait’s room for financial manoeuvre was sharply reduced as a result of the heavy cost of the war and Kuwait’s support for its allies, the estimated costs for reconstruction, and the need to borrow arising from the unwillingness to liquidate its own assets and the uncertain availability of Iraqi reparations. At least US$20bn was spent in direct military support of the USA, Britain and France, plus aid to states such as Turkey and Egypt who were discomfited by the effects of sanctions on Iraq. A further US$1bn was provided as a loan to the USSR. This had the effect of reducing the Kuwaiti government’s liquid foreign assets by a third. Estimates of the costs of reconstruction vary widely with each telling. On the basis of a UN mission’s damage assessments, the costs are of the order of US$14bn plus whatever it takes to repair the physical damage to the oil industry — yielding a global figure of perhaps US$20bn. For a summary of damage to the Kuwaiti oil sector, see Mehran Nakhjavani, After the Persian Gulf War (Ottawa: Canadian Institute for International Peace and Security, Working Paper 34, March 1991) pp. 7–9;
And Nakhjavani, The Implications for Economic Development of the Persian Gulf Crisis and Its Aftermath (Ottawa: United Nations Association of Canada, May 1991) pp. 7–8.
See also the statement by Kuwait’s Oil Minister quoted in Middle East Economic Survey, 34, 36 (10 June 1991) pp. A8–A9.
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© 1993 Bahgat Korany, Paul Noble and Rex Brynen
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Nakhjavani, M. (1993). Resources, Wealth and Security: The Case of Kuwait. In: Korany, B., Noble, P., Brynen, R. (eds) The Many Faces of National Security in the Arab World. International Political Economy Series. Palgrave Macmillan, London. https://doi.org/10.1007/978-1-349-22568-2_9
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