Three remarkable events in 2008 have shaped the alarmingly unstable environment in which the Arabs now find themselves. The first is the collapse of the international financial system, and its drastic impact on the health of the world economy; the second, closely allied to the first, is the sharp reduction in demand for oil, and the resulting collapse of oil prices.

This has dealt a crippling blow to Arab economies from Iraq to the Gulf to Algeria. It is no consolation that others have also suffered, notably the economies of Russia, Iran, Venezuela, Nigeria and Angola.

The third remarkable event of 2008 was, of course, the election of Barack Obama as president of the United States. Many Arabs have great hopes that Obama will help resolve some, at least, of the long-running conflicts that plague the Greater Middle East. He may well do so. But Arabs should also bear in mind that Obama is dedicated to reducing American dependence on imported oil -and that includes Arab oil. He has not hesitated to say that American dependence on foreign oil puts money into the hands of America's enemies.

It may be that, in his search for renewable sources of energy, in his encouragement for "green" technologies, in his urge to save the planet from the dangers of climate change, Obama may inflict a further blow on the Arab world's oil-dependent economies.

No one can be sure when demand for oil will revive and at what rate. But, in the meantime, the Arabs should note that engineers in many countries are working hard to develop hydrogen-fuelled cars. At the same time, a pioneering Chinese company is planning to mass produce a 100 per cent electric car by 2009. The company's boss, Wang Chuanfu, has predicted that his company will be China's biggest car manufacturer by 2015 - and the biggest in the world by 2025. It is no surprise that Warren Buffet, America's cleverest investor, has bought 10 per cent of BYD for $230 million (Dh844 million).

Such developments need to be carefully assessed by Arab oil producers, as they are bound to have a considerable impact on demand for oil.

Some experts predict that the oil price will average no more than about $40 a barrel in 2009 - a far cry from the $149 a barrel it reached at its peak last July. Some countries will be better able to cope than others with such a drastic reduction in revenue.

Saudi Arabia, the Arab world's largest economy, has announced that it is expected to run a budget deficit in 2009 for the first time in seven years. But Saudi Arabia has a cushion of foreign assets estimated at over $500 billion. It is therefore well-placed to ride out the crisis. It is even planning higher government spending to stimulate the economy.

The same cannot be said for Iraq, which will have to delay its plans to rebuild vital infrastructure, which has been shattered by six years of war. Indeed, Iraq has been at war - or has been punished by crippling sanctions - since 1980!

Iran, with a population of over 70 million, will also suffer greatly from the collapse of oil prices and will be forced to cut back on most of its economic projects. One prominent victim of the crisis could well be President Mahmoud Ahmadinejad himself. Having faced harsh criticism for squandering Iran's oil wealth by his populist economics, he risks losing the June 2009 elections.

Migrant labour

The Arab Gulf states could face serious social problems to do with their immigrant labourers. According to Human Rights Watch (quoted in the Financial Times of 23 December) there are almost three million Indians, Bangladeshis and Pakistanis in the UAE alone, most of them manual and construction workers.

What will happen to these workers if many real estate and construction projects are delayed or even cancelled? What will be the impact on the economies of the sub-continent if hundreds of thousands of these immigrant workers head back to their countries of origin?

What is clear is that the Gulf States now need to be ultra-careful. Grandiose, money-wasting, prestige projects should be firmly put aside. Instead, every effort and resource should be devoted to education and vocational training, to labour reform, to creating more opportunities for free expression, and to good governance generally. The success of the Gulf as a new pole of Arab progress and modernity must at all costs be protected.

The coming year threatens to be difficult economically. But it is also likely to pose severe political challenges, because of the host of conflicts which burden the Middle East. Helping Obama to tackle - and hopefully resolve - these conflicts should be high on the agenda of Arab leaders.

The following are some of the issues to which they might usefully put their minds:

- Helping the United States make a swift and orderly withdrawal from Iraq.

- Encouraging sectarian harmony, national reconciliation and economic reconstruction in Iraq, for the health and benefit of the wider Arab family.

- Giving full backing to the Arab Peace Plan (first launched at the Beirut Summit of 2002) and promoting it vigorously in world capitals - and also in Israel - as a major contribution to an Arab-Israeli peace settlement.

- Encouraging an early dialogue between the United States and Iran as an essential contribution to stability and prosperity in the Gulf region.

- Giving serious thought to creating a regional security system involving the member states of the Gulf Cooperation Council together with Iraq, Iran and Turkey. Once established, the security system could then be extended to include Syria, Jordan and Egypt.

The passage from one year to the next should provide a moment of calm in which to raise one's head from day-to-day worries and think creatively.

Patrick Seale is a commentator and author of several books on Middle East affairs.

Source: http://www.gulfnews.com