Managing Newfound Hydrocarbon Wealth: Macroeconomic Policy Challenges in the Eastern Mediterranean

The past several years have brought indisputable evidence that significant hydrocarbon resources lie below the Eastern Mediterranean seabed offshore Israel and Cyprus. An estimated 27 trillion cubic feet (tcf) of natural gas have already been discovered in the Leviathan and Tamar fields. Nearly a decade of energy exploration and development in its offshore waters have brought Israel, a nation long dependent on external energy sources, to the eve of energy abundance. Based on prices from recent sale contracts for the Tamar field, the value of 27 tcf of natural gas may be as much as $270 billion, more than Israel’s total GDP in 2012. In short, Israel seems poised not only to achieve a high degree of national energy security as early as 2014 but also a degree of energy wealth by 2018. Cyprus, while several years behind Israel in its exploration and development initiatives, confirmed in late 2011 the discovery of roughly 7 tcf of natural gas in the Aphrodite field, which lies adjacent to its maritime boundary with Israel and could be worth upward to $70 billion at current prices.

The maritime delimitation disputes in the region, the rapidly changing world energy markets, and the physical challenges of developing and distributing offshore hydrocarbons make the Eastern Mediterranean a microcosm of how politics, economics, and technological advances can collide in offshore energy development. The political dimensions and regional security implications of the Eastern Med gas finds are significant and have received increased attention in the past year. An area that has been covered less thoroughly, however, involves the macroeconomic impacts of new-found commodity wealth and the policy challenges that such wealth can pose. These issues are important because countries that manage their commodity wealth well are stronger as a consequence; those that do not are more vulnerable to global price swings, anemic economic growth, and a loss of economic diversification as well as corruption and conflict.

This paper seeks to fill a gap by considering the macroeconomic policy challenges facing the prospective energy producers in the Eastern Med, particularly Israel and Cyprus. In doing so, it explores both the economic upside of the gas discoveries and the downside risks associated with sudden commodity wealth. It examines the mechanisms that other countries have developed to manage new streams of commodity income and describes the steps taken to date by Israel and Cyprus in these areas.