Mussa (not his real name ), a Palestinian businessman who opened a quarry about a year ago across the Green Line from Modi'in, wanted to take advantage of its location and transport gravel to that Israeli city and its environs, as well as to Palestinian construction sites in the Ramallah area. He managed to close a deal with Israeli contractors to sell them gravel, but when his trucks arrived at the Na'alin checkpoint, Civil Administration officials ordered them to turn around. At the same time, he says, the Natuf quarry across the road, which belongs to the Israeli-owned Shafir Civil and Marine Engineering Ltd., delivers gravel in Israel uninterrupted.

Civil Administration officials explained to Mussa that his trucks could get to Modi'in only via another, more remote checkpoint, where the cargo would then be unloaded onto Israeli trucks that would reach Modi'in through areas inside the Green Line. Mussa estimates that this journey, which would be 70 kilometers longer, would make the gravel at least twice as expensive. "It is very frustrating," he says. "Modi'in is so close, but because of the army's orders it doesn't pay for me to transport gravel to it."

The Civil Administration said in response: "The Na'alin crossing is not suitable for transporting cargo because of its capacity for security checks."

According to official figures, 94 percent of the output from West Bank quarries reaches construction sites in Israel, and supplies a quarter of the industry's gravel needs. According to the data, Israel's housing industry will be dependent on the gravel produced by the quarries for the next 35 years. If it weren't for their activity, housing prices might today be even higher than those that prompted Daphni Leef and her friends to pitch tents on Rothschild Boulevard last summer.

"Gravel of various types is sold at a price of NIS 25-30 per ton," explains Shimon Giller, an Israeli geologist who is intimately acquainted with the quarry industry in the West Bank. "Transport constitutes a large part of the cost to the consumer; it raises the gravel price by 30 agorot a ton per kilometer of travel. Gravel in the Eilat region, for example, costs around NIS 60 per ton. Aside from Judea and Samaria, most of the quality quarry sites are in the Galilee or northern Negev. This clearly has implications for housing prices."

Israeli-owned quarries in the territories have been active for more than 40 years and are operated by large and well-known companies like Shafir Engineering, Kfar Giladi Quarries and Hanson Israel, plus some smaller firms. The quarries are licensed by the Civil Administration to operate without having to participate in a competitive tender, because Israeli law - in this case the Mandatory Tender Law of 1992 - does not apply to the West Bank.

The Palestinians claim that the ongoing occupation and the restrictions on mobility it entails give the Israeli quarries in the territories an advantage over Palestinian ones. The Israeli quarry industry sees the matter differently.

"It's not that for years Israeli quarries got rich from quarrying in the territories," says a source close to Shafir Engineering. "There were years when the market waned and a quarry lay dormant. Up until a few years ago, the Natuf quarry was operating at half capacity."

During the second intifada, he adds, workers at the quarry "were shot at, and they had to travel to work in guarded convoys. There were many days of curfew and confusion. In recent years things have been calm, and in the wake of the rising cost of raw materials, prices have gone up - but there is no telling what the market will look like in the future."

Yesh Din petition

Two years ago, Yesh Din, an Israeli NGO that works to safeguard human rights in the territories, filed a court petition demanding suspension of operation by Israeli quarries in the territories. The organization argued that they operate in violation of international law - specifically a clause in the Fourth Geneva Convention that was intended to prevent an economic incentive for going to war, and which stipulates that an occupying power is not permitted to exploit natural resources for its own benefit.

"When we began to handle the matter we noticed there was exploitation of the West Bank for economic purposes, but it was not receiving public attention," says Shlomi Zacharya of the law firm of Michael Sfard, which represents Yesh Din. "The Israeli quarries in the West Bank yield an annual income of NIS 900 million, but only NIS 25 million is transferred as royalties to the Civil Administration, which is responsible for building infrastructure for the Palestinians. Until we filed the petition, the royalties were being transferred to the state coffers and not into a separately dedicated repository, so it is impossible to know what that money was used for."

Several weeks ago, however, the High Court of Justice denied the petition. The panel of justices, headed by then-outgoing court president Dorit Beinisch, explained that Israeli quarrying does not consume the stone at a rate that justifies intervention, and also that the quarries employ Palestinians. Additionally, the court ruled that at issue is a reality of "ongoing occupation," as opposed to a state of temporary occupation to which the Geneva Convention referred. Yesh Din has petitioned the court to hear the case again.

According to Meir Bar-El, head of the quarry division of the Manufacturers Association of Israel, there is little chance the High Court will reverse its position, nor any reason to do so. "It is a political petition. The Israeli quarry industry in the territories is good for the Palestinians. They have good terms of employment there, and Palestinian contractors receive high-quality raw materials from us. Everyone benefits from this."

"If the verdict remains unchanged, it will be a clear-cut jump in the level of exploiting Israel's economic resources in the territories," says Prof. Jonathan Yovel, an expert in commercial international law at the University of Haifa. "To date, Israel has intensively exploited mainly the land resource. From here on it will be able to exploit other resources - including ones that may not have been discovered yet."

As long as there is no peace process under way, the situation that existed in the West Bank in the late 1990s has remained in place: Palestinian control of Area A (where Palestinians have full administrative control, including over internal security matters ) and Area B (where Palestinian control extends only to civil matters ) - in which most of the Palestinian populace is concentrated - is much less powerful than Israel's control, via the Civil Administration, over the 62 percent of the West Bank that constitutes Area C. The nine Israeli quarries in the territories operate in Area C.

The Palestinians, for whom the quarry industry constitutes 10 percent of their GDP, have many quarries in Areas A and B, primarily in the vicinity of Bethlehem and Hebron. From their perspective, they lose a very important chunk of the market when Israeli-owned quarries in Area C, rather than Palestinian ones, supply the raw materials to Israel.

Energy problems

Israel's control over land prevents economic development in other areas. For example, to develop sources of renewable energy you need an expanse on which to install solar panels. Because of the Palestinian Authority's dependence on the Israeli electricity grid, Palestinian projects for solar energy in the West Bank receive permission to supply electricity only to places that are not even hooked up to the electricity grid.

Lately the Civil Administration has been seeking to demolish a small facility of solar panels that was set up in the south Hebron hills by activists from the nonprofit organization Community, Energy, Technology in the Middle East, with financing from the German government. The administration says the panels were installed without a permit.

Danny Danan, owner of Friendly Energy, an Israeli company that installs solar panels, has also been trying for the past year to initiate a solar energy project in Palestinian villages in the southern West Bank, together with a Palestinian partner. He says he deliberately chose to focus on rooftop installation rather than on the ground: "Installing on the ground means butting heads with the Civil Administration, so I avoid such initiatives in advance. Because of the ground obstacle, it is much more complicated for Palestinians to utilize their solar energy, which is a shame, because you can do good solar projects in the West Bank."

The Civil Administration responds: "The facility in the south Hebron hills is an illegal solar facility that was built with the support of an international entity without the requisite plans, in complete disregard for the law. They were given an opportunity to try and get the facility approved retroactively, but they chose to ignore that option. Over the years, a number of joint projects were built with funding from the German government in the areas of infrastructure, which even earned praise from Israeli government representatives who visited the area."

"Israel's policy since 1967 has been to reinforce the fact that the economy of the territories is intertwined with Israel's economy," says Prof. Arie Arnon, an economist who coordinates the Israeli team of the Aix Group - experts from the PA, Israel and the international community who are studying economic aspects of a projected peace agreement. "At the time of the Oslo Accords, an attempt was made to create two separate economies, but today we have a situation wherein Area C and Israel are increasingly becoming one economic unit under Israeli control - the verdict in the quarries matter is representative of this."

Says Dr. Saeb Bamya, head of the Palestinian team in the group: "Most Palestinian natural resources are located in Area C. From our standpoint, the Israeli policy is not to let us develop the resources we have in these areas, as part of the efforts to prevent a two-state solution."

If the Palestinians had better access to the natural resources, they would need Israeli help to exploit them, and because of the physical proximity of the economies and the demands of the Israeli market, Palestinian economic initiatives in the fields of water and energy would become more feasible. Both sides would benefit.

"Israel would indeed have to give up land, but the economic development that would follow in the wake of that would not skip over it," says Yoav Stern, director of the business and environment department at the Peres Center for Peace. "The more time goes by, we get farther away from a peace agreement and facts are established on the ground that will make such initiatives difficult in the future."

The precious Dead Sea

The economic aspect of the conflict is not restricted to land issues. Hoteliers, Israel Chemicals and cosmetics firms that market products made of minerals from the Dead Sea can attest that this body of water, one-third of which (its northwestern part ) was conquered by Israel in 1967, is an economic asset to Israel. As far as the Palestinians are concerned, they own 25 percent of the Dead Sea. The Dead Sea cosmetics company Ahava buys mud - an essential raw material for its products - from the Dead Sea Works, which is located within the Green Line, but the firm's products are the subject of protests by Palestinian and international organizations around the world, because its factory is over the Green Line, on Kibbutz Kfar Shalem.

In the mid-1990s, the Palestinians presented plans for the tourist industry in the future Palestinian state (which included thousands of hotel rooms on the northern side of the Dead Sea ) in economic forums that accompanied the diplomatic negotiations. Today, these and other such plans are collecting dust.

"They have a development plan, which includes tourism and utilizing chemicals. They want to do as we and the Jordanians are doing," says economist Rafi Benvenisti, who advised former Labor governments. "Originally, the Dead Sea Works were built at the northern end of the sea, and it is possible [for the Palestinians] to build them once again in the same place. It would take hundreds of millions of dollars, and in all likelihood the production level would be lower than in the Israeli factories and closer to the Jordanian level."

Four years ago the Palestinian chemical manufacturer Star wanted to produce cosmetics based on Dead Sea mud. That initiative failed, according to Israeli and Palestinian sources familiar with the case, because of the refusal by the Civil Administration, the sovereign in the Dead Sea region beyond the Green Line.

Bamya: "Israeli companies essentially have a monopoly on manufacturing cosmetics that originate from the Dead Sea. This monopoly also exists in the tourism field. It is completely pointless for Palestinian entrepreneurs to submit a request to build hotels on the Dead Sea, because they will meet with rejection from the Civil Administration on various pretexts."

"The Palestinians have a lot of nerve making such a demand," says Dov Litvinoff, head of the Tamar Regional Council, which is within the Green Line. "There was never a Palestinian connection to the northern Dead Sea. But even if we dismiss the political issues, they would have a problem building hotels in that area. The sea is drying up there - each year it loses a meter and rehabilitating it will take 10 to 30 years. Today, if they want to build hotels there, they would have to invest a lot in artificial saltwater pools."

Motti Dahaman was among the founders of Kibbutz Kfar Shalem and now heads the Megilot regional council, which is over the Green Line. "There will not be Palestinian enterprises here. These are our lands, state lands, and they have no rights here. At the time of the Oslo Accords, Shimon Peres [then the foreign minister] wanted us to enter into an American-Palestinian-Israeli cooperation in the hotel business, but we refused. The Palestinians can be guests - they are welcome - but not build a hotel. After all, we wouldn't want them to build hotels in Tel Aviv either."

Gideon Bromberg, the Israeli director of the nonprofit organization Friends of Earth Middle East, a coalition of Jordanian, Palestinian and Israeli environmentalists, argues that the tourist potential of the West Bank is far from exhausted. "It has to do first and foremost with rehabilitating the southern Jordan River. So long as the Jordan remains a sewage canal, we will not be able to realize that potential," he says.

The Dead Sea is on the verge of a new death, mainly because of water pumping - by Israel, Jordan and Syria - from the Jordan and Yarmouk rivers, and also because of Israel's Dead Sea Works, which is responsible for 20 percent of the decline in the sea level - according to a study conducted by the Geological Survey of Israel. This, Bromberg says, is why the Palestinians will have to focus, when the time comes, on developing tourism rather than on industry dependent on the waters of the Dead Sea.

Water flows to Israel

The crux of the dispute over the water is the question of who owns the groundwater beneath the hills in the center of historic Palestine: the western mountain aquifer. The Palestinians claim that Israel has been encroaching on their water rights for years, mainly because rainfall in the territories flows to the coastal plain, but also because of discrimination within the West Bank, in terms of the water supplied to Palestinian villages versus the quantities settlements receive.

"During the last big rainfall, people rejoiced, but I explained that the rain won't increase our water supply because most of it will flow into Israel," says Dr. Shaddad Attili, the PA minister who heads the Palestinian Water Authority. "We want equitable and logical allocation and joint management of water resources, in keeping with international law. We simply want our share."

The water agreements that were signed between the parties in 1995 determined that until any permanent agreement is signed, Israel would get 80 percent of the aquifer and the Palestinians would get 20 percent - in accordance with the size of their populations. Today Palestinians consider the agreement nullified, because of the amount of time that has gone by since it was signed and because it doesn't look like a permanent agreement is in the offing.

Water experts say that in an era when desalination is an available solution, there is no need to argue about who owns the rainwater that fills the aquifer. "Once upon a time water really was an existential product over which wars break out, but today it is a product that can be manufactured for 60 cents per cubic meter," explains economist Benvenisti. "Hence, this is an argument over no more than $50-60 million."

But two years ago Attili approached the Israeli Water Authority with a request to buy desalinated water. Attorney Dov Weissglas, who had been Prime Minister Ariel Sharon's bureau chief, accompanied him as a liaison to IDI, a company owned jointly by Yitzhak Tshuva and Nochi Dankner that has a desalination plant in Palmahim, along the Mediterranean coast. Under Israeli law, the desalinated water is transported to a reservoir of the water authority, so Tshuva and Dankner could not sell the water to the Palestinians directly.

The Palestinians wanted to purchase approximately 20 million cubic meters, but the Israeli water authority refused.

"It began after Salam Fayyad became prime minister," says an Israeli source with knowledge of the talks, "and the move was foiled by the current government, which raised all sorts of reasons to torpedo the move."

Officials at the water authority confirm there was a Palestinian request, but claim it was rejected for pertinent reasons. "We told Attili that he has to submit a serious plan and then we would be able to consider it," says a senior official at the Israeli water authority, who asked not to be named, "but to this day he has not submitted such a plan. He doesn't really want the water, but rather to goad Israel."

The Palestinians also wanted to desalinate water in the vicinity of the Ein Feshkha nature reserve, near the Dead Sea, and put it to agricultural use in an area that suffers from a serious drought. According to a report published last May by the Israeli human-rights group B'Tselem, Israeli appropriation of water wells in the area limited the Palestinians' water, and many farmers were forced to abandon crops. The Palestinians wanted to desalinate water that originates in the eastern mountain aquifer - in other words, water that is not destined to flow into Israel. The Israeli water authority refused in this case as well.

The same source in the water authority says that, internationally, it's not acceptable for the expensive technology of desalination to be used for agriculture; for that, purified sewage water is used. "The Palestinians wanted to gain a hold on the land, and not really [start] a desalination project," a senior source there says.

The West Bank has one sewage purification plant. The Israeli water authority says that the Palestinians require another 50 such plants, but that the Palestinians flat out refuse to treat their sewage. The authority built another plant with Palestinian funding on Israeli soil, near Kibbutz Yad Hanna, which is meant to treat water that flows from the West Bank.

A few months ago the Palestinians sought to build a purification plant near Tul Karm with international funding, but their request was turned down by Israel.

"This is a project that is designed to protect Israel as well, so that sewage water does not reach within the Green Line," Attili says, "but the Israelis told us that the land was earmarked for other purposes."

For its part, the Israeli water authority claims that the Palestinians deliberately decided to set up the purification plant across from the community of Bat Hefer, which is on the Israeli side of the Green Line, even though the purification plant would be a seriously smelly nuisance to Bat Hefer residents. "It was manipulation on the part of the Palestinians," says the water authority official.

Gas woes

In 1999 Yasser Arafat, then chairman of the Palestinian Authority, granted the franchise for gas production from the natural gas deposit opposite the Gaza coast - the Gaza Marine Field, worth an estimated $6 billion - to British Gas, giving it 60 percent of the mining rights. Thirty percent of the holdings went to the Khourys, a wealthy family of Palestinian refugees living in Lebanon, and only 10 percent remained in the hands of the Palestinian people, a state of affairs that prompted charges of corruption against the Palestinian Authority and Arafat. In 2000, the Al-Aqsa Intifada erupted, and the gas project in Gaza has been frozen ever since, even though both sides could have benefited from it.

Earlier this month it was reported that British Gas is selling its holdings in the mining operation.

Today, because of the maritime blockade on Gaza, the possibility of developing the gas deposit seems more distant than ever. But even if the situation were otherwise, mining is economically feasible only if Israel buys the gas from the Palestinians, since demand from the less-developed Palestinian economy is not high enough to justify the high production costs, and exporting gas to other countries is too expensive.

In 2004 the possibility of developing the deposit was close to being realized. According to one of the routes considered, the gas was supposed to reach Ashkelon, where the Israel Electric Corp. would produce electricity for the Gaza Strip in return. At the time, IEC was debating between buying natural gas from Gaza Marine Field and buying natural gas from Egypt through EMG, a company co-owned by Israeli businessman Yossi Meiman.

Ultimately, after a political scandal that led to the resignation of then-minister of national infrastructure and energy Yossi Paritzky, who actually favored the Palestinian option, Prime Minister Sharon opted for the Egyptian option, also because he viewed the Palestinians as enemies to whom Israel should not funnel money.

"I had reached understandings with the Palestinian energy minister that they would receive electricity, not money, from the project, but Sharon shouted that he wasn't going to give money to terrorism," Paritzky recalls. "Too bad, all of the parties were supposed to be satisfied. We are continuing to miss that opportunity today as well."

In January 2006 Hamas seized control of the Gaza, but as late as a year later the Olmert government held talks with British Gas, mediated by Tony Blair, the Quartet's envoy to the Middle East, who also had been involved in the matter when he was prime minister of Britain. The negotiations collapsed, among other reasons because British Gas asked Israel to buy the gas directly instead of through the electric company.

"In retrospect it was a big mistake not to develop that deposit, certainly when electricity prices are on the rise," says Amit Mor, CEO of Eco Energy Ltd. "Buying gas from that deposit should be an inseparable part of the economic process that will accompany future diplomatic talks."

During Benjamin Netanyahu's tenure, there have been other Palestinian attempts to resume mining of the gas deposit, with an emphasis that the mining will be the sole responsibility of the PA under Prime Minister Fayyad and not left in the hands of Hamas.

"This is a gas deposit that can be developed in a very short time, even six months, by building a pipeline to the existing receptacle in Ashkelon - which already takes in gas from the nearby Yam Tethys deposit," says a senior Israeli official who had knowledge of the negotiations. "The Palestinians announced a long time ago that they were prepared to send all of its production to Israel, but the government decided, as in other fields, that here too issues of economic development would be leveraged for political pressure. British Gas had already agreed to sell directly to companies such as Israel Electric, Oil Refineries Ltd., and other companies, but the Netanyahu government is unwilling to grant authorization."

Asked from comment, the Prime Minister's Bureau released this statement: "Israel sees great importance in regional cooperation, and in the past negotiations were held between the Israel Electric Corporation and British Gas regarding joint development of the gas field. After the negotiations were unfruitful, Israel began to develop its [own] gas fields independently, and they are expected to yield gas in the coming year. The shortest time frame within which the field opposite Gaza will be able to begin operating is three years, and therefore at this stage, it will not be beneficial to the Israeli economy."