Nations are created, carved out of nothing and formed. 

America is an example of this; a nation whose name was decided, borders were established, and whose laws were innovated then implemented.

Who is to say new nations cannot be created or carved out of old ones?

I mean, hypothetically speaking, the Middle East would look very different if it were all united as one Arab Union.

What is the need for separate countries? 

Is it about national pride and culture?

Well, is it possible to maintain all those things while establishing some sort of political-economic-social unity between Arab states that allows for a flourishing economy?

Imagine if the wealth of Saudi Arabian oil flowed normally, justly, and fruitfully into other Arab nations. This could be done democratically and still privately, so as to preserve liberal values. However, it would allow for political legitimacy, and proper redistribution of wealth. 

What negative effects would a democratic, Arab Union have on the Middle East?

Would it not outnumber Israelis, making them a minority?

It certainly would.