March 11, 2002 No. 26

Oil News

March 11, 2002 | By Dr. Nimrod Raphaeli*
Libya | No. 26

Oil Price Rises Sharply
After remaining in the doldrums for a while, oil prices registered their biggest increase in recent weeks, reaching $23 per barrel.

Analysts attribute the spike to concerns about a possible military action against Iraq. In this connection, the U.S. is reported to have requested OPEC to increase its production by 1 million b/d to avoid stifling the American economy which was emerging from a recent recession.[1]

OPEC: No Change in Production Ceilings
The Secretary General of OPEC, Ali Rodriguez (Venezuela), said current ceilings on production will remain unchanged during OPEC meeting in mid-March. Various delegations were heading to Moscow to convince it to keep its production within the ceiling system negotiated last December.

While ostensibly adhering to the production ceiling, Venezuela has already stored 15 million barrels for sale at a later date which suggests production above the ceiling. [2]

OPEC Will Not Threaten Russia with a Price War
OPEC sources maintain that OPEC will follow a quite diplomacy in its dealings with Russia next week rather than declare a price war in the event Russia refuses to maintain a reduced production ceiling negotiated with the cartel. A senior OPEC official said; "If Russia has decided not to maintain the production at the negotiated level in the second quarter of the year, OPEC would lose its market share but we are not that stupid to declare a price war." The other reason for following a quite diplomacy is the "good record" of two other non-OPEC members, Mexico and Norway, in adhering to the negotiated ceilings. [3]

Elsewhere, it was reported that the Russian decision regarding the adherence to any informal quota system with OPEC will await further discussion between the Russian and American energy officials to take place before the OPEC ministerial meeting in mid-March. [4]

In the meantime, the Russian Ministry of Energy expects production of oil to rise from 6.99 million b/d to 7.33 million b/d this current year. [5]

OPEC Extends Invitation to Non-Members
OPEC has extended invitations to Egypt, Russia, Norway, Mexico and Oman to participate in the ministerial-level meeting of the cartel to be held in Vienna in mid-March. By inviting these non-member countries, OPEC is seeking to enhance its efforts to stabilize oil prices) namely, to keep it in the $20 range per barrel.) [6]

U.S. Increases Dependency on Iraqi Oil
Despite its position vis-à-vis Iraq, the U.S. has become the largest consumer of Iraqi oil which represents about 9% of its oil imports. Valero Energy and Chevron/Texaco are the two largest American companies which buy Iraqi oil. American companies bought 790,000 b/d of Iraqi oil in 2001, or about half of Iraqi sale under the "oil for food" program. Between July and December of last year, 70% of Iraqi oil was refined in American refineries.

While the U.S. may buy Iraqi oil directly under the "Oil for Food" program Iraq prefers to sell its oil to the U.S. though intermediaries and petroleum brokers, principally Russian.

OPEC members, such as Saudi Arabia, are committed to fill any shortfall as a result of a military intervention in Iraq. [7]

Emirates Economic Forum Calls for Lesser Dependency on Oil
Economists taking part in the Emirates International Economic Forum have recommended that the Gulf counties must reduce their dependency on oil if they wish to play a bigger role on the international economic scene. To do so, the Gulf countries should develop an education system that would produce a work force with qualifications required for a modern economy. The Arab Gulf countries and Iran control two-thirds of proven oil reserves and a huge amount of natural gas but have failed to introduce economic reforms. One of the speakers, the deputy secretary general of the European Economic Cooperation and Development (OECD) called on member countries to introduce political reforms that would ensure the transparency of government and of the legal system and to provide confidence to foreign investors.[8]

At the same time, voices calling for localization of jobs (using local rather than immigrant workers) are rising. Immigrant workers in the Gulf counties, mainly from Asia, number 10.85 million, likely to grow to 11.2 million in 2005. Their transfers of $29 billion a year to their home countries is a financial hemorrhage.[9]

Iraq Announces its Determination to Continue Oil Export
Iraq has announced that it will continue to export oil in the framework of the UN "Oil for Food" program, despite impediments imposed by the U.S. and the U.K. The main impediment, according to the Iraqi Minister of Oil, Muhammad Rashid, is the introduction of the ex post pricing system which was intended to deny Iraq the illegal collection of commissions if oil was priced at the point of departure. Iraq argues that it is losing traders who cannot earn profit because of the ex post pricing mechanism. The United Nations estimates that the ex post pricing system has denied Saddam Hussein and his government an illicit income of $40 million.[10]

Saudi Arabia postpones "indefinitely" Agreement of Gas Production
The negotiations between Saudi Arabia and major oil companies appear to have run into difficulties, and the signing of an agreement between the two parties has been postponed "indefinitely." It would appear that the main issue of disagreement is the rate of return on investments by the oil companies.

The projects under consideration are the exploration and extraction of natural gas and its use in petrochemical and chemical industries, power generation and water desalination. Saudi Arabia expects the oil companies to make initial investments of $20-25b. in these projects. [11]

Libya Prefers American Oil Companies
Sayf-Ul Islam (the Sword of Islam) Al-Qaddafi, the son of the Libya’s leader Mu’ammar Al-Qaddafi, led a large Libyan delegation to Paris to normalize relations between the two counties. The relations were strained following the bombing the French Airliner (UTA) with its passengers over Sub-Saharan Africa, by Libyan agents. He told the newspaper Al-Hayat that, for the first time, American oil companies have received permission from their government to negotiate ("but not to sign") oil contracts with Libya.[12]

It was reported elsewhere that a number of large European oil companies have been waiting in vain to conclude agreements with Libya on oil exploration/production. Analysts argue that Libya was dragging its feet because of its preference for the return of American companies.[13]

Iran Oil Stabilization Fund is Close to $8b.
Iran's Oil Minister, Bijan Namdar Zanganeh, said in London that he was not concerned about low crude prices in the short term having any impact on the country because of the safety net provided by the Oil Stabilization Fund (Iran deposits some oil revenues in the fund whenever the price per barrel exceeds a certain level.) The fund has a close to $8 billion which makes up for any shortfalls in oil revenues.

The minister confirmed that one of Iran's aims is to end wasteful gas flaring by the end of 2005. Currently, Iran is flaring about 10b. cu. meters of natural gas a year. "It is a huge amount and it is very bad for the environment, very bad for our revenues, very bad for everything". [14]

Saudi Technical Team to Study Feasibility of Restoring Tapline
A Saudi technical team is considering the feasibility of reopening the Tapline, a pipeline linking oil fields in Saudi Arabia with Mafraq in Jordan. The Tapline used to supply Jordan with 65,000 b/d before it was closed by Saudi Arabia in 1990 because of Jordan’s siding with Saddam Hussein during the Gulf War.

The Tapline, quite famous in Middle Eastern oil lore, was originally constructed in the 1940s to export Saudi oil to the West via Jordan to the port of Haifa, then part of mandatory Palestine. It had a capacity of 350,000 b/d. It was closed upon the establishment of Israel in 1948. [15]

Yemen: First Refinery by Private Sector
The cornerstone was laid for a $900 million refinery in Makla, Hadharmout region, financed entirely by Yemeni and Gulf investors. The refinery will refine about 25,000 b/d in the initial stage but will increase to 100,000 b/d at the final stage. [16]

Sudan Foils Attempt to Blow up Oil Pipeline
Security agencies in Sudan have foiled "a terrorist attempt" to blow up the oil pipeline in Eastern Sudan. The agencies discovered 22 pieces of TNT, each weighing one kilogram (lb2.24) ready to be activated. Two of the perpetrators have fled t Eritrea.

An official statement issued by Sudan condemned "this coward terrorist attempt at the wealth of the Sudanese people, representing the worst forms of terrorism by all regional and international standards."[17]

II. Regional Economic News

Euro Will Have Positive Impact on Arab Markets
A recent economic study confirmed that the emergence of the Euro will have a positive impact on the Arab economies, particularly in the Gulf area. The study argues that these countries are paid in dollars (which is cheap, in their view) for their oil but they had to use a more expensive currency, like the Deutsch Mark or the French Franc, to pay for their European imports. According to available figures, 34.3% of all Arab exports and 41.8% of all their imports are with the Euro currency zone. The Gulf countries, in particular, expect the European markets to outperform the American market which would mean higher rates of return on their investments in the Euro zone. A linkage with the Euro would also help Arab currencies which fluctuate sharply because of their linkage to the U.S. dollar.[18][Not clear why the dollar will fluctuate more frequently and more sharply than the Euro.]

The Creation of an Arab Common Market is Difficult and Complex
The President of the Arab Federation of Chambers of Commerce, Khaled Abu-Ismail, said the creation of an Arab common market is difficult, complex and long-term. Despite the growth of inter-Arab trade, most Arab exports are in the oil sector. The only way for such a market to be a viable entity is through the creation of a compensatory fund, similar to the one established by the then European Market. This means giving a priority to a country which may have a comparative advantage in a particular industry or agricultural commodity and compensating a country with a less advantageous position. [19]

Arab Capital Repatriated
The Director of the Gulf Finance and Investment Forum, ‘Hissam ‘Hattini, estimates the repatriated Gulf capital since 9/11 at $20b. [The total Gulf countries investments overseas are estimated between $900b and $1.3 trillion, most of it belonging to private investors.][20]

Iraq Calls for Strategic Trade Relations with Turkey
At a meeting with a Turkish trade delegation to Baghdad, Iraq's Vice-President, Taha Yassin Ramadhan, called on Turkey to establish broad strategic trade relations with his country to compensate for Turkey's losses caused by the economic sanctions on Iraq. He said that "the American evil administration is always trying to place roadblocks in the path of broader trade relations between the two countries." Ramadhan believes that Turkey's regional interest lies in broad trade relations with the Arab counties and, in particular, Iraq.

In his reply, Turkish state secretary Tuzmen said that "Turkey strives to build its relations with Iraq on a strategic rather than temporary basis.[21]

III. Country Economic News

Egypt Asks for Deferment of Payments to Gas distribution Companies
Egypt is asking companies that supply and distribute gas for domestic consumption to defer payments of 2.5 billion due them from Egypt. The Egyptian Minister of Oil, Sameh Fahmi, said the request "is not a binding decision" on the companies but Egypt would welcome any company that would respond favorably to the request. The companies involved are ENI (Italy), Royal Dutch/Shell (Anglo-Dutch), Apache Group (U.S.) and a couple of smaller companies.

However, according to an official of one of the companies involved, who chose to remain anonymous, the companies are being subjected to a heavy pressure by the Egyptian Government. He said "the real problem is that the Egyptian citizen pays for gas and electricity, which are highly subsidized, in Egyptian pound whereas the government contracts to buy the gas in foreign currency." [22]

U. S. Major Trade Partner of Egypt
The United States is becoming one of Egypt's major trading partners. The total volume of trade reached $4.4 billion, including $3.6 billion of American exports to Egypt and $798 million of Egypt exports to the U.S. Egyptian exports comprise primarily of textiles, fertilizers and chemicals, carpets and flooring. American exports to Egypt include machinery, equipment and agricultural products and commodities.[23]

AfDB to Lend Egypt $1.6b. Through 2005
The African Development Bank (headquartered in Abidjan) has indicated it would lend Egypt $1.6 billion in the next 4 years for a variety of development projects. The bank has financed, over the last few years, 40 projects in Egypt in the fields of agriculture, industry, private sector education and health.[24]

The Egyptian Customs Corruption Case
The High State Security Court has sentenced the former Egyptian Minister of Finance, Muhyi Al- Din Gharib, to 8 years of prison with hard labor and fined him LE16.3 million ($3.2 million), and Ali Taha, the former director of customs to 11 years in prison with hard labor and fined him LE4.9 million (approx. $1 million).The court also sentenced to various prison terms a number of businessmen, some in absentia. Ali Taha was brought to court on a stretcher and was in a coma. They were all accused of corruption, bribery and customs irregularities.

Upon hearing his sentence, the former minister of finance wept and shook while reciting "no god but Allah."[25]

Saudi Arabia Boycotts Company Exporting Israeli Products
The Saudi Minister of Trade, Osama bin Ja'far Al-Faqih has blacklisted a Cypriot company, Vita Greca, for exporting to Arab countries products originating from Israel. The Minister's decision was taken in conformity with a royal decree "against the entry of Israeli goods and commodities to the markets of the Kingdom of Saudi Arabia.[26]

Syria Seeks Globalization
An article in the Syrian official newspaper Teshreen uses three common indicators or measurements, to determine the level of integration of a national economy into the global economy. These are: (a) the volume of foreign trade as a percentage of GDP; (b) the regional and global trade relations; and (c) the relationships of the country with international financial and trade organizations. This is how Syria comes out:

  1. Volume of foreign trade: Syria imports from 100 countries, and its foreign trade represents 50% of GDP, reflecting strong ties with world trade. This ratio compares favorably with Egypt’s foreign trade which represents 8% of GDP, Tunisia 29% and Lebanon 9% (all figures are for 1997).
  2. Trade relations: Syria has signed bilateral trade agreements with Arab countries in the framework of the Arab Free Trade Agreement. Syria is also seeking membership in the World Trade Organizations which it, as many developing countries, considers "as an inevitable evil." Finally, Syria has negotiated, but not yet, signed a partnership agreement with the European Union (the latter is seeking meaningful economic reforms, including the introduction of a private banking system and the phased elimination or reduction of tariffs).
  3. The relationships with international financial institutions: Syria's relations with the World Bank and the IMF have been "less than warm." Syria has been reluctant to borrow from these institutions because it considered their conditionalities, particularly those of the IMF, as harmful to poor people. Nor is Syria ready to adopt ready-made prescriptions from them.

In short, while Syria has taken a few strides to integrate into the international economic system it has still along way to go. [27]

Syria: Decision to Implement Compulsory Retirement at 60 is Controversial
The Syrian Government’s decision to introduce a compulsory retirement system at age 60 is uncharacteristically criticized by the government newspaper, Teshreen. The paper argues that the decision will not solve the problem of unemployment which is far more entrenched than can be addressed through such palliatives. The paper says that it was common that the superiors in the Arab culture monopolize all information, keeping the second tier of officials in the dark. It recommends a transitional period, particularly in the public banks and economic entities, so that the second tier gets enough training before moving upward.[28]

[It should be noted that the new retirement rules have enabled the regime, among other things, to get rid of many of the "old guard," including senior military officers.]

Assad Displays Generosity toward Lebanon
During his unscheduled visit to Lebanon last week, President Bashar Al-Assad has agreed to reschedule Lebanon's debt due to the Syrian electric authority to January 2003 and to forgive half of the debt of $120 million. This act was considered "as a generous initiative which touched every Lebanese and made him feel that Syria and its president stand by him during these most difficult times."[29]

Money Markets Expect a Re-enactment in Lebanon of Argentine Crisis
The London financial market and financial analysts, in general, expects Lebanon to default on its sovereign debt similar to Argentina unless Lebanon undertakes structural adjustment of its economy which it does not seem capable of doing.

Lebanon’s external debt has reached $27 b. which is equal to %165 of its GDP. It has tried to refinance its debt periodically, seeking help from the Lebanese banks and the Lebanese in the Diaspora. The market for new Lebanese sovereign bonds has become increasingly less favorable. The most recent bond auction in February 28 netted $191.5 million compared with $239 million in February 14 and $328 million a week earlier.

Standard & Poor’s international rating system estimates that Lebanon will need to repay $112 million of its external debt in 2002. This figure will rise dramatically to $950 million in 2002 and $1.3 billion in 2004. These repayments will be impossible to generate internally, given a growing budget deficit, reaching $3 b. in 2002.

Moody’s, another international rating agency, warns that "Should policymakers fail to make the necessary adjustments to rein in borrowing and debt this year…Lebanon’s prospects of escaping distressed debt exchanges are rather dim."[[30]

Lebanese Economic Crisis Acquires a Communal Dimension
In its meeting early this week, the Lebanese Council of Cardinals, under Patriarch Cardinal Nassrallah Sfeir, referred to President Bashar Al-Assad’s visit to Lebanon last week as an event that should pave the way to that which we demand, namely "the redeployment of the Syrian army towards its withdrawal." This was a response to Prime Minister Hariri’s televised speech on the TV station which he owns in which he blamed the Christians, who have managed the economy for a long time, for the current state of economic affairs.

In the meantime, the Supreme Moslem Shari’i Council expressed its "regret for escalating the aggravated communal issue," ignoring what the civil war has done to Lebanon. The council expressed "its complete confidence in the economic measures that the state was taking to open the hopeful horizon to the economic future."[31]

Jordan Confident on the Future of Its QIZs
The qualified industrial zones (QIZs) are industrial parks from which goods can be exported duty-free and quota-free to the US market provided that a minimum of 8% of their input is of Israeli origin. Jordan, the only country in the world which has QIZs, sees them as the economic fruit of the peace process.

Jordanian officials have downplayed recent threats posed by the possible establishment of QIZs in Turkey. According to Maher Nasser, Chairman of the Chamber of Industry of Irbid which has the oldest and biggest QIZ, 'the cheap labor available in the Jordanian market is key advantage that would continue to attract investors to the Jordanian QIZs." Average monthly income of employees ranges between $110 and $130.[32]

The Jordanian concern was in response to a new item in the press that Alan Larsen, Assistant Secretary of State for Economic, Agricultural and Trade Affairs has agreed with his Turkish interlocutors that Turkey could benefit from QIZs system by simply attaching a label "Made in Israel" on Turkish products. Israel will benefit from the agreement by collecting a commission on Turkish exports to the U.S. market, in addition to enhancing its strategic relations with Turkey.[33]

EU Aid to Jordan
The European Union will grant Jordan Euro 142 million over the next 3 years to support economic reforms as well as projects designed to fight poverty and unemployment. Jordan plans to allocate from its budget $385 million for projects that address unemployment.

The average unemployment in Jordan in 2001 was 14% but independent sources estimate unemployment rate at 25% of the labor force.[34]

Foreign Investment in Israeli securities Plunged
The Bank of Israel (Israel's central bank) reported that foreign investment in Israeli securities both in Israel and abroad plunged 98% in 2001 to only $108 million from $4.96 billion in 2000.

Concurrently, total investments in Israel by non-residents reached $4.5 billion in 2001, down 60% from a record $11.2 billion the previous year. Only $2.5 billion were invested in the hi-tech sector during the year, a fall of 68% from $7.9 billion in 2000.[35]

Israel: Damages by Intifada Estimated at 24 b. Shekel
Israeli Minister of Finance, Silvan Shalom, estimates the damages to the Israeli economy caused by the Intifada at 24 b. Shekel ($5.1 b.) or 5% of GDP. As a result, 80,000 jobs will be lost. The GDP would register a decline of 7% in the last quarter of 2001.

As the same time, the governor of the Central Bank of Israel projected that for entire 2002, the economy will register a zero growth and a higher unemployment.[36]

IDA Makes a Credit to PA
The International Development Association (the concessionary arm of the World bank) has made a $20 million to the Palestinian Authority to finance urgent needs of Palestinian school and hospitals in West Bank and Gaza.[37]

[1] Al-Bayan, March 7, 2002.

[2] Al-Quds Al-Arabi, March 3, 2002.

[3] Al-Bayan Newspaper (Dubai), March 1. 2002.

[4] Al-Hayat, March 3, 2002.

[5] Al-Hayat, March, 3, 2002.

[6] Al-Ahram, March 6. 2002.

[7] Al-Quds Al-Arabi, March 3, 2002.

[8] Al-Sharq Al-Awsat, March 4, 2002.

[9] Al-Hayat, February 27, 2002.

[10] March 3. 2002.

[11] Al-Hayat, March 3, 2002.

[12] Al-Hayat, March 1, 2002.

[13] Al-Quds Al-Arabi, March 3, 2002.

[14] Tehran Times, March 5, 2002.

[15] Jordan Times, March 7, 2002.

[16] Al-Hayat, March 6, 2002.

[17] Al-Sharq Al-Awsat, March 1, 2002.

[18] Al-Bayan (U.A.E. March 5, 2002.

[19] Al-Watan (Kuwait), March 7, 2002.

[20] Al-Bayan (U.A.E.) March 6, 2002.

[21], March 5, 2002.

[22] Al-Quds Al-Arabi, February 27, 2002.

[23] Al-Ahram, March 2, 2002.

[24] Al-Hayat, February 27, 2002.

[25] Al-Ahram, March 1, 2002.

[26] Al-Sharq Al-Awsat, March 4, 2002.

[27] Teshreen, March 6, 2002.

[28] Teshreen, March 4, 2002.

[29] Al-Safir (Beirut), March 5, 2002.

[30] The Daily Star (Beirut), March 7, 2002.

[31] Al-Safir, March 7, 2002.

[32] Jordan Times, March 1, 2002.

[33] Arab Y net-Arabic News from Israel (Yedioth Ahronoth), March 4, 2002.

[34] Al-Quds Al-Arabi, March 3, 2002.

[35] The Jerusalem Post, February 28, 2002.

[36] Israel Radio, Reshet B, March 7, 2002.

[37] Al-Hayat, March 2, 2002.

*Dr. Nimrod Raphaeli is Senior Analyst of MEMRI's Middle East Economic Studies Program.

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