Regional Economic Issues

I. Oil News

The Baker Institute Issues a Comprehensive Report on Energy
The James Baker Institute for Public Policy in Houston issued a comprehensive report on "Political, Economic, Social, Cultural, and Religious Trends in the Middle East and the Gulf and Their Impact on Energy Supply, Security, and Pricing."[1]

The report points out that "the attacks of September 11… have led Washington to reassess its relationships with individual governments and to rethink more general policies, including energy security approaches." It goes on to say that the U.S. administration "is forging new relationships that would have seemed unbelievable prior to September 11, while long-standing ties with certain allies are in question. Events set in motion over the past year are likely to play out over the coming decades and will influence many areas of international discourse, including oil geopolitics." According to the London-based daily Al-Hayat, the study was published during the unprecedented meeting between American and Russian oil companies in Houston. The meetings underscored the American intent to diversify the sources of its oil supplies, and provided the first indication of the oil dimension of the Iraqi question.

At the same time, the report acknowledges the pivotal role of Saudi Arabia which has the largest oil reserves in the world and currently produces 10% of the world's oil supply. More significantly, Saudi Arabia maintains the largest share of the world's spare oil production capacity. The report says that Saudi Arabia "has a unique capacity to replace single handedly, within a short time, the exports of any small to medium oil producing country." Provided it has the political will, and if it serves its national interests, Saudi Arabia could use its spare capacity to calm oil markets any time.[2]

Russia could become a serious competitor to Saudi oil in the American market. However, Russia's investment environment, particularly for international oil companies, has been less than favorable. Russian-Iranian collaboration on nuclear energy may deter the U.S. from opening its markets to Russian oil.[3]

According to the Institute's report, the completion of a number of projects under construction will increase the production capacity of the OPEC countries from the current level of 29.5 million b/d to 36.4 million b/d in 2005 and, should OPEC members succeed in attracting international oil companies, the production could increase to 44-45 million b/d in 2010. At the same time, the demand for oil will increase from 76.4 million b/d in 2001 to 95.8 million b/d in 2010 and to 114.7 million b/d in 2020.

Warning against the danger of oil production being concentrated in the hands of a small number of countries, the Baker Institute's report recommends the following policy options:

• Expand and restructure the International Energy Association (an international consumer organization located in Paris) to better counter OPEC's short term influence, including associating with major Asian consuming countries such as China and India which are considering the creation of national strategic oil stockpiles
• Encourage investment in diverse non-OPEC oil resources
• Develop and deploy alternative energy technology
• Enhance energy efficiency
• Maintain taxes on gasoline and other petroleum products even in the face of rising oil prices[4]

OPEC Exceeds Production Quota
OPEC members continue to ignore production quotas established by the oil cartel. In September, the 10 OPEC members (Iraq is the eleventh member but currently is not included in the quota system) have produced an average of 24.1 million b/d which is 2.4 million b/d in excess of the authorized quota.

Saudi Arabia is reported to have exceeded its quota by as much as 1.07 million b/d, in addition to 210,000 b/d produced at Abu-Sa'fa oil field near the border with Bahrain which is pumped to the latter at no cost.[5] Saudi Arabia has denied that it has exceeded its quota.[6]

U.S. Shifts Attention for Oil from Middle East to Africa
In attempts to diversify its sources of oil supplies, the U.S. is turning its attention from the Middle East to Africa. Currently, the U.S. imports 15% of its oil needs from Africa and is seeking to raise this amount to 25%. In addition to Nigeria, which is a traditional source of oil for the U.S., new oil discoveries in Gabon, Angola, Sao Tome & Principe and Equatorial Guinea will greatly supplement the Nigeria supply. Apart from Nigeria, none of the other African oil producers is a member of OPEC and most of the oil explorations are carried out by American oil companies like Exxon Mobile and Chevron/Texaco. Shipping costs from West Africa to eastern United States will be lower than those from the Gulf countries.[7]

Debate Over the Role of Oil in the American War on Iraq
Executive President of Jordan Invest, Henry Tawfiq Azzam, wrote in Al-Hayat that "oil is the principal factor in the war on Iraq." He argued that if the U.S succeeds in changing the Iraqi regime it could assist Iraq in bringing its production in the short-term to 2.5 million b/d and to the pre-Gulf war level of 4 million b/d within 5 years. The entry of Iraq in a substantial way into the oil market would enable the U.S. to pressure Gulf countries to modify their regimes.

In response, D. Anas Al-Hajji, professor of energy economics at Ohio University, dismissed Azzam's arguments. To begin with, the U.S.'s attempt to diversify the sources of its oil imports was on President Bush's agenda 6 months before the events of 9/11. The assumption that the U.S. would henceforth rely on Iraqi oil contradicts its declared policy of diversification. If a possible war on Iraq is to be driven by oil considerations, the U.S. would not be willing to spend an estimated $100 billion on the war, in addition to risking the lives of many of its soldiers. The U.S. would simply have to do is to lift the embargo on Libya, Sudan, Iran, and Iraq and it can get all the oil it needs. Moreover, Iraq announced a few days earlier that the contracts with the American oil companies, signed in 1987, remain valid, which means that the door is open for these oil companies to invest without resorting to war. In fact, the U.S. is presently in an ideal situation not only to control Iraqi oil but also what Iraq imports under the "Oil for Food" program.[8] [Any permanent member of the Security Council may suspend any procurement contract under the program.]

Linkage between Level of Destruction in Iraq and Price of Oil
Shakib Khalil, the Algerian Minister of Energy and Mines, expects the price of oil to be affected by the level of destruction in Iraq, in the event of a military operation. He is confident, however that, as in September 2001, the spike in oil price will be temporary because OPEC is committed to maintaining price stability in the oil market through increased production.

Mr. Khalil admitted that Algeria has exceeded its production quota assigned to it by the oil cartel but said the excess production has not affected the oil price which remains around the ceiling of $28 per barrel established by OPEC.[9] [OPEC is committed to increase production if the price exceeds $28 per barrel for 20 consecutive days.]

Iraq Increases Oil Export to Syria
While Iraq announced it would no longer collect a surcharge on its oil, it continues to export oil to Syria in contravention of the U.N. sanctions. Iraq has been exporting 200,000 b/d to Syria and, based on the services of oil tankers engaged, the figure was to increase to 250,000 b/d in October.

Syria [which occupies a seat on the Security Council] maintains that it has only been testing the pipeline which carries the Iraqi oil. The flow of Iraqi oil allows Syria to export its entire production of 600,000 b/d at full market price while it pays Iraq discounted prices for its oil [no reliable information is available on the nature of the commercial agreement between the two countries.][10]

On the other hand, Iraqi oil exports have declined recently because of the reluctance of American companies to buy Iraqi oil despite the fact that, in the past, such transactions were carried out through commercial agents. Oil analysts maintain that of the five large American companies which bought Iraqi oil last year, only two companies continue to buy it and only for their European refineries.[11]

As a result of the decline in oil exports, the United Nations announced that the "Oil for Food" program is threatened by a financial crisis.[12]

Oil Revenues Could Finance Iraq's Reconstruction
Unlike Germany and Japan whose reconstruction burden after WWII fell on the victorious powers, primarily the United States, the reconstruction of a post-Saddam Iraq could be accomplished by self-generating revenues from the sale of oil. Iraq, with the second largest proven oil reserves in the Middle East, has been exporting an average of 2 million b/d through the "Oil for Food" program [in addition to another 0.5 million b/d of oil given to Jordan at heavily discounted prices and oil smuggled to Syria, Turkey and elsewhere.] Iraq could increase its production capacity by another one million b/d after the essential repairs and rehabilitation of its oil installations. Thus, Iraq could generate revenues of about $20 billion annually which could double once Iraq restores its full production capacity of about 5 million b/d. What could render all these calculations irrelevant is if Saddam set fire to Iraqi oil fields as he did in Kuwait.[13]

Shipping Costs of Oil Increase
Shipping costs of oil from the Gulf to East Asia have increased by 17% in recent days. The increase is attributed to a number of factors-higher insurance premium, shortage of tankers, the explosion in a French tanker in Yemen, and the overall higher tensions in the Middle East.[14]

Incidentally, the shortage of tankers is attributed to their being increasingly used by some oil producers to store oil as strategic reserves.[15] Kuwait alone has rented 10 super tankers to store 15 million barrels of oil, including 1 million barrels to meet the needs of its distribution stations in Europe which carry the trade mark of Q8.[16]

II. Regional Economic News

Islamic Economic Conference to Meet in Mecca
The third Islamic Economic Conference is scheduled to meet at the Um-Al-Qura University in Mecca next March. There are four themes on the conference agenda: First, the adoption of the theoretical and applied theory of Islamic economics; second, the economic problems in the Islamic world, including privatization, the role of the public sector, corruption, money laundering, the technological gap and the growing public debt; third, the absence of Islamic capital markets, investment according to the Shari'a (Islamic law), and the relationships between Islamic banks and central banks; and, finally, the impact of the new Islamic economy on Muslim countries, including liberalization of trade, dumping, intellectual property rights, and electronic trade and how to benefit from it.[17]

European Banks Campaign to Attract Gulf Savings
European bankers, Swiss bankers in particular, are criss-crossing the Gulf countries, offering incentives to wealthy individuals to transfer part of their assets from the U.S. to European banks. These bankers are hinting that the U.S. might confiscate Arab capital in case of a political conflict. According to a recent report by Merrill Lynch, there are 220,000 wealthy individuals in the Middle East whose total wealth is estimated at $12 trillion [an average of $54.5 million per individual.] Most of these wealthy men are Saudis who prefer to keep their capital abroad.[18]

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III. Country Economic News

Egypt Objects to Boycott
Yusuf Butrus Ghali, the Egyptian minister of foreign trade, stated in a press conference, following a visit to the U.S.: "President Mubarak opposes [a boycott on American goods]… we do not find it useful because it harms the employment opportunities of Egyptians."[19]

President Mubarak Takes Over Responsibility for Central Bank
President Hosni Mubarak announced in early October that the Central Bank of Egypt will henceforth come under his immediate control [thereby eroding the bank's independence]. This measure was taken in the face of mounting defaults by large borrowers which could jeopardize the financial viability of a number of commercial banks. It is estimated that questionable or non-collectable loans have reached the equivalent of $11 billion, most of them by wealthy Egyptians who have since left the country.[20]

Record Tourism in Egypt
Mamdouh Al-Biltagi, the Egyptian Minister of Tourism, said Egypt had a record number of tourists in August, exceeding by 11% the old record of 515,000 tourists in August 2000. This sector, the minister said, has regained its health after the crisis of September 11 faster than anyone would have expected. [21]

Unemployment Issues in Saudi Arabia, Syria, and Jordan
In an interview with Al-Hayat, the Saudi minister of labor and social affairs, Dr. Ali Al-Nimla, made the following points:

1. There is no precise percentage rate of unemployment in Saudi Arabia due to the absence of data
2. The implementation of the policy of Saudization has fallen below the expectations of the Saudi youth because it has only opened up employment opportunities in low level jobs
3. The ministry of labor is trying to find employment for women "that would suit their nature" and not put them in situations where they would be mixed with men.[22]

In Syria, Hassan Al-Ammash, the director general of the Agency for Fighting Unemployment, estimated that there were 430,000 Syrians looking for employment for the first time. Most of these people are illiterate or graduates of primary and secondary schools. In addition, there are another 500,000 who receive below subsistence wages.[23]

Unemployment in Jordan is the most significant problem the society faces. There is hardly a home without at least one young man looking for work. Limited natural resources and industrial employment opportunities force young university graduates to seek government positions as the only source of employment. In parts of the kingdom, the unemployment rate stands at 16%.[24]

Syrian-Russian Industrial Collaboration
Meeting in Damascus, Dr. Issam Al-Za'im and Ilya Klipanov, the Syrian and Russian ministers of industry, respectively, signed a comprehensive agreement for investments by Russian companies in Syrian scientific, technological, and industrial projects. Some of these projects include silicon metals and phosphates. The two parties have also established a joint group to support industry in strategic and technological growth industries.[25]

War Could Delay Construction of Yarmouk Dam
The construction of the Yarmouk Dam on the Syrian-Jordanian borders has gone through fits and starts in recent years. The new deadline for the beginning of construction has been set for February 2003, but a war on Iraq could postpone its construction indefinitely.[26]

U.S.-Israel Trade
The total amount of trade between Israel and the United States reached approximately $20 billion in 2001, including Israeli exports of $5 billion and imports of $12 billion. For the same period, total trade between the U.S. and the 22 members of the Arab league was $27.06 billion, which was comprised of $9.9 billion of Arab exports and $17.7 of imports. Tentative figures for 2002 published by the U.S. Bureau of Statistics indicate a decline in both categories attributed to an overall economic slowdown in the U.S. and the rest of the world. [27]

Israeli Pipeline to Carry Russian Oil to Asia
The Eilat-Ashkelon Pipeline Company is planning to carry Russian oil through its pipeline destined for the Asian markets through the Red Sea. It will be a substitute for tankers going through the Suez Canal or around the Cape of Good Hope.

The pipeline, with a capacity of 1.2 million b/d, was completed in 1979 with the support of the late Shah of Iran. It currently carries Egyptian oil to Israeli refineries in Ashdod and Haifa.[28] [The Egyptian Minister of Oil Sameh Fahmi, had denied any collaboration between Israel and Egypt in the field of oil and gas.][29]

Jordan Likely to Suffer Most from a Regime Change in Iraq
Iraq is Jordan's largest trade partner as well as the largest market for Jordanian manufacturing goods. In a post-Saddam regime, and free from sanctions, Iraq will be open to competitive market forces in which Jordan, and for that matter most Arab countries [mainly Syria, Egypt and Saudi Arabia], would have a less competitive advantage. Indeed, Jordanian industrialists recognize that the inferior quality of their products would doom them to failure if they have to compete with other producers. In the case of Jordan, a change in regime in Iraq could also mean the end of free oil.[30]

Economic Consequences of the Intifada
Two years after the Intifada, wrote the United Arab Emirates daily Al-Bayan, the Palestinian economy looks like Arafat's headquarters in Ramallah-totally destroyed.

In turn, the Israeli economy is going through a crisis of its own. Unemployment has exceeded 10% for the first time in the history of the country. Foreign direct investments have declined as has the rate of exchange of the Israeli national currency, the shekel. Tourism, a major contributor to GDP, has declined from 9.1% in 2001 to 5.1% in 2002. Ephraim Kleiman, professor of economics at the Hebrew University, suggests that the situation will improve no sooner than the violence ends.[31]