Marketplace Middle East - Blog
6/20/08
A Leading Role
Expectations ranged from very high to highly skeptical this weekend in Jeddah when producing and consuming nations meet at the invitation of King Abdullah of Saudi Arabia.

A volatile cocktail of record demand, a low dollar and high speculation is keeping oil prices stubbornly high, despite a second offer from the Kingdom to boost production by another 200,000 barrels a day. This will reportedly add more than a half million barrels of new production to Saudi Arabia’s daily output in the next month. In the overall scheme of things it is not much since there is a record demand of nearly 87 million barrels a day despite the downturn in the United States.

The Kingdom’s move did not go unchallenged, specifically from OPEC’s second largest producer Iran who thought the unilateral action was the “wrong move” and that other cartel members should have been consulted. For those who follow the oil market and specifically the world’s largest producer, it is widely known that it has a history of putting customers in the U.S., Europe and Japan ahead of rhetoric. The veteran Saudi oil minister Ali al-Naimi has certainly taken that “leading role”.

After participating this week in the World Economic Forum in Kuala Lumpur, it is evident it is not just the G-7 industrialized countries feeling the heat of $130 oil. In the face of higher prices countries like India, Indonesia, Malaysia, Pakistan and Sri Lanka cut or reduced fuel subsidies. Basically they could not afford to pick up the tab for their consumers, who are now bearing the brunt of the higher prices.

Malaysia’s Prime Minister Abdullah Ahmad Badawi told business leaders at an evening reception, "We have faced serious challenges before, but rarely in such a potent combination and which seriously threatens the world.” In an earlier briefing with journalists he asked Saudi Arabia and other major oil producers to “do whatever possible” to bring about an easing of prices. Meanwhile, Badawi has targeted some relief to the lower income earners in his country.

Vietnam like Malaysia is energy sufficient, so both are not feeling the pinch as severely as say India or South Korea who have been the subject of major protests. But the pressure is on. The Asian Development Bank is predicting that inflation in Asia will hit a ten-year high of 6 percent this year and that their Director General Rajat Nag admits is conservative. In an interview with Marketplace Middle East, Nag said inflation due to high energy and food prices is the biggest threat to growth.

Vietnam’s Finance Minister Vu Van Ninh is all too aware of that threat. Spiralling inflation hit 25 percent in the month of May. The country which has averaged more than 7 percent growth for a decade garnered $20 billion of foreign direct investment last year and its stock market surged 200 percent the last two years. In 2008, it is down 60 percent due to the rising cost of living pushing up labor costs.

But Asian economies are in much better shape to contend with the challenge. A decade ago they were in the throes of the Asian crisis. Today, according to the ADB they sit atop nearly $5 trillion of reserves -- that is enough to buffer them from the ill winds blowing from the United States.

Yoshimi Watanabe Japan’s Minister of Financial Services and Administrative Reform said that the “U.S. could no longer be the locomotive of the global economy.” The former finance minister of India Yashwant Sinha (and therefore offering a more blunt assessment) asked with a tinge of irony “What is the IMF doing about the U.S.?”

The honest answer is, not much. Years of low interest rates and high borrowing by U.S. consumers led to the downturn we are witnessing today. Unfortunately, instead of trying to boost their savings rates, they are now faced with the difficult challenge of slow growth, fewer jobs but higher prices for food and energy. In the 1970’s they called it “stagflation”, where the growth stagnated, but inflation still rose. It is not that severe today, but those in Kuala Lumpur were not prepared to call an end to the trouble just yet.

They were however prepared to ask for some relief where available. They are all hoping that over the next few months OPEC members offer more production and that “mysterious” market speculators offer a break from their active investments in the energy market.
ABOUT THIS BLOG
John Defterios’ blog accompanies the weekly business program, Marketplace Middle East (MME) that is dedicated to the latest financial news from the Middle East. As MME anchor, John Defterios talks to the people in the know, finding out their opinions on the big business moves in the region, he provides his views via this weekly blog. We hope you will join the discussion around the issues raised.
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