Marketplace Middle East - Blog
$120 - a new and worrying number

During the rush of the Pennsylvania primary, a $100 billion mortgage bailout in London and the global wake up call of higher food prices, oil prices quietly nudged up against a new threshold of $120 a barrel.

The unlikely source for news this week came out of Rome, one of the world’s most beautiful cities and a place I fortunately called home for four years. This week producing and consuming nation representatives gathered for the International Energy Forum, where they debated what future demand may be during a period of economic slowdown.

The 13 members of OPEC, ranging from Indonesia in the east, Venezuela in the west and giant Saudi Arabia in between, provide about 30 million barrels of today’s daily demand of roughly 85 million barrels. Of the 13 countries, oil executives and analysts say only Saudi Arabia has the excess capacity to meet the needs with China and India still growing at 8 percent or more.

However, if one reads between the lines of the comments coming out of the eternal city this week, there has not been a rush by the Kingdom or other players from OPEC to invest in developing excess capacity. If you can be paid nearly $120 a barrel for your existing production or $80 if you put more oil on the market, what would you choose?

Saudi Arabia is producing roughly 9 million barrels a day. At $120 dollars, it will make over $1 billion dollars a day; at $80 dollars subtract roughly about 30 percent of that. That, as they say in the U.S., is some serious money. Knowing that simple math, G8 consuming nations have increased the calls for more production to the market. It is not as easy as basically opening the taps a bit more.

Qatar’s Prime Minister Sheikh Hamad bin Jassim bin Jabr al-Thani who was a guest on Marketplace Middle East recently, put today’s excess capacity within the cartel at 300,000 to 500,000 barrels a day. That provides some cushion, but will not reverse the rise in prices over the past two years, for two key reasons.

While in Dubai I had a chance to talk to Martin Lovegrove Vice Chairman of Oil & Gas at Standard Chartered bank about the ingredients of the recent surge. Lovegrove broke down current demand in the market for oil overall. He reckons that $20 of the current price is a result of a 38 percent drop in the dollar since 2003. Another $20 is based on a surge of investment fund capital riding the wave of commodity prices. With equity and now real estate prices softening, the hot money has gone into, and will likely stay, in oil.

So $40 of the roughly $120 we see today has nothing to do with supply and demand.

OPEC Secretary General Abdalla Salem el-Badri tried to assuage leaders this week in Rome when he confidently stated that the cartel will be able to add another five million barrels a day to the market in the next five years.

While politicians are looking to calm consumer jitters, Badri did not seem to share their sense of urgency and said, “There are some problems, maybe a delay of a year or two … but it will come. I am not disturbed at all. I would like to assure the world that all the countries are investing.”

To do so, they are committing to spending $160 billion on infrastructure to expand production. That is about half of what Saudi Arabia takes in each year at today’s prices. The investment certainly won’t break their bank or others within the OPEC group of nations and as we now know from OPEC’s secretary general, will not erase the new target for oil traders of $120 dollars a barrel.
From Dubai to Doha

We took our programme on the road again this week to explore Dubai’s next wave business strategy.

There is a rich history of trading in Dubai which stretches back to the 1850s. It is a mindset which is at the heart of the Emirate’s business plan for the next quarter century. Take DP World, the trading division of Dubai World. It has forged 23 different deals stretching from China to Djibouti. This allows Dubai Inc. to place a corporate flag in each country, planting the seeds for future relationships and growth. This sounds simple, but it may be the key differentiating factor for the United Arab Emirates vis-à-vis its competitors in the Gulf.

This week I had a chance to take an in-depth look at some of the building blocks for the future and to take in some high-level analysis from some of the top political and business leaders in the region at two forums -- the Doha Forum on Democracy, Development and Free Trade and Business Week’s Middle East-China Leadership Forum in Dubai.

Pieces of the Puzzle

Over the weekend, I sat in a few business plan briefings at three divisions of Tatweer, itself a division of Dubai Holdings, the key development vehicle of the government. Dubai Land, Dubai Healthcare City and Dubai Industrial City fit into the next stage of growth. To be candid, it was hard to appreciate the scale of these projects. You might have seen the brands on the many flags, which flutter in the Arabian winds, but to see where they fit into the puzzle of this economy is quite a different perspective. I could write a column on each of the projects, but simply put, one represents sizable theme parks and residential real estate; another is a new approach to integrated healthcare which is sorely needed and the final piece an industrial hub to support the growth which is underway. The hotel, residential and retail hub Bawadi according to its Executive Chairman Saeed Al Muntafiq is worth $53 billion alone.

The industrial city is under construction; 55 square kilometres of real estate which has logistics facilities, land available for global and regional manufacturers to lease space and even low income housing for laborers. This is to address one of the thorniest issues facing the governments in the region; that is to take care of the thousands of workers, primarily from South Asia who have been imported into the U.A.E.

If you take a step back, one can see the industrial logic of all the blueprints and buildings to come. Hotels, golf courses and villas are built to attract visitors and residents. The largest airport in the world is being constructed to bring tourists in and the industrial city will be there to support light industry which has expanded to accommodate the growth. The division managers of these projects smile when asked about the original feasibility studies presented by consultants for all these projects. They were rejected, I am told, by the Ruler of Dubai and now Prime Minister of the United Arab Emirates. It is obvious after this week in the region that the bar is set very high.

Dubai seems to be sprinting to stay ahead of its Gulf neighbors who are now constructing their own visions of the future. On the final approach after a 40 minute flight to Doha from Dubai, one can witness how Qataris plan to expand to more than a million people. The Pearl is the giant project on the cards. Like Dubai, Qatar realizes that trained workers and graduates will be needed to fill the buildings and map out the strategies for the future. The first graduates from the Qatar Foundation campus of four university programs with links to the West will commence May 6th. This is encouraging.

New Culture of Globalization

While the small but wealthy Gulf emirates expand, the sizable players of the Middle East are benefiting from what Turkish Prime Minister, Recep Erdogan called “the new culture of globalization.” Since coming to power in 2003, foreign direct investment has surged from $1 billion to $22 billion. Turkey has not only a large population, but is able to look East and West as an export hub for Europe and the Middle East. Egypt is enjoying similar growth in FDI. This is the benefit of greater integration.

U.A.E. officials say they mapped out their blueprints not on the 40 million people of the Gulf, but the 310 million people of the Greater Middle East Free Trade Area or GAFTA. They have tapped into years of pent up demand, especially after many residents repatriated their savings and assets after 9/11. While consultants may want to be conservative with their project studies presented to their clients in the Gulf, the leaders in the region have no plans to heed that advice.

With oil at $110 or more per barrel, it is full steam ahead.
Food Inflation: From Chronic to Acute

The scenes seem to be from a different era; men and women scramble for what little bread there is left to buy. President Hosni Mubarak of Egypt orders bakeries from the police and the military to go into overdrive to provide whatever supplies they can.

President Mubarak, a man in power for 27 years, knows the link between ample food and a stable population. The problem for him and other leaders of the Middle East right now is that there is precious little they can do about it. Prices are surging for bread and a whole basket of vital commodities such as sugar, rice and cooking oil. It seems ironic that a region, Egypt included, awash with oil and/or natural gas is having problems with the basic staples of life.

The Middle East is certainly not alone. It is a fair point to say that the rise in food prices has moved from the chronic to acute stage. The challenge certainly is that the burden falls on the people who can least afford it.

According to the United Nation’s Food and Agriculture Organization (FAO), food prices have risen by 45 percent in the last nine months alone. That is serious. Jordan’s inflation rate surged nine percent in the last month. Syria saw their food prices climb 20 percent in the past half year. The list goes on and on. The FAO’s director-general Jacques Diouf said “unrest will spread” where half or more of income is spent on foodstuffs alone. Most of Africa falls into that category and so do many parts of the Middle East where poverty levels are still too high.

Ahead of the International Monetary Fund/World Bank meetings in Washington, British Prime Minister Gordon Brown wrote to the current head of the G8, Yasuo Fukuda, his counterpart in Japan. Brown said “rising food prices threaten to roll back progress made” on reducing poverty and fostering development.

A Perfect Storm

What we are witnessing today is a confluence of many factors hitting at the same time:

1. Global demand remains high despite a predicted slowdown in G8 economies

2. The rush to bio-fuels has created an artificial shortage for a basket of grains

3. Hedge fund investors have piled money into commodities, driving prices up even further

As a result, the World Bank candidly admitted that the situation, despite the threat of recession, will remain bleak through 2009. Worst yet, they are predicting that food prices will not come down to pre-2000 levels until 2015. Obviously, like the Titanic, it is not easy to steer agricultural policies that really miscalculated the economic surge of the Middle East, plus Brazil, Russia, India and China (the so-called BRIC countries.)

Complicating matters for the Middle East, last weekend Gulf leaders restated their loyalty to the U.S. dollar and that they will not de-peg their currencies.

As Daniel Hanna a visiting fellow at the Royal Institute of International Affairs said: “When you've got a situation of the dollar being at historical lows against the yen, against the Chinese currencies, against the European currencies, that has a knock-on impact onto the region as a whole. That kind of double-whammy effect has really pushed up sort of day-to-day prices across the whole of the region.”

So look for more proclamations against the rise in prices from many corners of the globe as leaders gather in Washington, but don’t be lulled into believing they will have any real solutions.

The East-East Economic Axis

Even in China, a country of more than a billion people, it would have been difficult to miss the Ruler of Dubai and Prime Minister of the United Arab Emirates and his delegation representing five and a half million people.

H.H Sheikh Mohammed Bin Rashid Al Maktoum brought an entourage of 50 business leaders and throngs of government support to advance trade between the two economies which are both expanding around 10 percent a year.

While a great deal of this was largely for the cameras, with President Hu Jintao for example handing over the official invitation in a Beijing ceremony, there is a lot to be said about the emerging axis between the Middle East and China. There was hope and early talk of $2 billion dollars worth of deals to be announced on this trip. Nothing really materialized beyond a research agreement between regional mobile operator Etilisat and Huwaei Technologies of China.

Merchandise trade however between China and the U.A.E. has been growing 30 percent or more each year for the last four years. Dubai is home to one of the largest retail and wholesale centers in the world, the Dragon Mart, and Chinese companies are busy constructing buildings across the region. These are the headline numbers, but what may be more fascinating is what could be on the way.

The Chairman of Dubai World, Sultan Ahmad bin Sulayem talks of the “excellent” bi-lateral relations and his group has placed investments on port projects in Qingdao and Shanghai. Unlike the P&O deal in the U.S. which created a fuss in Washington, there was no resistance to the capital investment from the Gulf into China.

During an interview this week on Marketplace Middle East, the former Prime Minister of Pakistan, Shaukat Aziz, underscored the point saying there are no competing interests. The Gulf needs Chinese goods, capital and construction groups. China wants access to a potential market of 430 million people in the Middle East and North Africa region and open access to their oil and natural gas reserves. After a landmark visit to Beijing in January 2006, King Abdullah of Saudi Arabia signed a deal to set up a refinery for the Kingdom’s oil on Chinese soil.

While energy security may represent the lion’s share of Chinese foreign policy and its investment decision making (look at Africa for inspiration), it is re-drawing the map of the Silk Route which is literally being re-built from the Middle East to Far East Asia. Good business deals, lead to good relations and open markets for goods and capital. With Washington and Brussels jittery over the Chinese trade surplus and the inability to compete on a low cost basis in certain sectors, Beijing wants to hedge its bets.

Sovereign Power-Play

Beyond trade links, there is a less obvious common ground that China and the U.A.E. share these days, investments by their sovereign wealth funds. While the transatlantic rhetoric has calmed down over the past month, the two countries have been at the forefront of the more high profile stakes in U.S. banks and retail brands such as Barney’s. Dubai International Capital, Istithmar, Dubai World and China Investment Corporation (CIC) are names we are familiar with after the global spending spree that heated up last autumn.

While Sheikh Mohammad was busy exploring b-lateral investments, a key executive at CIC sounded more “Gulf like” when he said “we are facing rising protectionism and nationalism”. After seeing his stakes in Citigroup and Blackstone suffer, CIC has publicly stated it is looking for conservative returns for their $200 billion fund.

Expect more discussions on this front and some unusual partnerships. Overlooked in analysis over a U.S. economic slowdown was a discreet meeting in Washington recently. It was a different type of Asia-Middle East partnership; this time Singapore and Abu Dhabi.

Representatives from sovereign funds GIC and the Abu Dhabi Investment Authority met with U.S. Treasury Secretary Henry Paulson and Deputy Treasury Secretary Robert Kimmitt and agreed on the principles that will govern best practices for investments. This process will wind its way through organizations like the International Monetary Fund and the O.E.C.D., the Paris based think tank for industrialized countries.

While that gathering did not capture the headlines of Sheikh Mohammad’s delegation, it is another example of the new East-East economic axis and the deals and partnerships that are set to emerge along with these markets.

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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