Marketplace Middle East - Blog
Club Med

As my family and I embark on a summer sojourn to a Greek island, it seems only fitting to write about what could either be an ambitious political effort with great architecture or a hollow shell with 43 countries and little substance.

The cradle of civilization without even a Plato-inspired debate lies at the heart of the Mediterranean. Until Nicolas Sarkozy re-ignited this effort, few could honestly say they looked at this region as a potentially powerful trade zone. It has been fraught with divisions, immigration problems; border disputes and remains home to the long-standing Israeli-Palestinian conflict.

In traditional French style, Sarkozy invited leaders to Paris to showcase his intent to create substance within the Union of the Mediterranean. For those who have covered or have taken an interest in European Union politics, you know that Franco-German axis dominates decision-making in Brussels. The crumbling of the Berlin Wall tilted that axis east. Minus Malta and Cyprus, the recent expansion of the E.U. has largely been an eastbound effort. So this new Union creates a new paradigm and some tensions in Europe.

German Chancellor Angela Merkel was not going to sit idle and let President Sarkozy design a non-E.U. driven structure, which would have seen only those countries bordering the Mediterranean as part of this effort. The strong-willed East German thought that would set the wrong precedent and allow France to relive the grandeur colonial times with little benefit to the 27 nation bloc.

This would explain where we are today with 43 countries cobbled together. What is now being called Club Med is not a new initiative; it goes back to the so-called Barcelona process of 1995. With so much instability and what many feared would be an endless call by North African countries for cash and E.U. structural funds, the effort stalled.

A lot has changed since then. For one, there is economic stability and pretty decent growth-- 4.4 percent since the turn of the century. While no one can contend the non-E.U. countries represent a cradle for democracy, they do represent a handful of countries that have embarked on real economic reforms – Egypt, Jordan, Morocco, and Turkey immediately spring to mind.

Those reforms caught the eye of some very wealthy Gulf neighbors who can clearly claim first mover status. Large development companies are building new cities, ports, factories and oil and gas facilities throughout Club Med.

As the Chief Executive of one Gulf real estate company aptly noted, “we are not a charity; we are out to make money, but if we help stabilize our region at the same time, so much the better.”

This is not the International Monetary Fund or World Bank at work, but the private sector smelling value.

European Trade Commissioner Peter Mandelson acknowledges the frustration many North African leaders have felt after a decade of limited leadership from Brussels, but sees the merits of this effort after the wave of investment.

“I think that it will bring greater political stability on the back of greater prosperity to the countries of the Southern Mediterranean and North Africa and that’s certainly in the interests of Europe,” Mandelson said.

The not-so-foreign direct investment from the Gulf (since they are in the same neighborhood) is the deciding factor for President Sarkozy. The economic risks are low, but the political upside is high and he could even carve out a role for France (and the E.U. for that matter) in the Middle East peace process.

The challenge for all leaders is to make sure wealth can be distributed more evenly. This bloc trails only China in FDI at nearly $60 billion a year. But it is the region’s two most populous countries, Turkey and Egypt and the most tech savvy, Israel, which are dominating that total. Investors either want a large consumer market to sell into or the ability to export skills and technology they don’t have.

That certainly is changing. DP World has, for example, a $3.5 billion port under construction in Tangiers and Renault Nissan has an automobile plant designed within the same facility. FDI is up six fold since the start of the century, with again Gulf players leading the modern day caravan across the Med.

"The Arab world today is in a dramatically different situation and a significantly more promising economic situation than it was in the mid 1990s,” says Florence Eid, President of Arabia Monitor. “On the back of six years of the oil windfall now, we are seeing dramatically different methods of investment."

The investment will provide a foundation for growth and hopefully long term job creation. It is the most pressing issue. Unemployment stands at about 12 percent in the non-E.U. Med countries; most experts contend it is double that amongst the youth.

If successful it will help stem the tide of immigrants who literally wash up on the shores of Spain, France, Malta and Greece seeking job opportunities.

President Sarkozy, with his Parisian hospitality, was out to make a statement that the Union of the Mediterranean can be grand, can lower barriers to trade, create jobs and assist in addressing one of Europe’s most pressing issues.

The Club Med launch party was relatively easy to pull off; the real work, however, just begins.

Many discussions, few solutions

“We have strong concerns about the sharp rise in oil prices, which poses risks to the global economy.”

This quote came from the G8 communiqué on the world economy from Japan, designed to reflect the consensus opinion amongst the developed economies that record oil prices will provide the tipping point into recession in their countries.

Many pundits got excited by the $5 drop per barrel earlier in the week -- the largest single day fall since March. These analysts believed the drop pointed to a bottoming out for the U.S. dollar and falling demand for crude as a result of a global slowdown.

Personally, I think it is too early draw those conclusions on both fronts. The housing market remains dangerously weak in the United States and that caution is clearly starting to take hold in Britain as well. U.S. Federal Reserve Board Chairman Ben Bernanke sent a strong signal of his concerns by noting that emergency cash facilities will be made available well into 2009 if necessary. He would not do so if he did not deem it necessary.

The dollar weakness that we have witnessed for the better part of three years is likely to remain until:

  • The economy bottoms out.
  • There is a change of leadership in the White House.

Political change often brings with it an ability to break with positions from the past. This could apply to both the dollar and oil prices.

Daily demand is holding up at around 87 million barrels a day, but according to OPEC and Saudi officials there is no demand beyond the current production now in place. Traders are basically making a big bet (and a lot of money in the short term) that demand from the developing world will outstrip the production earmarked to come on stream in the next few years.

On that front, the G8 also had something to say:

“Oil producing countries should ensure transparent and stable investment environments conducive to increase the production capacity needed to meet rising global demand.”

Transparent was a word used at great length this week in Japan and last week at the World Petroleum Congress in Madrid. There is a polite but serious “tug of war” taking place between the international oil companies (IOCs) and the national oil companies (NOCs) – think Saudi Aramco, Abu Dhabi National Oil Company (Adnoc), Libya’s National Oil Company or Kuwait Petroleum Corporation. There are similar oil groups in Russia, Central and Southeast Asia.

With crude at this level, national oil companies don’t want to pump too much oil and want to hold onto the highest percentage of a field that they can. Many of these NOCs, according to non-government oil company officials I have spoken with, have been less than eager to speed into production or give too much away. This is not reported in the headlines of daily papers and telecasts, but it is the reality on the ground.

That equation is part of a greater co-dependency between the G8 and the Middle East. The region is partnering across the board on major projects, but new terms get defined each month. For example, ConocoPhillips signed a long sought after deal with Adnoc this week to develop an onshore natural gas field southwest of Abu Dhabi. The U.S. energy giant will own 40 percent of the holding; its Gulf partner 60 percent. The Shah Field will likely cost $10 billion to develop.

On the macro-economic level, G-8 countries are more dependent than ever on Middle East producers. Robert Parker, Deputy Chairman of Credit Suisse Asset Management in London agrees: “The answer to that is a clear yes and the reason why I say yes is that when the oil market was trading at $80 to $100, the impact on the global economy was minimal. With the oil price trading above $140 a barrel, I would argue that is having a very negative effect on the Western economies on the oil consumers.”

In today’s scenario, the G8 is calling for great cooperation and dialogue. We saw a hint of this in Japan with the input by leaders of the G-5 (China, India, Brazil, Mexico and South Africa) on the final day. There was not a lot of agreement on how to best address a reduction in greenhouse gases, but plenty of finger-pointing going on.

This effort was however a good start. A G-13 (despite the unlucky number) is much more welcoming than the current structure, which candidly seems dated. It should be a group of equals addressing concerns eye-to-eye. While the world seems to be in an expansive mode, we might want to think a bit differently.

It should not be a gathering of just energy consuming nations, but bring in the producers (either GCC or another structure) to take us from dialogue to action. Let’s not have one-off energy summits like the recent meeting in Jeddah, but make the process more inclusive, more productive and yes more transparent.

Over a barrel

Walking through the sprawling Feria de Madrid convention center in the outskirts of the Spanish capital one clearly gets the sense there is plenty of money around. $140 oil can buy a lot of exhibition stand space at the World Petroleum Congress.

On one side, there is Exxon Mobil’s towering display wrapped in semi-transparent modern mesh designed to match its global marketing campaign. In the other hall, front and center the twin stands of Saudi Aramco and Qatar Petroleum are the size of oil platforms. I was told the latter took up 1,200 sq. meters, supported by a full range of recycled goods.

This tri-annual event brings together energy ministers and oil chief executives to rub shoulders and conduct business. This year they all had a lot to say during scores of interviews and press conferences about the price of oil, except when it will peak.

The straight talking Chief Executive of French giant Total, Christophe de Margerie told me: “I was always right to say the price would definitely climb, but unfortunately to a level I did not expect and don’t like”.

He and others don’t like it because they fear the severe spike up will lead to a dramatic fall from where we are today. The International Energy Agency is calling the record price run up a “third oil shock”. A partner at Ernst and Young (E&Y) labels this a “super spike scenario”.

Both groups say the implications of this never ending rally will be far reaching. Don Painter of E&Y believes this particular scenario is interesting because it will “drive changes in behaviour; consumer and consuming nation behavior”.

Having left suburbia for dinner in central Madrid I got a sense of what Painter was talking about. Spain’s Prime Minister José Luis Rodríguez Zapatero faced intense criticism this week before parliament for not calling the economic retreat and energy price spike a crisis.

I guess he did not tune in to see the fuel protests on the streets of the capital. After a tremendous 12 year economic run and property boom, Spain now has the highest unemployment rate amongst the developed countries at nearly 10 percent. Jobless claims rose for the first time since the recession in 1993. $140 oil is starting to bite.

To date, the downturn has been confined to the industrialized world. Asia as a whole continues to grow at six percent and, along with the Middle East continues to buffer the impact of the Western slowdown. If oil does not start to back off, don’t expect India, China and Southeast Asia to withstand the pressure.

This backdrop leads me nicely into the blame game. There were calls by G8 leaders for OPEC to provide more crude to the market. Saudi Arabia, which has most of the world’s spare capacity these days, has responded. This month it will add half a million barrels a day of production and says there are another two and a half million barrels available if demand warrants.

This is the headline: The Kingdom’s oil minister Ali Al Naimi says demand is not there.

In an interview with Marketplace Middle East, the President of OPEC, Chakib Khelil bluntly stated: “If you going to put more oil in the market, somebody has to buy it. If there is no use for that oil then it’s going go into stocks.”

He says inventories are running at better than 50 days, which is normal and not a crisis. Khelil and his other counterparts within OPEC pointed to three distinct factors driving prices higher:

  • The U.S. sub-prime mortgage crisis which has undermined the dollar

  • Geo-political tensions, especially over Iran

  • The role of speculators in the futures markets

Strip out these “special factors” and Khelil and most of the other energy players I spoke to this week said oil would be $80-$90 a barrel.

That may not sound like an entirely rosy scenario. But let’s say in a world where there are two giant countries with more than two billion people -- China and India -- developing their own middle classes and demanding energy at three times the rate of the developed countries, $80 a barrel may be the new $40. This means that producers can make money and consuming nations can survive comfortably when factoring in inflation and the depreciated dollar.

Missing from this debate are some cold hard facts from politicians who are looking to apportion blame somewhere else. Offshore oil drilling on the East and West Coasts of the U.S. won’t solve dependency on ‘foreign oil’ or bring down prices. G8 calls for more oil from OPEC have been answered, but still no response from the market. And it does not help that countries like Iran and Libya seem to relish the pain being inflicted on the West with the high prices.

The chief executive of Exxon Mobil, Rex Tillerson, did not want to be drawn into the debate over prices, but he does feel strongly that the public is not getting the full picture.

“It is unfortunate there is a lot fairly high-pitched rhetoric about energy independence on the part of consuming countries and resource nationalism on the part of producing countries.”

That certainly rang true this week in Madrid and unfortunately seems to be adding to a complicated mix of factors that have nothing to do with supply and demand.

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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