The Middle East and The Global Economic Crisis

October 19, 2009Carnegie Endowment for International Peace

International Economics Program

Jean-Francois Seznec, PhDCenter for Contemporary Arab Studies

Georgetown University

Main Points

• Focus on Arab Persian Gulf– Somewhat protected by oil price @$70/b– Financial system less impacted than in the West– Central banks pumped over $150 billion in the economies– Industrial development continuing unabated– Bahrain, Kuwait more hampered by political problems

than by economic ones• Iran strongly impacted by oil price $20/b lower than

their break even: could be going bankrupt• Iraq also suffering from lower income, but may be a

major producer within 5 years

Impact of Oil Prices: Saudi Arabia• Saudis require $50/b to break even

– Production costs between $1.5 & $6/b– Substantial funds needed to provide subsidies to people– Anything above $50/b goes into cash reserve ~ $ 50 billion/y = over

$40 billion increase in reserves• In 2008-2009, spent $100 billion for projects and subsidies to

protect people from decline in activity– State sponsored industrial projects go on

• Industrial cities: King Abdullah’s + Jizan + 4 others• Dow Chemical $20 billion plant • Ras AzZour: DAP + Aluminum project

– Bank lending frozen from November 08 to now is beginning anew– Stock Index declined from 14,000 in early 2008 to 4,130 in early 2009,

but is now back at 6,300

Impact of Oil Prices: UAE-AbuDhabi• UAE-AbuDhabi requires less than $20/b– Can build very strong reserves ~ $45 billion/y– AbuDhabi Increases its leadership of the Emirates– Is pouring money in the economy

• Major projects go on – Industrial development

• Aluminum• Borouge• Nuclear plants

– Cultural• Museums• New Island

Impact of Oil Prices: UAE-Dubai• Could become overstretched due to its $120billion of debt

outstanding• AbuDhabi can bail Dubai out but slowly

• Would have to sell assets at a loss in the present market• Thus, bails Dubai out $10 billion at a time

• May witness transfer of some of Iran’s money and transshipment to other places like Hong Kong

• Great impact on poorer laborers and young professionals• But Dubai still continues to survive

– Jebel Ali will continue, albeit more slowly– Funds transfers from Iran and Pakistan could actually increase– Most white elephants have been killed

• Kilometer high tower• Huge entertainment park and Dubai as point of mass tourism

destination

Impact of Oil Prices: Bahrain• Decline in oil prices cuts Bahrain income by $3billion/y• Bahrain hampered by lack of capital, lack of gas

• Delay in Aluminum expansion• Has contracted Occidental to find more oil and more Gas• Had to delay expansion of Aluminum plant

• Mainly hampered by splits within society Impact of Oil – Vision of the future is split between CP & PM– Division within society• There is a political center of Shi’a and Sunni but is overwhelmed by the extremes

on both sides• Strong division within the majority Shi’a groups, al Haq vs al Wafq• Issue of Nationality: Many non Bahraini Sunnis are given citizenship– Parliament is dysfunctional

• If it could solve its political problems Bahrain could do well

Impact of Oil Prices: Qatar• Qatar reputed to be bullet proof because is in

process of doubling LNG production from 35 million ts/y to >70 million ts/y

• However, future could be less rosy as gas prices are very weak, while costs remain constant– Price to Far East usually based on oil prices: Could be

as low as $5/mmbtu, down from $20 in 2008– Costs could be as high as $3/Mmbtu

• Qatar ends up making more money on its 800Mb/d of oil than on its gas, but is greatly indebted because of the gas

Note on Iran

• Can be argued that Iran is going bankrupt– Original budget for 2010 was computed at $90/b– IMF says Iran’s elite export $15 billion/y to Dubai– Subsidies on Gasoline and Natural Gas cost over

$5billion per year– Cannot borrow on world markets, hence has to print

money, which is triggering great inflation• If regime could or would end isolation Iran could

take off with investments from the Gulf in its Gas fields

Note on Iraq

• Iraq is on the verge [as often in the past] to become a major supplier of oil

• Bids by the IOCs could bring an increase in production of 4 to 8 million b/d

• Needs to resolve Kurdish oil dispute• Need to have a national oil law