Friday, May 27, 2005

Baheyya: Egypt Analysis and Whimsy

Baheyya has a very nice little montage of photos of and quotes on the Egyptian referendum on the amendment of Article 76. Check it out.


Which she has followed up with what is possibly the best piece of analysis I've read on Egypt in recent memory.

[Towards the end of the piece]

When regime hacks claim that Egyptians aren’t ready for democracy, or when foreign know-nothings pontificate about the baby steps of democracy, or when Egyptians entrenched in the status quo wrap their fear of change in claims of the unsuitability of democracy, I can only marvel at the brazen spinning of such rank lies.

And then I reach for my nearest history text. There I don’t find comforting proof of Egyptians’ readiness for democracy, for that is not and never has been the issue. Nor do I find triumphal stories of democratic happy endings, for that is not how democracy comes about. I do find a dizzying diversity of socio-political mobilisation, a fevered clash of interests, heated contests of ideas, high-stakes political brinksmanship, stupendous miscalculations, felicitous and unexpected advances, regrettable losses, shameful failures, and everything in between. In sum, a chequered political history of one democratic step forward, three steps back. The puzzle is not that we have not yet achieved democracy, but that there are those who would rob us of this history, distort and falsify it, and package it into a claim that Egyptians lack the maturity “necessary” for democracy.

Oil Market Update

On May 9, the Algerian oil minister confidedthat even with OPEC pumping at maximium capacity, world oil supply would not be enough to meet demand in Q4.

“Let’s assume we go to a maximum (in output) and assuming we don’t have any (significant) stocks, we are not going to meet demand in the fourth quarter,” Khelil said on the sidelines of an energy ceremony in the capital Algiers.

“What you need to do is raise stocks in the third quarter to accumulate enough of them in the third quarter that you can deplete stocks and maintain a high level of production for the fourth quarter. That’s what I’ve been saying we need to do,” he said.

Which appears to be precisely what's happening. US oil stocks are at a six year high, as the EIA's Week in Petroleum shows:

At a speech at the Economic Club of New York on May 20, Alan Greenspan noted that a similar accumulation of oil stocks was taking place in other major countries.

He also notes that the oil futures market is in contango - that is, present delivery is at a discount to future delivery. His explanation is that a demand slowdown combined with expanded production have caused prices to drop in the short term: presumably by that he infers that higher future price is the real market price for oil. The contango situation also seems to square with Khelil's anticipated Q4 tightness.

This is a clear shift in tack for OPEC. Speaking at the WEF conference in Amman at the weekend, the current president of the cartel, Kuwaiti Oil Minister Sheikh Ahmad Fahad al-Ahmad Al Sabah, made the slightly confusing statement that instead of focusing on stocks, OPEC was now focusing on prices. Given the tight linkages between the two, the comment doesn't enlighten particularly. But looking at the pattern of inventory accumulation, the statement becomes clearer.

To backtrack a little - OPEC's strategy up until now has been to keep foreign oil stocks low. Some might argue that this is just to buoy up the price: the more nuanced argument is that it is a way to maintain a tight linkage between OPEC oil production and market prices. When stocks are low, demand for OPEC oil is inelastic, regardless of the price; when stocks are high, they can theoretically be substituted for imported oil and so demand for OPEC production becomes more elastic. So making sure that foreign stocks are low mean that by playing with supply OPEC could keep a very tight hold over prices.

All of this broke down over the last year, however, as increasing demand narrowed official OPEC spare capacity to about 1 million barrels per day. Khelil's comments suggest that even that margin may be exhausted at the moment, and after all the OPEC members are notorious for not abiding by their quotas.

So the new strategy is to use US stocks to replace the missing buffer zone. Reports of higher inventories have dampened some of the volatility in the oil futures market, but without causing a major dip in prices - WTI and Brent are both hovering around the US$50 mark and show little sign of dropping below US$40 in the near future - which seems to be persuading OPEC that it is safe to continue allowing major oil consumers to carry on building their inventories ahead of the Q4 squeeze.

Thursday, May 26, 2005

The Iraq Scene on al-Jazeera

Informed Comment

Juan Cole picks up on an interesting debate on al-Jazeera between: Dr Tariq al-Hashimi, secretary general of the Iraqi Islamic Party; Sa'd Jawad Qandil, member of the Political Bureau of the Supreme Council for the Islamic Revolution in Iraq [SCIRI] and Dr Ghassan al-Atiyah, director of the Iraqi Institute for Democracy and Development.

(translation all courtesy of BBC Monitoring)

Ghassan al-Atiyah has some interesting, if worrying, comments. He says "Today we are really in the furnace of civil war", and blames the resurgence of sectarian divisions on the CPA policy of allocating seats along ethnoreligious lines:

"Actually, the current situation is the result of a number of policies which began with the formation of the Governing Council and the way things were handled. Things were handled on a sectarian and ethnic basis. We were divided into Shi'is, Sunnis, Kurds, and Turkomans. There was no room for us to deal with each other as citizens. Posts were later distributed along these lines."

Tariq al-Hashimi agrees on that, though while al-Atiyah says that Iraqis as a whole are responsible for the descent into sectarian violence, al-Hasmihi maintains that it is the state of occupation that is the heart of the problem. He also blames al-Iraqiya:

"Incitement campaigns by Al-Iraqiyah television and other suspect channels and news media with the aim of planting the seeds of an abominable sectarianism must immediately stop." He adds that Al-Iraqiyah television "disseminated false claims by persons who claimed to have been involved in killings."

Presumably he's referring to the 'Terrorists in the Hands of Justice' programme, the brainchild of one General Adnan Thabit, a former Ba'athist from Samarra. Peter Maas has an excellent piece on the Special Police Commando unit which General Adnan commands in the NYT.

What's interesting is that all three emphasise the importance of national unity. Granted, all the groups have their conditions and interests that they want to guard/pursue, but I'm not left with the feeling of utter resignation to sectarian conflict that I got from spokespeople for the three sides in the Bosnian conflict. Back then Alijah Izetbegovic said something along the lines of "We have no choice but to be sectional".

That said, I'm equally worried by the increasing use of the terms 'genocide' and 'ethnic cleansing'. What is happening in some of the contested towns is indeed starting to resemble the low-level ethnic cleansing that was going on in Kosovo in the late 1990s. Fortunately we don't seem to be facing that scale of refugee problem at present - there are refugees, don't get me wrong, notably from Fallujah and al-Qaim but also even some left over from the Iran/Iraq war - but I don't think we're looking at the use of refugee flows as an instrument of war as they were in the Balkans. And for all the bad press the likes of Thabit and the Badr Brigades get (and ignoring for a second Zarqawi, who has similarities but completely different motivations and tactics), we don't seem to be seeing many Arkans knocking about. Violence is being used in a fairly controlled fashion - to destabilise the existing government and weaken the will of the Coalition, yes, but not to create the kind of absolute bloody chaos and havoc that was required for the attempted land-grabs in the Balkans. Should neo-Ba'athists succeed in seizing control of the state apparatus, they'd want to be able to impose order quite quickly so as to establish their legitimacy - so the national unity argument would work in their favour too.

At least, those are my thoughts. It's not often a productive game, fortune-telling.

Thomas P.M. Barnett :: Weblog: The other culprit on high oil prices

Thomas P.M. Barnett :: Weblog: The other culprit on high oil prices

I never know quite what to make of Thomas P.M. Barnett. On the one hand, his Core/Gap theory set out in ‘The Pentagon’s New Map’ was an inspired synthesis of Gramsci’s reading of hegemony and Wallerstein’s world system theory, repackaged for the US military. On the other hand, he seems to be milking the idea for all it’s worth, which leaves something of a bad taste in my mouth – it was a better idea when there wasn’t such an air of self-congratulation about it. Still, that’s my personal opinion.

Anyway, he picked up on this WSJ front page from May 24 - Oil Industry's Refining Squeeze Limits Prospects of Price Relief
By Bhushan Bahree and Thaddeus Herrick (sub only) – which is actually more than a little behind the curve. Its basic argument is that oil prices will stay high until 2007/2008 because there isn’t enough oil refining capacity to go around. Saudi Arabia has actually been saying exactly this since April 2004 – at a speech (pdf) at CSIS in Washington Saudi Oil Minister Ali Naimi said:

“In the U.S. a plethora or state and local regulations have vulcanized the gasoline markets placing increasing strains on refiners to meet local demands.

On this occasion let me state emphatically that Saudi Arabia is willing and ready to invest in two new 500,000 barrel per day refineries and their associated marketing facilities in the U.S. to help alleviate some of the bottlenecks in product availability.” also covered this in January 2005 in a round-up of OPEC policy at the time of their Cairo policy.

The WSJ gets something quite wrong in their analysis, too – they imply that all refiners are enjoying huge profits. The ones that can only run light sweet crude aren’t – Valero, the refiner they take as an example, is making money hand over fist because it can process heavy sour crudes, which means it can buy heavy sour at a discount and sell at a high market price set by the scarcity of light sweet crude.

Barnett says:

“What's interesting about this is that it's really a self-fulfilling prophecy: the oil companies resist sinking the big bucks because they fear oil is receding in importance in coming years and decades as we shift to hydrogen (e.g., British Petroleum becomes Beyond Petroleum), and so by eschewing these investments, they create persistent high prices that accelerate that shift.”

Cart, horse… Oil majors and national oil companies (NOCs) didn’t invest in refining capacity when oil was $10 a barrel because they didn’t really have enough money. They didn’t spend as much on E&P either during that period. The alternative fuels thing is an important part of their long-term game-plan and also a strong PR strategy to re-cast themselves as future-oriented, environmentally friendly companies rather than polluting remnants of early 20thC imperialism. Now the NOCs are investing heavily in refining because they have realised that they need to guarantee throughput as well as supply if they are not to encourage diversification of the world’s energy mix away from petroleum. Hence Saudi Aramco’s investment in refineries both on the Peninsula and in Asia.

The oil majors aren’t likely to invest as much in refining because their role in the market is changing. There was a fear that they were being hollowed out to become oil services firms like Halliburton and Schlumberger, it doesn’t look like they are any more – instead they’re becoming more like project managers, the people who come in and help set a strategy for a field while the state retains overall control over production and the services firms sink the holes and lay the pipes. In that role, they don’t need to worry so much about the relationship between production and processing – that’s the role of the much more cash-rich NOCs.

(NB – African production tends to be sweet and light so although there aren’t NOCs there in quite the same way as in the Middle East the same logic doesn’t apply to refining capacity).

Tuesday, May 24, 2005

Nakheel IPO?

Bloomberg is reporting that Nakheel’s chairman, Sultan bin Sulayem, is talking about launching some IPOs at some point in the foreseeable future (though not before next year) – in his words, it "is inevitable and will be worth billions." He’s not wrong: Nakheel is the company behind the Palms and the World, among other things, and is worth about US$25 billion.

The IPOs are likely to be structured as investments in the individual developments rather than Nakheel itself.

The sceptical part of me sees this as a fairly transparent strategy to shift the not inconsiderable risk associated with these developments off Nakheel’s (and, for that matter, the government’s) books and onto (local) speculators while creaming money off for reinvestment in other white elephants. All completely above board, don’t get me wrong, but the fact that the IPOs are likely to be in the individual projects rather than the parent company makes me think it’s more about risk than anything else.

Anyway it’d be interesting to see the Palms rise and fall on the stock market – a nice visual representation of their fortunes…

Monday, May 23, 2005

Islamist Democracy

Saad Eddin Ibrahim’s piece in the NYTimes on Mid East democratisation and the role of Islamic groups reminded me of a comment made by Dr Charles Tripp, from London’s SOAS, at a conference last year on the role of the clergy in post-war Iraq. I paraphrase of course, but he said something along the lines of “I don’t think that the current resurgence in religious sentiment will survive a couple of years of watching Islamic groups arguing about taxes”.

I think I agree with him – the problem is that the ‘one man, one vote, once’ trope has been firmly established in the popular consciousness: people sincerely believe that political groupings based on religious belief are simply entryists hiding their true colours. The general pragmatism of the Islamist Turkish government doesn’t really seem to bear that fear out. Put simply, no government, Islamic or secular, is going to last very long if it doesn’t deal with the pressing economic problems that are pervasive in the region, so I think it’ll be very difficult for an Islamic government to avoid contact with reality for very long. Just look at Iran – most young people are a little sick of the regime, and they make up, oh, 70% of the population? Change isn’t very far away (though the likelihood of it being change that people in the West aren’t scared of for one reason or another is slim).


Though on reflection I think it's important to add a little nuance to that. The persistence of the Islamic Republic in Iran seems to me to have much more to do with the regime's stranglehold on the economy and unchallengeable political position that it does with its Islamic character. I'd point at Egypt, another large predominantly Muslim country with a history stretching back millennia and a heavily centralised, autocratic government whose traditional policy orientation has been left-leaning central planning in economic terms and a heady mix of conservatism and nationalism in social issues. Only in Egypt the autocracy is secular. In both, any gradual social opening seems to be linked with a gradual economic opening - in both, the elite's believes that jobs are crucial to maintaining stability, and they are using whatever bargaining chips they have to attract FDI. Anyway, it's possible to push the comparison too far, but I felt the point needed clarification.

OPEC calls for more refining capacity

The FT reports that Sheikh Ahmad al-Fahd al-Sabah, Kuwait’s Oil Minister and holder of the rotation OPEC presidency, has called for increased investment in refining, attributing high oil prices to downstream bottlenecks. His argument is fairly close to the argument Saudi Oil Minister Al Naimi made at CSIS last week.

The FT quotes al-Sabah thusly:

"What's needed now is joint investment in both upstream and downstream operations. To make downstream investment attractive to international oil companies it should be tied in to upstream investment".

Which is interesting, because it raises the prospect of some kind of investment conditionality being attached to E&P contracts. Makes sense, really: what’s the use of raising the oil if you can’t process it?


Saudi Aramco is investing in several joint venture refineries in Asia which will be entitled to a guaranteed supply exempt from OPEC quotas. So Aramco gets guaranteed buyers, establishes strong strategic linkages with rising Asian economies, and gets to stick two fingers up at the US (which turned down Ali Naimi’s offer of two refineries). It’ll be interesting to unpick the various JVs and see what deals Aramco cut with the Asian importers.

That said, the 3 refineries that Aramco is building (worth US$50bn) are intended primarily for export. Which presumably means that the US and EU are still going to be able to buy petroleum products from the Kingdom – but they’ll be subject to OPEC quotas.

Friday, May 20, 2005

Truth, politics, and rationality.

I was reminded by this article by the American realist John Mearsheimer of Hans Morgenthau. Morgenthau was something of an anachronism, to my mind, straddling several eras intellectually and fitting in none neatly. His influences ranged as far as Pascal, Niehbur, Arendt and Nietzsche; he could quote Machiavelli and Marx in the same breath and have it make complete sense.


It set me to thinking. Much wrong has been done to political thought in the name of the Realist School, not least in the form of Kenneth Waltz’s parsimonious and utterly unelucidating state/anarchy theory.


Yet Morgenthau’s thought is still as cogent today as it was 40 or 50 years ago, as this round denunciation of the war in Vietnam shows – just substitute ‘The Middle East’ for ‘China’ and ‘Iraq’ for ‘Vietnam’ and think of Iran’s nuclear programme (and before anyone suggests otherwise, even the Iranians themselves have no illusions about the true purposes of the programme).


Much of his intellectual power seems to reside in the fact that he admitted no moral or intellectual absolutism:


"Politics must be understood through reason, yet it is not in reason that it finds its model. The principles of scientific reason are always simple, consistent, and abstract; the social world is always complicated, incongruous, and concrete. To apply the former to the latter is either futile, in that the social reality remains impervious to the attack of that one-eyed reason, deficient in its vision of depth; or it is fatal, in that it will bring about results destructive of the intended purpose. Politics is an art and not a science, and what is required for its mastery is not the rationality of the engineer but the wisdom and the moral strength of the statesman. The social world, deaf to the appeal to reason pure and simple, yields only to that intricate combination of moral and material pressures which the art of the statesman creates and maintains.


"Contemptuous of power politics and incapable of the statesmanship which alone is able to master it, the age has tried to make politics a science. By doing so, it has demonstrated its intellectual confusion, moral blindness, and political decay. A book such as this can picture the disease but cannot cure it. More especially, it must leave the production of neat and rational solutions to those who believe in the philosophy against which this book is written. It must deprive the reader of that exhilaration which the rational solution of an oversimplified problem, from the single tax to the outlawry of war, so easily imparts. Yet, if it might lift the veil of oblivion from a truth once known, it would do for the theory and, in the long run, for the practice of politics all that a book can do."


From this review of a biography of the man.


Later, the reviewer quotes Morgenthau quoting Pascal:


Morgenthau quotes Pascal - "Man is neither angel nor beast and his misery is that he who would act the angel acts the brute" — only to add:


"It is only the awareness of the tragic presence of evil in all political action which at least enables man to choose the lesser evil and to be as good as he can be in an evil world. Neither science nor ethics nor politics can resolve the conflict between politics and ethics into harmony. We have no choice between power and the common good. To act successfully, that is, according to the rules of the political art, is political wisdom. To know with despair that the political act is inevitably evil, and to act nevertheless, is moral courage. To choose among several expedient actions the least evil one is moral judgment. In the combination of political wisdom, moral courage, and moral judgment, man reconciles his political nature with his moral destiny. That this conciliation is nothing more than a modus vivendi, uneasy, precarious, and even paradoxical, can disappoint only those who prefer to gloss over and to distort the tragic contradictions of human existence with the soothing logic of a specious concord."


As with many of the best thinkers that I have come across, Morgenthau never claimed to have a perfect map of the world – only the understanding that our understanding was necessarily flawed, and a healthy scepticism of those who, however earnestly, claimed to have all the answers – who, as Pascal noted, often cause more grief than joy.


Thursday, May 19, 2005

UAE Markets

Aabar IPO story continues
Well, it looks like the proverbial has hit the fan in Abu Dhabi after it emerged that some banks had flouted central bank regulations and loaned clients up to ten times their own contribution to buy shares in the Aabar IPO (see here for a recap, it’s about halfway through). Shuaa Capital reports that the Central Bank is penalising 4 national banks for breaching the lending limit of 4 times the cash contribution and for breaking their own exposure limits.

The names of the 4 banks haven’t been released, but I’ll be keeping an eye out to see if the names trickle out somewhere.

Real Estate
I don’t entirely know how to describe the atmosphere of the UAE markets at the moment. The government is very keen to present an image of fiscal probity and economic responsibility, but investors seem to be as frantic as a bunch of Mexican jumping beans in a very small jar. Nowhere is this more apparent than in the property market, which is dominated by off-plan – designed but not yet built, to the uninitiated – dwellings in high profile developments like the infamous Palms. Most of these properties sell out in a matter of days, and it seems that most of them go to GCC investors with little intention of actually living in the properties. The frenetic pace of the market, combined with Dubai’s all-too-successful hype has consisted driven prices upwards, despite the fact that many of these residences have yet to be completed. The situation was enough to worry the director of Nakheel, the company behind the Palms and other projects: in January he warned that speculation was too large a proportion of market transactions.

Despite the forced optimism of most of the local news outlets – whose coverage ranges from superficial arguments saying that ‘prices are going up because Dubai is a good investment’ to more nuanced arguments drawing comparisons with the foreign property markets. Most of the foreign arguments tend to hinge on interest rates – they argue that because interest rates are low in the UAE, people will be able to take out mortgages to buy property which will keep the market buoyant. The problem is, speculators have access to lending at the same interest rates, and can borrow quite a bit more, allowing them to crowd residents out of the market – precisely what is happening at present. In any case, none of these arguments seem to be convincing the people on the ground – a survey (pdf) conducted in March by MEED and HSBC showed that 83.3% of respondents believed that the UAE was experiencing a property bubble and was due for a market correction. Granted, as Everett-Heath (a director at Kroll) points out, most seem to think that the correction is still some way off – not until at least 2006 – but to be honest that kind of logic makes me feel uncomfortable. Make hay while the sun shines, sure, but don’t pull the barn down to make more room for the hay. Or something. My metaphors are strained these days. The problem is that our innate tendency (doc) to loss aversion seems to mean that people are reluctant to pull out of the market when they should – rather than take their gains and withdraw from the market, they stay involved for fear of losing out. It comes down primarily to the way in which the market is framed, which is where all the hype comes in: the papers emphasise the upside potential of the market and hype up the danger of prematurely exiting the market, which essentially frames the investment decision as a loss avoidance issue rather than what it really is, which is a gain on investment issue. I suspect the more sophisticated investors are well aware of the true nature of the investment decision, but I wonder how many of the people pushing prices upwards could be called sophisticated investors. Most anecdotal evidence seems to be that many people are getting involved on recommendations from friends, who point out the upside potential and then back it up with “it’d be a shame to miss out.”

At the same time, rental prices are increasing. A report (pdf) by a local job agency suggests that rental prices are beginning to force people out of Dubai, which isn’t good for the future of the property market. The optimists argue that once all the off-plan properties are completed, the increased supply will dampen rental prices and provide a soft landing for the boom. That’s one possibility, yes: the other is that a sudden spike in supply could make rental prices drop suddenly, which would then reduce the values of the properties to the investors. Given the volatility on the upward curve, there’s every reason to believe that the market will react in just as hysterical a fashion and all the loss-averse investors will pile out of the market as quickly as they piled in. That’s something the Dubai government is going to have to be very careful about, because the future of the emirate’s economy depends on it – research by EFG Hermes suggests that property is about to overtake oil as the largest contributor to Dubai’s GDP.

Meanwhile, delays, difficult labour relations and materials ‘problems’ are continuing to dog the construction of all these off-plan developments. Yay!

Tuesday, May 17, 2005

CSIS Oil Conference

There was quite a big conference at CSIS in Washington today. Speeches were given by Saudi Arabian Oil Minister Ali al-Naimi, the new US Energy Secretary, Samuel Bodman, and Senator Jeff Bingham. Apparently Jeff Bingham (D, NM) was the minority member on the Senate Energy and Natural Resources Committee in 2003 - presumably he still is, I haven't come across him before.

Naimi's speech (pdf) contains quite a bit of useful information, though his allusions are a little opaque if you're not familiar with the oil market.

He begins by pointing out that while oil producers are committed to being environmentally friendly, environmental regulations in OECD countries have made it difficult for oil producers. Local opposition to the construction of oil infrastructure, combined with the lack of investment in the sector during the era of USD$10-$15 oil, has "tended to reduce flexibility in the system creating situations where isolated supply/demand imbalances become magnified, affecting world price levels."

This is a pretty explicit description of what has become the Saudi position on the state of the oil market, and I have to say I agree with it. The period of cheap oil coincided with the progressive introduction of fairly stringent environmental regulations on oil products, not least in the imposition of sulphur limits. Since there was ample supply of sweet (low sulphur) oil in the market during that period and oil was cheap, few companies thought fit to invest in refineries which can process sour oil. The last two years, however, saw Indian and particularly Chinese demand increase significantly, and refiners suddenly found that the price of light sweet oil was rocketing. Because few had the capacity to process sour oil, sour oil started trading at quite an increasingly large discount to sweet oil, and those refiners that could process sour made a killing running their refineries at full capacity and taking advantage of the high petrol prices.

The differentials between sweet and sour seem to be easing slightly at the moment, but the Saudi government has taken the issue very seriously - at a previous appearance at CSIS, Naimi offered to build two refineries in the US (presumably ones that could deal with sour crude). He was told that he'd be lucky to get them past environmental regulations. So Saudi Aramco is now spending US$5bn building a refinery in Yanbu. It is also investing in refineries in India and China. I'm under the impression that it's more cost effective to ship crude than refined products, hence the Saudi interest in building refineries at the target markets rather than refining at home and shipping the products, so I imagine that the Chinese and Indian refineries will be able to deal with sour crude as well.

Next Naimi moves onto concrete policy directions. I'll go through them one by one.

a) Increase global crude production capacity.

There isn't much spare capacity left in the world, because most countries with oil produce at full capacity because they're desperate for the cash. Only Saudi Arabia and UAE have room to expand, and they're both investing to do just that. KSA is already running at full capacity, though they don't like to advertise the fact, and they're investing in an additional 2.2m bpd to take their capacity up to 12m bpd.

b) Address downstream bottlenecks

That's pretty much the refining issue which I mentioned above. There is also the question of tankers, which are in scarce supply just at the moment. In October 2004 KSA put an order in to Hyundai for 6 tankers worth US$380m.

c) Upgrade Saudi energy infrastructure

This is interesting. They're investing to increase capacity to produce oil derivatives, which are going to be useful if Saudi industry ever takes off in a meaningful way. Whether there's scope for export I'm not sure, but it'll be interesting to check that out.

d) Improve efficiency and conservation

This is quite an important policy. Oil is Saudi's legacy, its great gift and curse. They need to focus on how to make the most of it. Greater efficiency, whether on the production or the consumption side is going to make the oil last longer; conservation may well mean that KSA will be less willing to push its fields hard for the sake of bringing prices down. There are already suggestions that some damage may have been done to some of the reservoirs by pushing them too hard (a problem Iraq is currently facing rather acutely).

e) Improve transparency. Naimi mentions that they put up a building so that the International Energy Forum Secretariat in Riyadh, though to be honest I'm not entirely sure what the forum achieves - it's an elite talking shop, not a negotiating arena (according to the RIIA), and it has been slated for not producing much of any real use. Though there's something to be said with increasing communication between producers and consumers, which would help to filter out some of the speculative froth that has been making oil prices particularly volatile. To that end, the Joint Oil Data Initiative would be a particularly useful step. It has been talked about for rather a while, though, and as of yet the database is still in development, you can't use any of the information in it, and you need a password to get at it. All of which means that it is having precisely no effect on the market, which is precisely where the information is needed. Pricing is just coded information signals, after all.

f) Expand human capital in the industry

This is pretty standard, actually - Saudisation and so on.

g) Innovate technologically

Also fairly standard, but also rather crucial. Minimising oil left behind (that is, the oil they can't get out of the reservoirs at an economic price) means investing in more advanced technologies. Finding more oil and making existing unextractable oil (at current economic conditions) extractable also means investing more in technology.

The first thing that strikes me about Bodman's speech is that it's printed in huge type with a large white space at the bottom for him to hold it. Good thinking, I always seem to end up squinting at the page when I'm giving a presentation.

More seriously, his speech is more diplomatic (I don't mean 'soft', I mean instrumental). He basically says that the US appreciates Saudi efforts but that it's going to invest large amounts of money in alternative energy because a) pricing is too volatile and b) it's a finite resource. I'd read that not only as a statement of intent but as a veiled threat to KSA - as in, 'improve your game or we'll have no choice but to stop playing'. In the nicest possible way, of course, but why else talk about alternative energy sources at length to an ally whose only real strategic value is its energy resources and attendant financial clout? KSA needs to start being a lot more open with its data, first and foremost - that is the single thing that would take a lot of froth out of the markets. At the moment speculators are able to feed quite nicely off the oil depletion trope, which although not inaccurate is more than slightly overegged - a 40-year window is still rather a long time, given the rate of technological advancement in this day and age.

I'm leaving Bingham's speech, he seems just to say that he's glad KSA is taking the US' issues seriously and so on.

2005 MENA Economic Developments and Prospects

The World Bank has issued a report which, on the face of it, seems to be telling the rentier states of the Gulf what to do with all this money that they're accumulating thanks to the high oil prices . It might well have been titled "How to make hay while the sun is shining."

You can get the report here.

One theme of the report is that while things might be going well at the moment - there's nothing like oodles of cash to speed up decision-making - the lack of public accountability and specifically the lack of useful, transparent and comprehensive information means that there is no mechanism to check bad decision-making. The UAE springs to mind - after giving civil servants (read 'Emiratis') a pay rise back at the beginning of April, the government is now frantically trying to make sure that the decision doesn't translate into wage-push inflation.

It's an odd way of making economic policy. Along similar lines, the government of Dubai had to buy Chevron's subsidiary Caltex out of the national petrol station business in April because the government's insistence that petrol should be sold cheaply meant that the company, EPPCO, was losing money hand over fist. Now the government is effectively subsidising cheap petrol. Thankfully for Dubayyis, the secret police is quite effective or else it'd all end up on the black market like in Iraq.

Another interesting theme is the way that the region has turned in on itself. After the sociopolitical shock of 9/11, Westerners have been more reluctant to go to the MENA, and locals have been reluctant to go abroad. There has been a significant repatriation of capital by Gulf investors, which has flooded the region with liquidity.

The liquidity flood seems to be making the financial markets get very, very hot. IPOs and bond issues are regularly oversubscribed many, many times - at the end of April, an IPO in Aabar, which as of yet seems only to exist in brochures (al-Bayan reported on April 1 that it was 'in process of creation'), was oversubscribed 800 times.

To my untrained eye, it looks like there's a risk of a feedback loop setting into the financial markets in the Gulf, particularly in the UAE. The high levels of liquidity in the world in general mean that lenders are already underpricing risk, and there's an inordinate amount of speculation in Gulf stocks and bonds. Combine the two and you have a heady mix. As the FT's Lex Column noted on May 16:

And there are reports that some of those buying shares in Aabar were able to get loans of more than 10 times their own cash contribution to fund it. In the world's most volatile region, that sort of leverage is about the last thing that is needed.

And concerns were raised by a senior Abu Dhabi banker in Gulf News:

"I don't think banks have adhered to Central Bank regulations. Much of the money gone into the subscriptions is bank money or paper money and not the investors' own money," said Ziad Al Dabbas, the manager of National Bank of Abu Dhabi's domestic capital markets group.

A great deal of this IPO and bond issuing activity looks to me like a stealth tax for a region without taxation. Aabar looks rather like a private equity firm: its stated purpose is to aquire existing oil companies in the region. The question is, who owns the oil companies? And with 45% of its shares to be allocated to local firms and individuals (who just might include those close to the ruling families), I don't see Aabar leaving government control.

The rest of the WB report says that governments are generally reacting to the current oil boom more prudently than in previous booms, but that there is still rather a lot of work to be done. In all the economies of the region, the major problem is removing protection and subsidies, which, as Westerners also know all too well, is a pretty difficult thing to do even in a relatively prosperous economy, regardless of whether it's better for the economy or not. There is a strong risk that the oil boom will allow the region to defer its problems rather than addressing them - though in that regard the general push towards more liberal economic policies is quite encouraging. That's particularly the case in Egypt and Dubai, where hydocarbon resources are rather more limited. But overall, the regional economies have not improved anything like quickly enough to properly deal with the pressure of rapid demographic growth - for many of the rentier states, their baby boomers are just coming of age.

Watch this space, then, I suppose...