Are Federal Fiscal Policies Keeping Oil Prices High?

Thanks to sluggish growth in the U.S. and problems in the eurozone, Americans shouldn’t see price spikes at the gas pumps this summer. Still, U.S. officials can’t say that oil prices are something they can’t control.

But Joseph Mason, a banking professor at the Ourso School of Business, Louisiana State University, and a Senior Fellow at the Wharton School, says that’s an excuse for inaction. “Oil prices are currently being buffeted by an imbalance between supply and demand,” he says. “But that imbalance has also combined with current U.S. monetary policy to cause a variety of perverse effects in U.S. markets that are worsening, rather than alleviating, price pressures.”

Mason is the author of The Perverse Dynamics of Long-Term Low Interest Rates: Evidence from Oil Prices, in which he argues that U.S. fiscal policy “continues to aggravate [oil supply] imbalances by increasing pressures on global demand abroad while pushing away domestic production.”

“In the short term, reducing the inflationary bias in Federal Reserve policy and improving the quality of the U.S. energy infrastructure can help bring down prices,” Mason writes in the paper, which was sponsored by the Small Business & Entrepreneurship Council.

Read more here: http://bit.ly/IJ7qOb

International Energy Forum Official: We Will Continue to Live in the Age of Hydrocarbons

The American consumer might get some relief at the gas pump this summer. A sluggish U.S. economy, prolonged fears about the eurozone, and U.S. crude supplies reaching a 22-year high have all contributed to a downward trend for crude oil prices. Much of the pricing of oil in recent months has to do with geopolitical factors, says Aldo Flores-Quiroga, the recently elected secretary general of the Riyadh-based International Energy Forum. He speaks with Arabic Knowledge@Wharton about fears over oil prices and supply amid further sanctions on oil producer Iran, and the impact of continued outages at energy producers.

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Booz & Company’s Joe Saddi: The Arab Spring Toppled Governments, but High Unemployment Remains the Region’s Biggest Concern

Now a year beyond the first flush of the Arab Spring movements throughout Northern Africa and other parts of the Middle East, the difficulties of economic uplift in the area are becoming apparent. In a way, the sudden successes of the uprisings, particularly in Tunisia, Egypt and Libya, mask the real long-term difficulties of laying the foundations for sustained economic viability for the region.

Joe Saddi, the chairman of Booz & Company, has long done business in the region and spoke about both the Arab Spring’s upsides and downsides at the first Wharton Middle East North Africa (MENA) business conference recently.

“I hear often the phrase, ‘The Arabs never miss an opportunity to miss an opportunity’,” said Saddi. “But now that the opportunity to have an economic success is there, we can no longer afford to do that.”

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Despite Wealthy Appearances, the Middle East’s Oil and Gas Exporters Worry about the Future of Energy

One of the great lamentations of the Western world is that its economy is being held hostage to Middle Eastern oligarchies, that the nations of the Middle East and North Africa are becoming richer and richer from monies the United States and the rest of the developed world lay at their feet.

Yet at a recent panel at the first Wharton Middle East and North Africa Business Conference, experts who have spent years looking at the oil industry, often first hand from those oil countries themselves, painted a different picture. It is one of worry about the future of oil, and a move in many places toward not only different industries, but completely different kinds of energy production.

“The challenges in the Middle East transcend oil,” said Morten Klumb, a partner at McKinsey & Company, who has spent the last six years for the firm in the Middle East, often focusing on infrastructure and real estate, not solely the oil business. The World Bank, said Klumb, estimates that the region has to spend billions of dollars on infrastructure just to get up to speed.

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A Beautiful Mind’s Sylvia Nasar Analyzes the Arab Spring, and Why Oil-funded Handouts Don’t Work

Most know Sylvia Nasar from her book, A Beautiful Mind, which narrates the life story of John Forbes Nash, Jr., a mathematician who suffered from schizophrenia for three decades only to recover and win the Nobel Prize in Economics. Nasar follows up with a second book called Grand Pursuit: The Story of Economic Genius, in which she examines the work and lives of important economists whose ideas helped humanity gain control over its material circumstances. Speaking to Arabic Knowledge@Wharton, Nasar analyzes the Arab Spring, and discusses the harm of oil-funded handouts.

“I was interested in some of the interviews in Tahrir Square,” she says. “The first time around, the protestors were saying, “What we really want is economic opportunity.” I think it’s very comparable to the former Soviet Union. These regimes and how they’ve organized themselves, they can’t deliver. In today’s world, the political repression, economic backwardness, and heavy-handed state interference don’t work.”

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Can Arab Gulf Economies Survive a Shale Gas Revolution?

Bala Balachandran, the J. L. Kellogg Distinguished Professor of accounting and information management at the Kellogg School of Management at Northwestern University, wonders how the commercial development of shale gas will forever alter Gulf economies.

“Oil reserves here are good for only 40 more years,” Balachandran tells Arabic Knowledge@Wharton. “Shale gas reserves are something like 500 years. So if that becomes economically viable, the barrel of crude oil is going to go down to $US15 dollars in three years. Then what happens to the economy here? Is there an alternative strategic plan? This is something they have to think about.”

Balachandran acknowledges that Arab Gulf countries are still flush with cash, and are investing into alternative energy technology. But technology isn’t enough by itself, he notes, nor does being wealthy help innovation.

“When you’re affluent, you are not motivated to change,” he says. “When your survival is threatened, you’ll come forward.”

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In A Fight Over Hormuz, Gulf Economies Would Be ‘Very Exposed’

The Hormuz Strait is only 21 miles wide at its narrowest point. With shipping lanes only 2 miles wide to ferry a fifth of the world’s oil trade, it is a choke point in all senses of the word. If closed or blocked, attempts to reopen the strait would concern all of the world’s powers.

The obvious implications of any closure of the Hormuz Strait are stark. According to the U.S. Energy Information Administration, almost 17 million barrels of oil were transported daily through the Strait last year, representing nearly 20% of global oil trade. (Most Gulf oil exports now head to Asia.) A number of analysts predict prices for oil would jump 100%.

Closely neighboring Iran, most of the Arab Gulf countries would find themselves at risk and their economies under pressure. Instead of benefiting from a windfall from sudden increases in the price of oil, they would be dealing with increased security and logistical costs, a fleeing expatriate workforce, flight of investment capital and a squeeze on resource demands.

Read the story here: http://bit.ly/AmieD7

Fareed Zakaria On Afghanistan, China’s Middle East Plans, and Turkey’s Fight With Iran for Influence

A year ago, the Middle East was shaken by the Arab Spring and the subsequent fall of three of its most enduring autocrats. Then in the midst of the upheaval came news about the death of elusive terrorist mastermind Osama Bin Laden. But these endings have not yet brought about new beginnings; instead they have brought new challenges, says prominent foreign policy commentator Fareed Zakaria.

Though Afghanistan will see most of its foreign troop presence dwindle, Zakaria says there will have to be a continuation of foreign aid to the nation to keep it from falling into chaos again.

China has been aggressive in pursuing natural resources in the region, he notes, “but they seem unwilling to take on a larger, more political role, [or articulate a] political vision of what that means in terms of the politics of the Middle East.”

There is meanwhile a battle for regional political influence between Turkey and Iran, he adds, a battle that Turkey is winning. “When I was in Cairo, the people I talked to all looked to Turkey as a model, because they viewed it as democratic, powerful economic model, capitalist, a great trading country, able to deal with the west and the east, confident, assertive,” he says.

Zakaria is host of CNN’s flagship international affairs program,Fareed Zakaria GPS, is also editor-at-large of TIME magazine, a columnist for the Washington Post, and a New York Times-bestselling author.

Read the full article here: http://bit.ly/zsB8rD

Talal Abu-Ghazaleh, Renowned Arab Businessman and Philanthropist: Western Economies Will Copy the Arab Model

Ailing Western economies are going to adapt to the Arab model, says Jordan-based business leader Talal Abu-Ghazaleh, adding that the deepening economic crisis in Europe and a prolonged recession in the U.S. will do little to prevent the growth of Middle East economies.

Abu-Ghazaleh, who has made his name into a business brand catering to a host of corporate functions around the world and philanthropic initiatives in the Middle East, does not buy into the idea that the Arab world will be largely affected by further bad economic news from the West. “While there will be a minor shrinkage for the need for oil in the West, that will be more than made up by the greater need in emerging economy countries,” he says. “Still, I don’t think we will see fewer cars being driven, fewer airplanes and lesser demand for electricity in the West. Only a margin of shrinkage will be in the needs of factories.

“I remember the words of former U.S. President George Bush Jr. when the crisis started. He said, ‘We’re in this together and we will come through it together.’ Nonsense. We did not go into this together. This was a crisis precipitated by Wall Street. It was not precipitated by the stock exchange of Cairo, or of Delhi or Shanghai. This was a crisis by the financial markets of the U.S. and of Europe because of the partnerships between Europe and the U.S. There are no partnerships between the West and Arab world. There are markets, and the cheaper the goods are the better it is for our economies.”

Read the full interview here: http://bit.ly/uxw0WC

Focus on Libya’s Oil Following Qaddafi’s Death

The sudden, bloody end to Colonel Muammar Qaddafi’s 42-year rule of Libya has observers concerned about the risk of a power struggle in the North African country. But for the moment, the world’s focus is on Libya’s oil economy.

Libya has primarily relied on its oil resources — according to 2010 figures from the CIA world factbook, before its civil war, the country’s petroleum industry produced 1.789 barrels per day, and its oil exports accounted for 25% of its GDP.

That production fell to less than 400,000 barrels a day during the conflict. The most optimistic suggest full production capacity could be restored by early next year. The country has roughly 46 billion barrels of oil reserves — ninth largest in the world — and nearly 55 trillion cubic feet of natural gas reserves.

“Libya is fortunate in having a small population of a bit over 6 million and valuable oil resources; it has the potential to derive a large income from oil after an initial period of reconstructing the infrastructure,” says Ann E. Mayer, Associate Professor of Legal Studies and Business Ethics at Wharton. “But, the oil sector cannot offer enough jobs to satisfy all Libyans demanding employment.”

Mayer notes under Qaddafi, “the unemployment rate among Libyan citizens was high, in part because of the distaste that Libyans felt for accepting work in low status jobs that were seen to be demeaning, which were left for migrants to handle.” Most migrant laborers fled the country when civil war broke out.

The International Energy Agency (IEA) advised caution on expectations of renewed oil production in Libya. “If [Qaddafi’s death] leads to greater political clarity within Libya, and to a more stable operating and investment environment, then it may result in a more rapid restoration of the Libyan oil sector,” stated David Fyfe, head of the IEA’s oil industry and markets division.

“However, many logistical, operational, and security-related challenges remain in that country, so we are not changing our underlying assumptions on Libyan production recovery for now. We still believe it could take many months for production to regain pre-crisis levels.”

The thorny question of who takes control of Libya’s oil exports was first raised while fighting still raged in the country. Speaking with Reuters, the head of the country’s National Oil Company speculated that he would not remain in a potential reshuffle. Divisions between the Western and Eastern parts of the country also loom large in future control of the country’s oil resources.

Most analysts suggest that little stability will exist while a transitional government in forms, hindering any plans to get Libya’s oil flowing again. “The death of Qaddafi changes very little in the underlying dynamics of the oil picture on the ground,” said Barclays Capital analysts.

Juan Cole, a Middle East expert at the University of Michigan, told Reuters that strife in Libya between its tribes could be avoided through egalitarian economic policy. “A more or less democratic government that spreads around [Libya’s] oil largesse more equitably could easily overcome this divide, which is contingent and not structural,” Cole said.

Mayer says Libyan economic planners will also have to figure out how to address unemployment concerns, “which will include deciding whether or not to revive the former system of extensive reliance on a vast underclass of migrant workers, a system that is typical in oil-rich countries but that naturally creates social tensions and imbalances.

“Do they want to invite back the same diverse population of migrants?  Do they prefer to try to integrate their economy with the economies of Egypt and Tunisia by favoring their nationals?  Do they want to try to alter Libyans’ attitudes so that they will accept to work in jobs that were previously left for migrants? A lot will hinge on the answers to these questions.”