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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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.

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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.”

Energy Innovation is Both Costly and Difficult

The sad reality, says Christian Terwiesch, Wharton operations and information management professor, is that “in the U.S. is there is simply little need for alternative energy from the mass markets. Energy is too cheap. You might look at US$4 a gallon and disagree, but in countries that are moving faster on the alternative energy side, gas is taxed at much higher rates. Cheap traditional energy makes innovation in alternative energy simply less profitable.”

Since the oil crises of the 1970s, no solution has been found that provides society with a practical alternative to fossil fuels. Terwiesch and other scholars say there are a number of reasons why, including the fact that oil as an energy source is not only practical, it has an entire infrastructure built around its use. But by far the biggest hurdle to alternative energy innovation is that oil wins as a simple matter of cost.

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Saudi Oil to China: A New Age in the History of Energy?

As unrest sweeps across the Middle East and North Africa, the entire region is on the cusp of change in ways that will affect the geopolitics of oil. The Chinese need Saudi Arabia as a stable, established oil producer. The Saudis need China’s burgeoning demand for oil in light of flat, or even decreasing, demand among consumers in developed markets. ”It is a major turning point,” says Tim Niblock, professor of Arab Gulf studies at the University of Exeter in the U.K. “Inevitably, that will have foreign policy effects.”

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