War and oil: the short term impact

For the Middle East, which produces 65% of the world’s oil, talk of war has caused regional markets to gyrate, making some investors cautious and clouding the future for many private sector businesses.

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By  Massoud Derhally Published  February 4, 2003

|~||~||~|For the Middle East, which produces 65% of the world’s oil, talk of war has caused regional markets to gyrate, making some investors cautious and clouding the future for many private sector businesses.

The psychological impact of a possible strike on Iraq and the worker strikes in Venezuela have created war premiums, where markets are not reacting as they usually do to oil prices, says Joe Kawkabani, an advisor in the asset management division of Shuaa Capital, a private equity firm based in Dubai.

The two markets most affected have been Jordan and Kuwait. Although the Amman Stock Exchange is still in dire straits, the Kuwaiti market has recouped losses it sustained in October very fast and is in positive territory over recent months.

Tiny Jordan, stuck between Israel and Iraq, is under more pressure now with the price of oil triple what it was two years ago. “A strike on Iraq or a cut off of Iraqi oil has a major implication for Jordan. It has an implication on our budget, on our balance of payments, our central bank reserves. It has quite a dramatic effect,” Bassem Awadallah, Jordan’s Minister of Planning, told Arabian Business.

Jordan, which has close trade relations with Iraq, gets a discount on oil products and pays for the rest of its oil bill by exports rather to Iraq rather than hard cash. “We save around US $600 million from the existing oil agreement with Iraq. [If a war takes place] we will lose an export market, which is about US $300-400 million, so we will have to come up with $900 million to pay for an oil bill that we pay much less for right now.”

“These two are the most volatile markets in the regions and usually have wide swings. Kuwait rebounded because there is more liquidity in the market, because of low interest rates, the decision to peg the dinar to the dollar, and because a lot of money invested in US equity markets has returned,” explains Kawkabani.

Talk of a looming war doesn’t seem to have had a negative bearing on the attitude of businesses in the lower Gulf. Publishing companies, whose life source is advertising, seem to be managing just fine and recruitment consultants aren’t complaining about a lack of movement in the work force.

“We have all been talking about a war in Iraq. People have been worried about expanding their businesses and multinationals in the Gulf who have been saying for the last several months ‘We need to see what happens in Iraq before we do anything,’ are now saying ‘We need to get on and bear the brunt of the impact of a war’ because they have no choice and if they don’t they’ll miss the boat,” says Charles Wilson, general manager of ITP Recruitment, a division of ITP, the publisher of this magazine.

Kawkabani at Shuaa Capital agrees and is outright optimistic. “Definitely, the instability and uncertainty of war is causing hesitation but business and projects are continuing. I think a smart person right now would probably get his money and ideas ready for a post war scenario,” says Kawkabani.

At times like these, when oil producers could easily push up prices even further to boost the private sector, William Quandt, a former member of the US National Security Council, believes oil exporters are taking into account their positions within the world economy. “If they push prices too high and cause a worldwide recession, they will be affected as well. It seems prudent to aim for relatively stable prices in the $20-30 range [a barrel],” says Quandt.

Bisher Bakheet, a Saudi economist, thinks that all the fuss about oil prices may be overstated, however. “Oil is an area, which is a very wild card,” he says. “The whole story for me about oil is that since the war 1973 when the price of oil increased, the price of oil today adjusted for inflation and after 30 years is back, in real terms, to what it used to be pre-1973.”

However, the Middle East has been affected by a slowing down of the global economy and the impact of September 11, according to Jean-Louis Sarbib, World Bank’s vice president for the Middle East and North Africa. Sarbib told Reuters that these two events, “combined with the [present] concerns about the situation that may or may not develop in Iraq, [are] making the Middle East a place where the economic environment and the investment climate on a technical side are not the most attractive and where the risks are perceived to be very high.”

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