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Abu Dhabi green city the start of a new Middle East energy vision

November 8, 2011 1 comment

If Abu Dhabi were a canvas, few painters would consider using “green” to paint the skyscraper-clad urban desert oasis. Sure, the rich United Arab Emirates city pumps artificial green into its oven of a climate — tree-lined boulevards, expansive golf courses and other vegetation that could never survive without plundering a tremendous amount of resources give the metropolis a more Western feel.

Maintaining this Middle Eastern fantasy ecosystem comes at a heavy environmental and social price. Environmentalists last year warned, “the country, already reliant on costly desalination plants powered by its lucrative fossil fuels, must cut consumption by its 8.2 million people or risk depleting groundwater resources in 50 years,” according to a Reuters report.

It appears Masdar City, an Abu Dhabi community, took that message seriously. Masdar aspires to be the world’s first zero-carbon community and hopes waste timber will earn it that distinction. Masdar also will use native plants in landscaping, which require one-third the amount of water compared with Abu Dhabi’s penchant for unsustainable, unnatural flora. The city intends to divert 50 percent of all waste from landfills by recycling and reusing timber and other materials in the project’s first phase.

Sustainability practices are the first step in attracting research and business opportunities in other energy fields, especially for a region like the Gulf Coast. With European energy markets already more mature and those economies lacking the capital to initiate expensive, advanced projects, energy firms are looking toward emerging economies in the Middle East, Latin America and Asia Pacific for investment.

Scotland struck a deal with Masdar City on Monday to support  university research and other initiatives. That deal is potentially worth billions of dollars, Scottish First Minister Alex Salmond said:

“I firmly believe this agreement will yield great results for Abu Dhabi, great results for Scotland, and I do believe it will lead to significant advances that will benefit this entire planet. That’s the importance of what’s been talked about.”

As I’ve said in this space many times before, Middle Eastern nations must diversify their energy economies. That will that help avoid dependence on state-owned oil c0mpanies that prone to corruption. It also will provide a place for investment dollars, as energy firms are simply waiting for the next market to pop up so they can do something with all their money. In turn, that will spur research institutions — possibly leading to patents and valuable innovation — in Middle Eastern nations that desperately need to create skilled jobs for its educated, underemployed and young citizens.

The Middle East, with its well-documented dependence on fossil fuel production as a main economic driver, is an embryonic energy market. Energy pioneers there realize the benefits of technologies like PV solar, but too few people in the region have enough understanding of the technology for any sort of renewable energy movement momentum. However, investors will be more than ready when that momentum builds.

The Masdar City project is a good start, as it will get people in the region thinking about renewable energy and sustainability. Already, Masdar Institute, a graduate-level university focusing on renewable energy and sustainability, hosted a meeting with 12 UAE universities about joining the European Union-Gulf Cooperation Council (EU-GCC) Clean Energy Network. That organization strives to “build a functional partnership and extensive new networks relevant to renewable energy sources, energy demand side management and energy efficiency, clean natural gas & related clean technologies, electricity interconnections and market integration; as well as carbon capture and storage.”

The Middle East needs a new energy picture. It’s time to paint the region green.

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Cartoon: Iraqi puppets

August 3, 2011 1 comment

As Iraq dithers on its decision regarding US troop extension beyond 2012, violence only increases in the war-torn nation. The cartoon shows the massive presence US boots have in Iraq, but that the military is simply biding its time as Iraq tears itself apart. Iraqis have increased suicide bombings, targeted their own oil fields and ramped up sectarian violence.

The US has long played puppetmaster in Iraq. All bets are off when the US cuts the strings. Instability and unpredictability are about the only things foreign investors and Iraqi citizens can count on. That will have a detrimental effect on investment and economic recovery for decades to come. Not only that, but a stressed economic system and security situation will only cement corruption in the hands of powerful, oppressive leaders who believe they must resort to force.

The US might have unnecessarily involved itself in Iraq when it went to war there in 2003, and it might leave Iraq’s society and economy even more tangled.

From UPI:

Stuart W. Bowen Jr. said in his quarterly report that June was the deadliest month for the U.S. military in more than two years, with 14 soldiers killed, The Washington Post said. Most of the deaths were the work of Shiite militias, he added.

“Iraq remains an extraordinarily dangerous place to work,” Bowen wrote. “It is less safe, in my judgment, than 12 months ago.”

Oil-rich nations spend more at home, but it’s not sustainable

July 19, 2011 1 comment

Oil-rich Arab nations spent more at home this year as autocrats dished out one-time benefits to quell civil unrest. While it’s a good sign that such rulers responded to protesters, it falls short of a real policy change in how oil-rich states disburse revenue.

The fact protesters pushed autocrats to realize they needed to spend more domestically shows the effect the threat of losing power has on those rulers. So what then would create long lasting reforms in government spending on domestic programs and businesses? Democracy. Human rights. Better institutions. Anything that allows citizens to hold officials accountable, and one way of doing that is through an enforced electoral process.

In essence, this spending merely aimed to pacify those with only a lukewarm revolutionary fever and increase support among regime backers. These are not long term, sustainable spending programs.

From ArabianBusiness.com:

Following popular revolts in the Middle East and North Africa, countries like Bahrain, Libya and Kuwait increased domestic spending or handed cash outright to their citizens in packages totalling as much as four percent of gross domestic product. Saudi Arabia alone is spending $130bn, or a staggering 30 percent of its GDP.

These countries can more than afford to do so, if Goldman Sachs’ estimate for petrodollar savings flows are anything to go by: the bank forecasts imply $840bn over the coming year, based on Brent oil at $126.50 a barrel by mid-2012.

Saudi Arabia, for example, doled $130 billion to its citizens this spring. But much of this came in the form of housing credits and other cosmetic fixes to superficially enhance quality of life without actually changing anything.

Institutions are rarely built from the top-down in such societies. Protesters coaxed benefits from tight-fisted rulers through their voices and actions. Imagine what would happen if they could do that every two or four years at the polls.

 

Saudi private school teachers forced to take low wages or quit

While teachers in the United States are poorly paid, I don’t think they would settle for $533-$800 per month. But that’s what Saudi Arabian private school teachers are being forced to take, unless they’d rather quit.

Of course, the Saudi Arabia gross domestic product per capita was $14,799 in 2009 — about one-third of the U.S. And much of that GDP is locked into the royal family’s bank accounts. Saudi Arabia should put that money back into the economy in some way — funding education would be a good start — to ensure it doesn’t hang onto an unsustainable industry for its indefinite economic future.

From ArabNews.com:

Maha Al-Qadi, an elementary school teacher, said that she sees no justification for the school management to compel her to sign a new contract with a monthly salary of SR3,000 or resign.

“The order issued by the king should be fully enforced. It needs no further clarifications from the ministry or any other educational bodies,” she said.

Al-Qadi refused to sign the new contract and instead resigned.

“I tendered my resignation papers even though I am in dire need of money to support my family. But I have no regrets leaving the job,” she said while criticizing private school operators for their greed and exploitation.

This underfunding of education professionals will be a drain on one of the richest countries in the world. Saudi Arabia needs talented brainpower for the coming decades as oil reserves begins to deplete. It won’t necessarily be their own oil reserves running out, but if supply runs out around the world it will increase the cost of Saudi oil. That, in turn, could make importing oil too expensive and force more countries to turn to other fuel sources rather than being dependent on a foreign nation. And then Saudi Arabia will be left with an ancient industry and no backup plan.

This scenario is still decades away, but it is very real. Saudi Arabia should be using its oil revenues to support education, pay teachers and diversify the economy. Instead, the House of Saud keeps the revenues for itself.

US should reevaluate Iraq exit after oil attacks

June 28, 2011 1 comment

Recent reports that Iraqi insurgents are attacking the oil industry should give the US pause about its planned exit considering the impact these incidents could have on long term economic development.

Joel Wing at Musings on Iraq has a good summary (with links) to the reports. In all, there were five mishaps related to oil in June.

Wing explained that oil accounts for 90 percent of the nation’s revenue. He said insurgents plan such attacks to grab headlines, which leads to recruits, which leads to money, which leads to continued operations.

The constant threat of those attacks lead to unpredictability, and Wing hypothesized that insurgent timing was planned to coincide with the beginning of several foreign oil contracts.

This dynamic will have a tremendously negative effect on Iraq’s economic development potential. In his essay “International Investment and Colonial Control: A New Interpretation,” Jeffrey Frieden explained that site-specific foreign investment during a host country conflict is easier to defend with force — for example, oil fields. But there are some major security concerns ahead of the planned US exit from Iraq. The Iraqi police and army do not appear trustworthy or legitimate to many citizens, which means they cannot be counted on to provide vital security for the nation’s precious oil resources.

Whether this causes investor flight remains to be seen — although that’s doubtful considering every country has oil needs. But it could significantly alter the contracts Iraq receives. Maybe not monetarily, but something may have to give. What that is remains unclear, but one thing is certain — investors won’t like the prospect of their millions of dollars going ablaze.

The attacks on oil have another effect — by crippling the nation’s main breadwinner, the insurgents render the government ineffective. Depleted jobs numbers and oil revenue sends a bad signal to the Iraqi people that their government cannot provide for them. That in turn feeds into insurgent recruiting, as those groups are bankrolled by wealthy people and can offer essential services such as education, food and shelter.

In essence, the attacks on oil encourage civilian dependence on insurgent groups for general welfare. It’s a scenario the U.S. has tried to avoid for years, but one that may still be a factor when it leaves.

Saudi Arabia plans nuclear energy expansion, has oil implications

June 3, 2011 1 comment

Saudi Arabia, which has defined the term “rentier state,” has decided to expand its nuclear energy production so it can devote more of its crude oil to exports.

A Saudi official said the kingdom plans to build 16 nuclear reactors by 2030. The $100 billion project will help meet the country’s energy demands, which are rising between 7 and 8 percent annually.

With oil hitting $100 per barrel, Saudi Arabia is considering increasing its output to lower oil prices. That should raise consumer demand and potentially generate even greater revenues for the world’s largest oil producing state. The country will attempt to reduce its own energy consumption to accommodate the increase in exports. It seems it will try to make up for that loss through nuclear energy.

It’s safe to say Saudi Arabia isn’t at risk of Japan-like tsunamis and earthquakes — the Saudi kingdom can thank Yemen and Oman for being the geographical buffer between it and the Indian Ocean — so this move makes sense for Saudi Arabia.

But the question is what happens with increased oil revenues from devoting more of the nation’s main economic driver. Currently, the kingdom keeps most of those revenues already. It recently offered citizens $35 billion of economic relief in hopes of preventing revolutions that occurred in Egypt, Tunisia, Bahrain and elsewhere. But the only reason it was able to offer that abrupt aid was because it has such a vast pool of money tied up among political elite that does not get regularly redistributed throughout the rest of Saudi society.

Saudi Arabia knows the time is ripe for expanding oil output, especially if it will help lead to energy diversification — relying on oil is not sustainable and the Saudi economy is doomed if it expects that to be the cornerstone for decades to come. China is demanding more of it and nations that once allowed privatization by foreign companies have consolidated “black gold” into public control, therefore putting a damper on the international oil supply and driving up demand. But if Saudi Arabia is ever going to improve the lives of its citizens and become a truly modern nation, it needs to pump oil out of the Royal Palace and into Main Street.

Bahrain Trouble Brewing

June 3, 2011 2 comments

UPDATE: Bahrain has rescheduled its Formula 1 Grand Prix for October. It had originally been planned for March, but was pushed back because of civil unrest. That dealt a significant blow to the nation’s tourism industry. It’s unclear what kind of event spectators will get in October — expect a lot of protests. I am sure plenty of devoted racing fans will still attend, but enough people could still be wary about that nation’s situation to provide less of an economic boost than anticipated.

Bahrain has not received the sexy news coverage of its Arab Spring counterparts in Egypt or Libya, but there’s definitely reason for concern in that country that has gone somewhat unnoticed.

A Miami Herald story from Monday sums up what is going on in that tiny island vacation destination:

On May 19, President Barack Obama criticized the Sunni Muslim government’s harsh crackdown on the country’s majority Shiite Muslim population. The crackdown has featured the destruction of Shiite mosques, the jailing and physical abuse of leading opposition political figures and journalists, and official harassment and intimidation of teachers, medical professionals and others.

This is economically significant for several reasons.

The single greatest aid to economic development, aside from education, are stable political institutions. Call me old fashioned, but I don’t believe most investors think a country where there is government-backed torture and killing of peaceful protestors is a safe spot to stash their money.

Bahrain’s situation is more unique because of its advanced banking and regulatory system. The Heritage Foundation ranks it as the freest economy in the Middle East, but that all can change if institutions are overturned. And what was once considered a stable and respectful government has turned out to be something quite different, thus making for some unpredictability. Significantly, the Bahrain Islamic Bank’s credit rating was cut to junk status this week.

To that effect, Moody’s Investor Services downgraded Bahrain’s credit rating to Baa1 with a negative outlook, saying “there seems little prospect of the underlying causes of the unrest being peaceably resolved, at least over the short term.” That is the third-lowest investment rating, which will make it much more expensive and difficult for Bahrain to borrow money, which could stall or prevent large projects and lead to underfunding of various services. It also sends a strong message to investors that the political fiasco in Bahrain is not likely to turn around soon. The International Monetary Fund also readjusted its prediction on Bahrain economic growth from 4.1 percent to 3.1 percent.

Out of a sense of panic or urgency, the Bahrain government responded to the Moody’s downgrade with the cosmetic fix of lifting its state of emergency. That announcement was met with continued protests, as if nothing had changed (because, let’s be honest, nothing did aside from a few tanks pulling out of cities).

Foreign direct investment accounts for $15.8 billion of Bahrain’s economy, putting it 10th in the region. But it falls behind powerhouses such as Saudi Arabia (oil), Israel (technology, stable democratic institutions), Egypt and Qatar. For a country of its size, Bahrain gets a substantial amount of foreign investment — for the time being.

Any domestic instability has to be troubling for international markets and foreign investors. Even before the government crackdown, beatdown, showdown, whatever you want to call it, Bahrain was ranked 36th worldwide in public debt. And while many Middle Eastern nations rely on natural resources — such as oil — for a bulk of its gross domestic product, Bahrain derives 11 percent of its GDP from oil, making it one of the smallest producers of the crude stuff in the Middle East.

So where does a bulk of Bahrain’s economy come from? Tourism. And unless your fanny-packed family of four had insurrection on the travel itinerary, I think Bahrain might be pushed down the list of Middle East hotspots.

Of course, tumbling tourism dollars has been a theme of the Arab Spring — after all, the people carrying out these revolutions are hardly concerned about what John Smith and his three redheaded children think.

If the country must rely on tourism for a sizable portion of its economy, has a large debt burden and still wants to pride itself on being a progressive business economy, it must address its social unrest. This type of instability sends a bad signal to foreign investors — especially if its ability to generate revenue from tourism decreases, which directly affects Bahrain’s debt level.

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