Weak Oil Market Hampering Arab Development Efforts

By John T. Haldane

The World Bank reports that the persistent weakness in the oil market throughout 1988 continued to have an adverse effect on the development efforts of the high-income, Arab oil-exporting countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates), all of whom experienced stagnant or negative rates of growth. To adjust to these changes, governmental efforts are being made to rationalize expenditures and reduce subsidies in various public services.

The reduced level of economic activity and expectations of modest growth in the future have brought to the forefront in these countries the issue of the effective integration of the indigenous labor force into the productive sectors, with less reliance on expatriate labor.

It is expected that, at least in the short term, any increase in oil revenues of these countries is likely to be limited and that restraint in government expenditures will continue. At the same time, there is an increasing call for the private sector to increase its contribution to the growth process, making use of the massive infrastructure in place and applying profits accumulated during the boom years to productive investments in the context of specific incentive schemes.

It remains to be seen to what extent the private sector in the oil states will rise to this challenge in the face of limited opportunities for diversification and trade barriers in international markets, particularly against petrochemicals, for which all of these countries have a comparative advantage.

Algeria Moving Toward Major Economic Reform

Algerian President Chadli Benjedid has appointed a new prime minister, Kasdi Merbah, with orders to undertake a basic reform of the economy. The new government is expected to submit an economic liberalization program to the National Assembly shortly.

Merbah will be pressing for economic reforms designed to draw Algeria, whose debts now total over $25 billion, out of its serious economic stagnation. For years, the country has relied on oil and gas sales, which have represented 98 percent of foreign currency earnings. It has been hit hard by the fall in oil prices. Algeria's export revenues have plunged from $13.2 billion in 1985 to $8.6 billion last year. The drop in oil prices resulted in a 40 percent drop in imports between 1983 and 1987.

Austerity has been a fact of life in Algeria since the 1985-86 oil price crash. The latest round of belt-tightening measures has had severe effects on the Algerian consumer. The October riots were to a considerable extent economic in nature. The man in the street was protesting declining living standards, food shortages, spiraling prices and high unemployment rate. Algeria's unemployment rate is estimated to be about 40 percent; and food prices have risen by at least 40 percent since January.

Western economists say failing oil prices have combined with the mismanagement of Algeria's highly centralized economy to bring about the nation's most serious social and economic crisis since it won independence from France in 1962.

Libyan "Man-Made River" Project Moving Ahead

The first phase of the Libyan "Great Man-Made River Project," one of the world's most expensive engineering schemes, has passed the half-way mark. This phase consists of about 1,200 miles of pipe from wells tapping underground aquifers near the inland towns of Sarir and Tazerbo to the coastal cities of Sirte and Benghazi. Water will start flowing to Sirte at the end of next year, and to Benghazi in mid-1991. Most of the factory equipment for the first phase, including cranes and rails, was made in the United States and shipped before President Reagan's 1986 ban on trade with Libya.

A contract for the second phase, to serve Tripoli from wells in western Libya, is scheduled for award before the end of this year. Phases three through five will complete a coastal pipeline from Tripoli to Benghazi and link the eastern port of Tobruk and the southern oasis of Kufra to the pipeline network. The project's ultimate 2,200 miles of massive pipeline will double Libya's current water supply and permit a 100 percent increase in agricultural area under irrigation.

Despite the sharp drop in Libyan oil income (from $21 billion in 1980 to about $7 billion in 1988), foreign contractors advise that payments for the high-priority project remain on schedule.

Saudi Arabia and Texaco Form Joint Company

Aramco Services Company, acting on behalf of the government of Saudi Arabia, and Texaco, Inc. have signed a letter of intent to form a joint venture partnership for refining, distributing, and marketing petroleum products in 23 US eastern and gulf coast states. Texaco will receive $812 million for a 50 percent interest. By sharing inventory and working capital, the company expects to achieve approximately $2 billion in cash benefits and savings.

The new venture, known as Star Enterprises, will provide Saudi Arabia, the world's biggest oil exporter, with a secure outlet for its products while guaranteeing Texaco a steady stream of crude oil at market prices. The Saudis will provide 75 percent of the initial oil inventory. The new firm will operate three major Texaco refineries and about 1,450 owned and leased service stations and distribute products to more than 10,000 stations.

The downstream deal is believed to be the largest of its kind ever between a foreign supplier and an American domestic oil company.

Iraq Studying Diversion of the Shatt al-Arab

Baghdad has announced a study project on the feasibility of diverting the waters of the Shalt al-Arab into a man-made channel that would end in a port well away from Iraq's southern frontier with Iran. The actual work could cost as much as $8 billion.

The new canal would connect Basra and Umm Qasr, a port on the Khaur Abdallah. A small canal, built by the Japanese in the late 1970s, already connects Basra to Khor Zubair, about 25 kilometers to the south.

Although Iran has accepted Baghdad's demand to begin dredging operations in the waterway as part of the cease-fire agreement, Iraq continues to demand revocation of the 1975 accord setting the common border down the middle of the waterway.

Removing the many ships sunk in the Shalt al-Arab and dredging it to pre-war depths could cost an estimated $2 to 3 billion. Baghdad may well decide the political advantage of a channel away from the Iranian border is worth the additional cost.

US-Arab Trade Steadily Rising.

The US Department of Commerce expects American two-way trade with the Arab countries to increase to over $23 billion this year. US exports may total approximately $11 billion for 1988, up from $9.4 billion last year. Imports should total about $12 billion, an increase from $9.8 billion in 1987.

A Department of Commerce official stated recently that "Although total Arab imports are remaining on an even keel, American products are displacing higher-priced goods from Europe and Japan. Since much of the oil producers' income is dollar denominated, our products have a price advantage."

John T. Haldane is a Middle East specialist who has served as a Foreign Service officer in Baghdad, Cairo, and Beirut, and as an international economist in the departments of Commerce and Treasury.