Gulf Car Sector - Buckle up for the downturn

Executive magazine

By Paul Cochrane in Dubai

The Middle East's automotive industry adjusts itself to meet another difficult year in 2010

In the wake of the global financial crisis, 2009 has been the worst year ever for the 850,000 unit Gulf automotive market. Sales plunged by 27 percent from previous levels in 2008, and the luxury car segment of the industry dropped by an estimated 30 percent, according to major manufacturers.

The story couldn’t be farther removed from the success of former years, when the $16.2 billion sector experienced prolonged double-digit growth that was among the highest in the world for automotive sales.

“The Gulf has been one of the worst effected regions [globally] as they’ve never seen anything like a financial and liquidity crisis at the same time,” said Jeff Mannering, managing director of Audi Middle East.

Whole car segments disappeared as the real estate, construction and financial bubble burst across the Gulf in the last quarter of 2008 bringing down markets and industries across the board as it caved inward.

“People were making significant financial gains in property and large amounts of money were changing hands, so there was a sense of perceived wealth that had created phenomenal consumer confidence. But that sense of easy wealth has gone, and must have an impact on luxury goods,” said Robin Colgan, managing director of Land Rover and Jaguar Middle East.

Porsche certainly noticed the initial crunch. “The Boxter and Cayman drivers, the bankers, property dealers and the up-and-coming, they disappeared for months,” said Deesch Papke, managing director of Porsche Middle East and Africa.

In the wider Middle East, the area of operations for car manufacturers, the Gulf Cooperation Council markets were the hardest hit, with the United Arab Emirates, Dubai in particular, taking the brunt of the drop in car sales, down by 47 percent, according to General Motors (GM), followed by Kuwait, Oman, Saudi Arabia, Bahrain and Qatar.

But given the dearth of data on car sales in the region it is hard to assess the true impact on the sector, particularly as a sizable percentage of vehicles are re-exported.

“It is the first place I’ve managed where I can’t get data, and it is a re-export market,” said Mike Devereux, president of GM Middle East. “We try and triangulate with other brands but it is farmers math.”

“A Toyota dealer in Oman may sell say 50,000 units, but only 7,000 stay there, with some 40,000 odd going elsewhere as exports. Over 20 percent of volume leaves the Middle East,” he added.

Ford estimates that automotive industry average sales have fallen this year between 8 and 45 percent depending on the country, and by 27 percent in the GCC as a whole.

But while there is no official registration available to substantiate accurate market share and sales data, it is clear that the financial crisis has been a double whammy for international car companies selling in the region. These companies have been hit by the plunge in demand in the Gulf and at the same time by the effects of the crisis at global headquarters.

“It is the most brutal year in my business since 1929,” said Devereux.

Regional representative offices have had to adjust to restructuring at mother companies, American brands have had to handle a brush with near bankruptcy, marketing budgets have been constrained and banks have reined in access to car loans. Companies have also realized how sensitive the market is to new products, with 2009 models being delivered just as the crisis hit the Gulf, resulting in over stocked inventories this year.

“It’s been a combination of different things, and Land Rover has had a tough year. [All our] new products arrived in the late months of 2008, and from November to January 2010 [we are expecting] a complete line of new products,” said Colgan.

Change at the HQ

Japanese and European manufacturers have had difficult years, with public funds assisting companies and financial restructuring. Manufacturing giant BMW saw global sales drop by 15.7 percent to September; Volkswagen’s third quarter profits are down 85.7 percent from 2008; and Porsche recorded an after tax loss of $8.18 billion, seeking a government injection of $2.6 billion. Last year Porsche SE made $12.6 billion in profit.

Meanwhile, Qatar, through its sovereign wealth fund, has become the third biggest stakeholder in Porsche following an abortive attempt by Porsche SE to take over the Volkswagen Group.

In March, the world’s biggest car maker, Toyota, reported the worst performance in its 72-year history, while Nissan reported a $2.4 billion loss in the 2008-2009 fiscal year. Both companies were forced to cut back production globally. Cost cutting and holding back expansion plans has also forced manufacturers to pull out of Formula 1 racing, with Honda quitting last December, Toyota in November, and BMW entering its final race in Abu Dhabi this year.

But it has been American manufacturers that have really felt the impact of the crisis, downscaling production while dealerships laid off thousands of workers.

“The company I worked for doesn’t exist anymore, GM doesn’t exist,” said Devereux. The US giant has gone through a massive overhaul of its administration and operations, he said.

“We had an obligation to one million retirees and that drove everything, even out here, as products came from the United States and $2,200 from every vehicle was going to benefits. It was not always what was best for the customer. [GM became] a retirement fund that happened to make cars. Our business model now is to build brands and take care of customers.”

Banking and brand equity

The economic impact on the Gulf’s banking and real estate sectors had a corresponding knock-on effect on car sales, affecting consumer buying patterns.

“At the beginning of the year, consumer confidence was at low levels while most banks applied additional restrictions to their financing activities,” said Hussein Murad, director of sales Ford Middle East.

“Buying patterns have changed, people are buying long term, not every 18 months, and are more discerning because banks have stopped funding, and the availability of cash has dried up,” said Porsche’s Papke.

In the UAE, around 80 percent of automotive sales were dependent on financing. After the summer, the UAE pumped liquidity into banks and eased lending for cars.

“Banks couldn’t stop lending altogether, but the application process is far more stringent now,” said Audi’s Mannering. “Before it was 48 hours, now it is seven to eight days. In one way it is a good thing, as now the risk is lower.”

Manufacturers and dealers are teaming up with banks to offer zero percent interest on vehicle sales and are making credit more readily available to customers. The most notable change in sales strategy has been the widespread introduction of leasing, a technique dealers had formerly eschewed as vehicle prices were low and customers preferred to buy.

While enticing customers into showrooms is one concern for the manufacturers, so is keeping dealerships afloat, which in many cases have ordered vehicles months in advance that now cannot be sold or re-exported elsewhere. To offload such excess inventory, dealers have been offering discounts left, right and center.

“If you have the cash it’s a good idea to buy a car, as there are some good deals now,” said Porsche’s Papke.

But while such deals might be advantageous in the immediate term, heavily discounted cars are affecting brand equity as well as resale values with, in some cases, new vehicles selling for less than used cars.

“If you discount cars in a new environment you destroy the residual value of the car; that’s something dealers in the Middle East didn’t factor in. And it is important for used cars to retain value,” said Audi’s Mannering. “We made a conscious decision this year to not have half price cars on sale and sell the brand out, whereas others have.”

Dealers have also had to struggle with another effect of the global financial crisis: the flood of used cars from the United States by Americans selling up and downsizing, in addition to the thousands of dealerships affected by forced closures, with up to 150,000 losing jobs.

“What’s happened this year is [GM] got rid of a third of the dealership network in the US. They had big inventories, and shipped overseas to this region too. It was an epidemic this year, and all from the US. How can I compete with that?” said Devereux of GM Middle East.

As a result, manufacturers have focused on certified used car programs that provide warranties for vehicles at competitive prices.

“We only got into that business two and a half years ago, but this was the first year that customers were really looking at used cars,” said James Crichton, sales and marketing director of the BMW Group Middle East, which covers 14 partners in the market in the GCC, the Levant, Iran, Afghanistan, Pakistan and Yemen. He added that while overall sales of new premium cars are down by 30 percent, premium used BMW sales were up 27 percent this year.

A low for high-end cars

“The UAE is the single largest luxury car market in the Gulf, much bigger than Saudi Arabia,” said Colgan, of Land Rover and Jaguar. “But the same way the UAE saw incredible growth, [it] also felt the contraction more acutely than elsewhere in the world.”

Indeed, for luxury car manufacturers, until this year the Gulf was viewed as a veritable paradise, with a populace keen on cars and oil revenues providing the funds to acquire high-end vehicles.

An estimated 20 percent of Rolls Royce global sales in 2008 were to the Gulf; McLaren opened a regional office in Dubai this year and Ferrari, which witnessed triple digit growth in the years before the crisis, opened its largest showroom in the world in Dubai in October.

“During the good times [there were] 130 to 135 sales a month,” said Porsche’s Papke, “Now that it’s 105 in Dubai a month, it’s not a disaster.”

But with luxury sales down 30 percent this year, brands have struggled to maintain sales, particularly of lower priced luxury vehicles. Japanese brands have especially felt the pinch, with one manufacturer calling Toyota’s Lexus brand “a disaster.”

BMW has seen sales drop by 8 percent in the region, “but the luxury segment is not down as much as the mainstream,” said Crichton.

Bolstering sales for the likes of BMW was the introduction this year of the 7 Series, the brand’s best selling model in the region as well as in the premium automotive segment. The company also bagged a deal with the Saudi government to supply 120 ‘750 Series’ BMWs for the Kingdom’s ambassadors worldwide.

“Saudi Arabia is a good market, up 41 percent, and our partner made big investments there. The world’s biggest service center is now in Jeddah,” said Crichton. “It is a positive message that we are still investing in tough times.”

The region’s affinity for luxury cars is likely to help the sector rebound, particularly given that in Europe, North America and Asia there has been a rise in demand for smaller vehicles.

“Around the world [the smaller] Audi A4s and A8s drive sales, but in the Middle East there is still a craving for big, luxury cars,” said Mannering. It is the same for BMW, with the 1 and 3 Series the big sellers in Europe.

“The market is an exact inverted triangle compared to Europe; in the GCC as you go down in size volume decreases,” said Crichton.

All luxury manufacturers reported that there has been heightened activity in showrooms, which signals a return in sales and more confidence in the economy: a paramount factor for car sales.

“Now we have more inventory than before but it allows for sales by speculative buyers, and here people buy on a whim,” said Papke, adding that Porsche sales are only 2 percent down on last year.

While sales in the UAE are not expected to rebound to former levels, other GCC countries pose potential growth.

“The GCC is a fundamentally fantastic place to sell motor cars,” said Colgan of Land Rover and Jaguar.

“Saudi, Kuwait and Qatar are very strong markets. For Jaguar and Land Rover, Saudi Arabia represents a big opportunity, and we will look to Saudi Arabia for positive sales as we are due to launch the Jaguar XJ next year,” he added.

The luxury Sports Utility Vehicle (SUV) segment is still fairly small in Saudi Arabia compared to elsewhere in the Gulf, and is projected to grow.

GM’s Devereux said that Iraq was another market that had great potential: “Iraq had a spectacular year, and will be a 100,000 to 120,000 units a year market. It was a huge surprise and made up sales for us.”

The year ahead

For manufacturers, future sales are being pinned on the introduction of 2010 models, and the Dubai and Riyadh motor shows to spark interest.

“What we’re seeing…is that there is more to life than just economic life, and that this region is driven by product cycle,” said Colgan. “People know 2010 models are coming, and advance orders are picking up dramatically. Despite the crisis, people are still buying expensive cars in this region.”

Manufacturers are not obviously as upbeat as they would have been two years ago, but are not looking into the void like they were at the beginning of 2009.

“We came for a record year with 1 million cars sold in 2008, and 925,000 sold in 2009. In 2010, first indicators in the Middle East are not to rebound to levels [there were] before — growth will be 1.5 to 2 percent, and coming back. It was unhealthy growth [before] and now [it is] normal,” said Audi’s Mannering.

“The first half of 2010 will remain challenging. This year has been hard to predict, but there’s optimism that the second half of 2010 will bring better market conditions. We are releasing a lot of new products as well,” said Crichton.

Much will depend on how well the Gulf rebounds economically and government stimulus’ work to boost consumer confidence. Higher oil prices would also help the region’s depleted coffers.

“Everyone is hoping on the oil price,” said Porsche’s Papke. “But I’ve not heard that people have been made unemployed over the last three to four months. The opportunists and speculators have gone, and you don’t have to grow 20 percent. Between 6 and 7 percent is healthy for emerging markets,” he added.

Thorns of a burst bubble

Commentary - Executive magazine

For business journalists, writing about the Gulf from 2004 to 2008 was often a repetitive process. Regardless of the sector being covered, the opening paragraph would invariably have a growth figure in the double digits, and the projection for the next year would also be a very healthy one. Every year was a record year, or so it seemed.
The global financial crisis in the autumn of 2008 dimmed the Gulf Cooperation Council’s business fortunes, flipping that opening paragraph to negative double digit growth or, for some sectors, growth in the low single digits. This change was welcomed by many business journalists, if only to spice up their writing, but of course not by the business community.
The reasons behind strong growth can be easily explained, but a downturn and a serious contraction in
revenues requires a different explanation, and it was time for journalists to start asking hard questions – at least it should have been time to play hardball.
However, just as the crisis was beginning to bite, the government of the United Arab Emirates introduced a draft media law in January to update the archaic 1980 law. Media outlets quickly understood the ramifications of the proposed rules, which include article 32, whereby journalists can be fined up to $1.3 million for “disparaging” government officials, members of the royal family or Islam, and article 33, which fines journalists up to $136,000 for harming the nation’s image and reporting “misleading” information on the economy.
Given such fines, way beyond the financial means of most journalists and media outlets, how could hacks ask hard questions? And how could journalists report on companies and firms that were in trouble but directly linked to royal families? It is a clear Catch-22 situation: journalists want to do their job, and the public and investors have the right to know about financial shenanigans, but to do so could come with a hefty price tag, and if you can’t cough it up, it’s a stint behind bars in the debtors’ jail.
The whole notion of transparency thus became a mockery, and how deep the impact of the crisis had run became a topic that was barely debated in print or on television, at least not in the UAE and the other GCC countries, which have similarly draconian media laws.
How ingrained such self-censorship is among Gulf journalists was evident in the headlines and articles in the aftermath of the bomb dropped on the global markets by state-owned Dubai World's announcement of a six-month standstill in payments of $59.3 billion in liabilities. The Gulf News gushed “Government intervention to ensure commercial success,” the Abu Dhabi-owned The National downplayed the impact, stating “A silver lining in Dubai World” and the Khaleej Times espoused optimism, “Restructuring ‘A Sensible Business Decision.’” Elsewhere, papers headlines were of “castles in the sand,” “Dubai in turmoil,” and “Bombshell decision has severely damaged Dubai's reputation.”
But while papers outside the region can tell it as it is, reporting in other parts of the Middle East on what has already been reported can be a risky business.
In one case, a UAE-based journalist wrote an article on the new media law for the American University of Cairo’s (AUC) Arab Media & Society (AMS) website. In it, she referred to a case in May where British daily The Independent ran a story about a case of fraud in which a Dubai developer showed investors photographs of buildings under construction, but they were in fact photos of another project. The investors demanded a refund, but until now they have not been reimbursed.
The developer is the Al Fajer Group run by Sheikh Maktoum bin Hasher Al Maktoum, who is none other than the nephew of Dubai’s ruler. For citing – not breaking – this story, the Maktoums threatened to sue AUC.
What this case highlights is the lengths to which the UAE will go to try and rein in negative media coverage. Furthermore, such cases ward off necessary reporting on dubious tactics by developers, which damage the reputation of the real estate sector at the very time when the sector is suffering, with real estate prices down 50 percent in Dubai from their 2008 peak, and investment bank UBS projecting in November that it could take up to 10 years for the sector to bounce back. The last thing the sector should want in such a tenuous climate is jittery investors. As an Al Fajer investor told The Independent, “This is going to define my faith in the country. If I’m dealt with correctly, great. But at the moment, it’s not going that way. We’re in the witching hour now.”
That witching hour extends to media coverage, transparency in economic data and whether firms connected to the royal family are being unfairly assisted and bailed out at the expense of ‘ordinary’
companies trying to compete in a supposedly free market. As for us business journalists, reporting on the Gulf is certainly keeping us on our toes as we cover, or indeed cover up, the Gulf’s (mis)fortunes, and avoid getting fined a lifetime’s salary in the process.

PAUL COCHRANE is the Middle East correspondent for International News Services

The Middle East's demographic time bomb

Commentary - Executive magazine

With the end of the summer holidays, children and young people across the Middle East and North Africa (MENA) once again donned uniforms, packed satchels and headed to school, amounting to more than a quarter of the region returning to class.

In Syria, a quarter of the country's population, some 5.3 million people, are enrolled in schools, while 38 percent of Saudis, 46 percent of Yemenis, 31 percent of Jordanians and 31 percent of Egyptians are below 14 years of age. Altogether, half of the MENA's (including Iran) 300-million-plus people are under 24 years old.

While all these kids are in school, there is no pressing socio-economic problem. But over the next decade as students graduate and want to enter the workplace, finding employment for them all will be difficult. Already the Middle East and North Africa has the highest unemployment rates in the world at 9.4 percent and 10.3 percent respectively, according to an International Labor Organization report.

According to UN projections, the MENA's population will reach 430 million by 2020, of which 280 million are expected to be urbanites — already the three mega-cities of Tehran, Cairo and Baghdad are home to 25 percent of the region's population. This rapid urbanization stresses infrastructure and exacerbates not only the employment problem, but other issues afflicting the MENA region to varying degrees, including political instability, food sufficiency, drought and energy shortfalls. Furthermore, a main pressure valve used to keep some of these woes at bay — finding work abroad — has led to remittance reliance, a revenue stream that cannot be taken as a certainty.

The Gulf was once considered an employment paradise for the rest of the MENA region, taking in millions of white and blue-collar workers alike. But given the economic contraction of the past year, the Gulf gold rush is not as robust as it once was, with workers laid off and remittances down. Moreover, the majority of expatriate workers in the Gulf are not Arabs but Asians. Some 1.5 million Egyptians, for instance, work in the Gulf, compared to 4.8 million Indians. Unless there is a pro-Arab employment policy, the Gulf cannot create enough jobs for the MENA's burgeoning youth.

The viability of migrating outside the MENA region for employment is also questionable. Europe’s rapidly aging population will increasingly be leaving the workforce, but it is far from a given that this will lead Europeans to be more accommodating to large numbers of Arab job-seekers, whether 'guest workers' or given full citizenship. While many Europeans acknowledge that there will be a need for migrants to take up the slack, there is also jingoistic concern about a 'Eurabia' developing.

The onus has to be on the MENA region’s public and private sectors to come up with viable solutions and programs. But what kind of model should they follow? Promoting more of the 1970s-style American capitalism flaunted in the Gulf and elsewhere in the region, with its rampant consumption, large cars and excess is as undesirable as it is unattainable and unsustainable. Indeed, last year the Worldwide Fund for Nature's Living Planet report ranked the UAE at the top of the list of carbon emissions, with an ecological footprint of 9.5 global hectares per person, more than triple the global average of 2.7 hectares and exceeding the USA, ranked number two, of 9.4 hectares.

Moreover, the Western economic ideological model, championed by the World Bank and the International Monetary Fund, has taken a serious battering, evidenced by the rising unemployed in the West and the billions of dollars of taxpayers’ money used to bail out the financial sector. Economic growth is all well and good, but when surging growth is then followed by a staggering collapse, it's two steps forwards, one step back.

Economic reform in the region is clearly needed, but the crux is in the implementation. For places like Syria — which has been undergoing reform for the past decade — the reforms have created jobs and opportunities, but the main beneficiaries have been the already well off — those able to invest funds into the new stock market and establish holding companies. Reforms are benefiting Syria’s elite, while the vast majority of the population has seen salaries remain stagnant as real estate prices and food costs have soared. It's a similar story throughout the MENA region, particularly in Egypt, Lebanon, Jordan, Saudi Arabia and Yemen.

One of the ways to shrink this widening disparity in income and equality is through bolstering small and medium sized enterprises (SMEs), coupled with the micro financing that enables such ventures to happen. Improving education levels — to create 'knowledge-based societies' — implementing more progressive taxation regimes and population control are other components.

It has long been debate whether a more democratic MENA would be better able to surmount its sociological and political hurdles — an equally pressing issue, however, is how to defuse the demographic ticking time bomb the whole region is sitting on.

PAUL COCHRANE is the Middle East correspondent for the International News Services

Syria: Deeper into Drought

Water scarcity causing food shortages and rural flight

The Kabur river is barely above ankle height.

Executive magazine

By Paul Cochrane in Hasakah and Damascus

At face value the city of Hasakah in Syria's northeast doesn't suggest a four-year drought is underway. On the outskirts cotton pickers work away in fields and dozens of trucks line the roads piled high with sacks bursting at the seams with raw cotton, while in the local market water melons and vegetables are on sale, and the hotels have bath tubs.

The Kabur river that runs through the city is not dry, yet hardly a river, more a small stream with a depth just above ankle height – exactly what one might expect following a hot and rainless summer.

But the Kabur is much lower than normal for early autumn. The Hasakah area only received 100 millimeters of rain this year, way below the annual average of 200-250mm. As a result an estimated 36,000 families from the Hasakah Governorate have been driven off the land. In neighboring Deir-e-Zour, dust storms caused by desertification were so bad this summer that on certain days people couldn't see more than two meters in front of them. Business ground to a halt and roads were closed off after being covered in sand.

From farming to urban poverty

Indeed, according to a United Nations report, an estimated 1.3 million people in Eastern Syria have been affected by climate change and drought, while 803,000 people have lost their livelihoods. The displaced are finding their way to the larger cities, living in tents and makeshift shacks, and forced to work as day laborers or even scavenge from the rubbish dumps on the edges of Damascus.

“Those that are really dependent, herders and small farmers, their livelihoods are being destroyed. If they are not already dependent on food aid, they will be,” said Jean-Marie Frentz, program manager of the economic cooperation section at the European Commission to Syria.

The paradox of places like Hasakah, deep in drought but yet still farming away, is that Syria has still not adapted its agricultural and farming policies in line with hydrological conditions. While crops fed by rainfall have failed, irrigation and the usage of dwindling groundwater reserves presents the illusion, a veritable mirage, of an oasis of productive farming land.

Water intensive watermelons on sale in drought ridden Hasakah.

For a country that has prided itself on agricultural self-sufficiency and its use of water resources – the back of the 500 Syrian pound note depicts the Assad Dam and fields being tilled – the drought is clearly bad news. Yet unlike the past, the Syrian government is admitting they have a problem.

“For the first time the government is really speaking about the issue, and realizes it is an emergency situation. In the past, there was a tendency to deny or say it is Syrian business and no need for international assistance,” said Frentz.

The UN, along with seven NGOs and the Syrian government, have established the Syrian Drought Response Team, requesting $53.9 million from international donors. The bulk of the money - $29 million - is for food aid, while $20 million is earmarked for supporting agriculture and livelihoods.

This is significantly more than asked for in 2008 by Damascus, for some $20 million, which Syria failed to raise from donors until earlier this year.

Conceding the scale of the drought has put Damascus in a tough spot, as it was “bad public relations for Syria to have to feel like Ethiopia, of presenting an image of people starving and sick children,” said Jihad Yazigi, editor of business publication Syria Report. “And it was quite a strange situation, as the same week the appeal was made [UAE real estate developer] Majid Al Futtaim announced the launch of a $1 billion project [just outside Damascus] in Yaafour. It says something about the new Syria,” he added.

The government is even attributing the economic slowdown in the country to the drought, despite agriculture accounting for an estimated 20 percent of gross domestic product and 10 percent of total exports.

Last year, as EXECUTIVE reported, Syria experienced its worst wheat and barley harvest in recent history, producing just two million tons of wheat and 90 percent less barley than in 2007. The target for wheat production in 2009 was back to former levels of 4.5 million tons, but year end projections estimate only 3.4 million tons.

Cotton pickers in Hasakah.

Importing food staples

The up-tick is due to average rainfall in certain areas of the country, particularly along the coastline, and from better irrigation usage. However, in areas reliant on rainfall in the northeast and east there was almost zero production, said Dr Abdullah Droubi, director of Water Resources at the Arab League's Center for the Studies of Arid Zones and Dry Lands in Damascus.

As a result, the Syrian government has boosted its imports of wheat by 300,000 tones to 1.5 million tones this year to boost its reserves, crucial for keeping the populace placated via flour subsidies.

Such a shortfall in agricultural output is forcing the government to rethink how water is allocated, with agriculture accounting for 90 percent of water usage. “The government is looking over the next decade to reduce this figure by 30 percent through new irrigation techniques,” said Droubi, while the Agriculture Ministry is studying a plan to reduce cotton cultivation by 20 to 30 percent from the current one million tones per year.

A shift from heavy usage of groundwater reserves is also needed, said Frentz.

Governorate	Population	Severely affected
Rural Damascus	1,765, 622	2,500
Homs	2,033,337	20,500
Hama	1,997,870	98,000
Ar-Raqqah	934,897	155,000
Deir-e-Zour	1,566,691	41,000
Hassakeh	1,495,276	486,000
Total	9,793,693	803,000
Total households		75,641

Source: Syrian Ministry of Agriculture and Agrarian Reform; UN

No master water plan

“The general trend is that groundwater levels are falling considerably every year. In rural Damascus there has been a six meter per year drop, while in the Homs area the drop in groundwater levels ranges from 12-35 meters a year, so this is very worrying indeed and clearly not a sustainable model.”

But with no master water plan, and a lack of coordination between government bodies, coming up with viable solutions is problematic.

“Water is a very fragmented sector with many actors. For instance, the ministries of construction, agriculture, environment and local administration all cover different aspects of water. There needs to be an integrated water management policy, not a piece meal approach,” said Frentz.

Then there is the scale of the drought and climatic changes. As Droubi pointed out droughts are often cyclical, but without scientific data it is difficult to plan ahead. And for a country of 20 million people with 2.1 percent growth per annum, such data is essential to address the needs of a rapidly growing, and rapidly urbanizing population.

“We have to have a plan to combat desertification and study climate change, but there has been no research about the frequency of the drought,” said Droubi.

Photographs by George Haddad and Paul Cochrane.

Unemployed workers, unite! The ILO – Arab Employment Forum

Not much on sale: the Middle East needs to create more jobs

Executive magazine

By Paul Cochrane in Beirut

How to solve the global financial crisis is naturally a hot topic, sparking innumerable talks, conferences and forums. The Middle East is no exception. But while certain countries in the region like to boast that the crisis has largely passed them by, delegates at the International Labor Organization's (ILO) Arab Employment Forum (AEF) in Beirut last month pointed out that the Middle East had a chronic employment problem way before the financial crisis rocked markets worldwide.

Growth without jobs

The forum therefore had a degree of urgency about it, given the challenges the region faces and the highest unemployment rates in the world, set to rise from an average of 9.4 percent to as high as 11 percent this year, according to the ILO. Meanwhile, aggregate growth in the region is projected to drop two percent this year, rising to four percent in 2010.

Yet growth, as Ahmad Majdalani, the Palestinian Authority's Labor Minister, suggested, doesn't always mean jobs, citing statistics of 5.4 percent growth regionally over the past three years but only 1.5 percent growth in job opportunities. Indeed, as the director general of the ILO, Juan Somavia, said in his opening address, “the unemployment rate is only the tip of the iceberg.”

Somavia went on to blast the neo-liberal model of development as a “dysfunctional financial economy” that “privileged the short-term profit objectives of financial operators. The end result was globalization without a moral compass.”

The ILO has set itself the task of rectifying the structural weaknesses of the capitalist system by being that seemingly mislaid moral compass for the workers of the world. The forum was also a platform for the ILO to plug the policy paper that came out of the International Labor Conference in Geneva in June: “Recovering from the crisis: A Global Jobs Pact.” The paper, which calls for among other things investment in the real economy, received “recognition” at the G20 summit in Pittsburgh in September, and it looks like the outcome of the AEF will also receive such coveted “recognition” by Arab governments. For while the forum had the majority of the Arab League's labor ministries in attendance, and plenty of hand-wringing in speeches, the AEF was essentially all talk.

Ministries without clout

The comments of Jordan's Labor Minister, Ghazi Shbeikat, suggested a reason why. In discussing the financial crisis he said part of the problem stemmed from the region's labor ministries not being brought into governmental discussions about the economy, and that employment was seen solely as a labor ministry issue. “The crisis is an opportunity for a change in relations, for labor ministries to make economic policies,” he added.

Shbeikat made an important point in that not enough resources are allocated to labor ministries as opposed to the ministries of economy and finance. But if the other ministries were not letting labor ministries through the door before, would they now? Perhaps the region's economy and finance ministries should have been at the forum too, as well as high-level representatives of the private sector, the very people that have influence on economic policy.

Expatriate workers

Arab trade unions were also there in force, but they have witness a prolonged erosion of their strength, their ability to rally workers and their voice to advocate labor rights. For the constructive change that the ILO wants, strong labor ministries and trade unions are essential.

Therein lies the crux of the problem: Will governments that are heavily influenced by the financial sector remove the leash that has held back labor ministries and unions? Realpolitik would suggest not, especially given union involvement in politics and the resulting strikes and demonstrations, which invariably send shivers down the spines of the more authoritarian regimes in the Middle East and North Africa.

Indeed, some of the policies that governments have implemented in response to the crisis suggest that the needed change is not afoot. For instance, Shbeikat said the Jordanian government has adopted an initiative to help expatriate workers at the Aqaba Special Economic Zone (SEZ) and Qualifying Industrial Zone (QIZ) buy apartments. While this could boost the real estate sector, what Shbeikat did not mention was that the majority of the workers at the SEZ and QIZ are expatriates, and low paid ones at that. According to a 2009 US Defense Resources Management Institute paper, the number of jobs the QIZ created from 2001 to 2004 rose by 46 percent for local workers, while expatriate workers grew 360 percent. So instead of boosting the number of local workers, which would curb unemployment, the government is advocating real estate purchases.

Measuring the crisis

Other suggestions at the forum were not so nonsensical, particularly from Talal Abu Ghazaleh, Chair of the UN Global Alliance for ICT and Development. He said the Arab world “doesn't need intellectuals, businessmen or politicians, but experts in vocational work.” Ghazaleh added that to understand the scale of the region's economic problems an Arab Statistics Agency is needed. “We cannot measure the crisis if there are no measurements.” A lot of benefit could come out of implementing these two ideas alone. As for the outcome of the forum, this will depend on whether labor ministries can punch above their weight to get the policies the ILO is advocating in place.

Syria's first air show - with no planes

Executive magazine
By Paul Cochrane in Damascus

It must rank as one of the quietest air shows in modern history. Despite even posters featuring a red devil bi-wing stunt plane pictured flying upside down, the clear blue sky was clear – no helicopters, no airplanes and no screaming jet fighters performing the aerial acrobatics typically seen at international air shows. There weren't even grounded aircraft at the exhibition, near though it was to the Damascus International Airport. The attraction that closest resembled aviation technology was an Iranian-made flight simulator tucked away in a corner.

Still, the first Syria Air Show International Aviation Technology Exhibition was a premiere event for the country. It signifies that the Syrian aviation industry has made small but significant progress over the past few years, including the launch of two private airlines that broke the state-owned Syrian Arab Airlines' (SAA) monopoly. United States President Barrack Obama even extended an olive branch to Damascus this summer, suggesting America may end sanctions against the country's aviation sector.

Nonetheless, the air show raised eyebrows. “I'm wondering: why have a show?” said Nabil Sukkar, managing director of the Syrian Consulting Bureau for Development and Investment. “Who is going to exhibit, as Syria is not buying planes?”

The post-sanctions horizon

Indeed, with American companies dominating the aviation sector worldwide Syria is unable to purchase planes due to the sanctions and instead relies on leases and Russian made aircraft. On the other hand, several company representatives said it was the potential of tapping into an essentially virgin market once the sanctions are removed that prompted them to come to the air show.

“Syria's not very commercial yet, we are here to feel out the market,” a spokeswoman for Moscow-based Sukhoi Civil Aircraft said. “We can't sell in Syria as we have 10 percent American parts in our planes; it's politics, and we don't want to jeopardize sales elsewhere. But when the sanctions are lifted [aviation companies] will flood in,” she added.

Sukhoi, however, was the only major international aviation player at the exhibit. Dominating half of the stands were Iranian aircraft, helicopter and aviation services' companies, while the rest were made up of Syrian aviation companies, the Jordanian Royal Air Force, Jordanian pilot training academies, and airport handling services from Bahrain and Egypt. Iran was over-represented as it is in the same position as Syria when it comes to aviation sanctions imposed by the US, with Syria one of the few countries Iran can viably market to.

State-owned Iranian Aerospace Industries Organization (IAIO) manufactures cargo planes, small wing aircraft and civilian planes developed in partnership with Ukrainian engineers to get around the ban on buying parts from global giants Boeing and Airbus. Asked why the company was at the air show, Amin Salari, member of IAIO's board, said, “It's the first event in Syria so we had to be here.”

Other aviation companies were of a similar mind. “We don't provide services here yet, but we hope to and are looking at the market to sell to private companies and individuals,” said Mohamad Khosravi, managing director of Tehran-based Navid Helicopter Services.

The presence of Iranian companies was indicative of the sentiment that US aviation sanctions will not end anytime soon. The Obama administration may have eased sanctions, with American companies now able to get a license to export to Syria, but so far none have. According to a well-placed source, SAA requested Airbus planes but was rejected by Washington.

“The US is basically saying they are easing exports, but the fact that SAA is going to [Russia's] Tupolev [for two new aircraft] means Syria doesn't believe this,” said Jihad Yazigi, editor of business publication Syria Report.

This was further evidenced when the US pressured Germany in late October to ground the engines of two SAA planes there were under repair, reducing the fleet to just three aircraft.

For Syria's private companies, Pearl Air (which has a 25 percent stake held by SAA) and Cham Wings, one of the air show's sponsors, they are getting around the sanctions by leasing aircraft until they can “buy American,” said one executive off the record.

“It's a double edged sword, it affects us and the owner of the sanctions. If sanctions were lifted, we'd buy more planes, technical training, services, and have deals with maintenance companies. We would buy from America, of course. Millions of dollars in deals could be made,” he said.

The potential is certainly there, with Syria attracting a record four million plus tourists this year and more airlines flying into the country.

“Services are really growing for tourism, investment and business travel - private jets and VIP lounges. Business is up for us in Syria while it is down elsewhere,” said Marwan Hijazi of Sky Aviation Services.

Photograph by Paul Cochrane

Press TV appearance: Yemen Crisis

I was on Press TV on the Middle East Today show, second part, talking about the crisis in Yemen (Sept 26).

http://www.presstv.ir/programs/detail.aspx?sectionid=3510507&id=107241#107241

Lockerbie's cloak and dagger

Commentary - Executive magazine

Earlier this month, Libyan leader Muammar al-Qaddafi's son, Seif al-Islam, told the Arab press that the case of Abdelbaset Al-Megrahi, the Libyan convicted by a Scottish court for the bombing of a PanAm flight over Lockerbie in 1988, “is over for good”.

It would seem to be over for Megrahi, returned to Libya in August on compassionate grounds – he has terminal cancer - after serving eight years in prison. But the Lockerbie issue, in which 270 people were murdered, is far from over.

On an almost weekly basis, certain British publications have been running articles that something was amiss in both the decision to free Megrahi and the investigation into the bombing.

The first major story was that oil giant BP signed major oil deals with Libya in the week following Megrahi's release. Could be coincidence, but certainly fishy. The British government of course claimed nothing of the sort. There could be no “trade for terrorists.”

BP then came out and scuppered that whole premise, saying it had lobbied the British government in late 2007 that a delay in concluding a prisoner-transfer agreement with the Libyan government could hurt a $900 million deal it had inked with Tripoli.

Then it was revealed that the new international mediator on the bloc, Qatar, had put its oar in, with the Minister for International Cooperation, Khalid bin Mohammed Al-Attiyah, pressing Scottish First Minister Alex Salmond over Megrahi in June. Scotland is in talks with Qatar to fund a $3.4 billion road bridge, major subsea electricity cables and other projects.

So yet another case of that sleazy troika of money, oil and dirty politics coming together. But that has been the case from the start. When Libya was accused of being the mastermind, Tripoli eventually paid out compensation to families affected by the Lockerbie bombing as part of a deal to lift economic sanctions. While Tripoli paid up, it refused to accept guilt. “We thought that it was easier for us to buy peace,” said Libyan Prime Minister Shukri Ghanem in a 2004 interview with the BBC.

If that wasn't curious enough – we are not guilty but here's millions of dollars so we can get rid of sanctions – then just as curious was the mainstream Western media's silence on why the Libyans were so jubilant when Megrahi touched down in Tripoli. It was seen as callous and miscalculated. Prime Minister Gordon Brown was “repulsed,” and Barack Obama “outraged”; but Libyans, publicly and privately, consider Megrahi to be innocent.

Yet if the mainstream media suggested that, this would imply a cover up and that Megrahi was framed for the bombing. Explaining all the ins and outs of a stitch-up would have been too much for a report on the 10 o'clock news. Indeed, there are a reported 600 pages of new and deliberately suppressed evidence that would have cleared Megrahi's name if the case had continued, and Megrahi not been pressured by the British government to drop his appeal in exchange for immediate release. Even the Scottish judges admitted there was a “mass of conflicting evidence”.

Let's take a few puzzling parts of the investigation. A “key secret witness” at the original trial, who claimed to have seen Megrahi putting the bomb on to the plane at Frankfurt, was exposed by the defense as a CIA informer that would have been paid up to $4 million if Megrahi was convicted. Then there is the circuit board and bomb timer “found” around Lockerbie and proved by a forensic scientist to have no trace of an explosion on it. But the crucial, damning evidence that put Megrahi away was the clothes found in the wreckage of the plane. A Maltese store owner claimed he sold Megrahi the clothes, yet he gave a false description of Megrahi in 19 separate statements and couldn't even recognize him in the courtroom.

The whole saga of the actual bombing, the reasons behind it and the trial itself– held in Holland without a jury – would make for a good Hollywood thriller. The Lockerbie bombing is a story of double crosses, bribed and dodgy witnesses, government corruption, CIA rogue agents, drugs for hostage deals in (where else?) Lebanon, and tampered evidence. It is also one about the ongoing 'war on terror,' and how geopolitical strategic interests get in the way of real justice.

Qaddafi junior saying that the issue is over is somewhat true for Libya. The country has successfully come in from the cold and now part of the club again; Megrahi is home, guilty in the eyes of the Scottish courts and much of the West but considered innocent in Libya. As for finding out 'whodunnit', the Lockerbie case is yet another file in that ever growing pile of unsolved, politically charged cases of murder and mayhem.

PAUL COCHRANE is the Middle East correspondent for the International News Service

Somalia: Piracy, Ransom and Wads of Cash

EUNAVFOR ship Brandenburg escorts the MV Hansa Stavanger in the pirate ridden waters off Somalia

By Paul Cochrane in London and Beirut

Executive Magazine

The financial cost of piracy off the Horn of Africa has surged over the past year as the pirates become increasingly audacious, better funded and equipped, and able to extend their reach in the high seas. From vessels warned to keep 50 nautical miles off the Somali coast a few years ago, pirates are now boarding ships as far away as the Seychelles. The area the European Union Naval Force (EUNAVFOR) patrols is some 9 million square kilometers, almost the territorial size of the United States of America.

Just as the range of pirate operations has increased, so has the ransoms being paid out, rising from $250,000 to an average of $1.25 million in 2008. According to the London-based International Maritime Bureau (IMB), there were 111 pirate attacks off the Horn of Africa in 2008, of which 42 were successful hijackings. In the first half of 2009 there have been 130 incidents.

The situation turned into what was internationally deemed 'a crisis' last year, prompting the EU to establish its first naval security mission - consisting of 12 ships - in 2008, while Russia, the US, China, India and other nations put to sea to protect their maritime vessels. In a rare show of international solidarity, the armada patrolling the Gulf of Aden is coordinating together to curb the scourge of piracy.

But covering the costs of bases in Djibouti, Kenya, Bahrain (the US base), Dubai and elsewhere runs into the tens of millions. The operating cost of EUNAVFOR alone – naval vessels, aircraft and military personnel costs aside – is $12 million a year.

The cost to the shipping and insurance industries however is far higher. Last year, pirates collected around $30 million in ransoms. Cyrus Mody, Manager of the IMB, said that figure doubles when the legal fees, negotiators, delivery of ransoms and associated costs were added. “The amount paid out is pretty much equal to what the ransom is,” he said.

The cost to insure ships transiting the Gulf of Aden is estimated at $20,000 per ship per

voyage, excluding injury, liability, and ransom coverage. A year ago, the cost of the additional insurance

premium was only $500, according to maritime newspaper Lloyd's List. It is estimated that the increased cost of war risk insurance premiums for the 25,000 ships that ply these waters – which includes an estimated 11 percent of the world's petroleum - could reach as much as $400 million.

Keeping to the designated shipping lanes in what EUNAVFOR calls “group transit” of several ships, and paying up if captured, would seem to be the only options for the world's shippers. The alternative of avoiding the Gulf of Aden and the Suez Canal is simply too expensive and time consuming.

According to the US Department of Transportation, to re-route a tanker from Saudi Arabia to the USA via the Cape of Good Hope adds approximately 2,700 miles to the voyage and some $3.5 million annually. A routing from Europe to the Far East via the Cape, rather than through the Suez Canal, would incur an estimated additional $89 million annually, which includes $74.4 million in fuel and $14.6 million in charter expenses. In addition, the rerouting would increase transit times by about 5.7 days per ship.

Pirate dens

The heightened international naval presence off the Horn of Africa has had a direct impact on curbing piracy. “The number of attacks has not decreased but the number of successful attacks has gone down, primarily because of the naval presence,” said Mody.

EUNAVFOR's specific mandate protects ships of the World Food Progamme. Commander John Harbour of the British Royal Navy and chief media spokesman for EUNAVFOR, said the rate of success was one ship hijacked for every three attempts, whereas a year later it is one in nine successful pirate attacks. “Every single day there is an attempt and everyday we thwart that attempt. And even when there is not a direct attack, we see many skiffs with armed men,” said Harbour.

A knock-on effect however of the naval presence has been the ramping up of the ransoms demanded by the pirates and heightened investment in faster speed boats, mother ships to refuel and launch skiffs on the high seas, and better weaponry.

“When the navies united under an Aden task force, the pirates needed to be more audacious. Ransoms then rose from $250,000 to $1.25 million,” said Simon Davies, a former detective and specialist investigator with Britain's Scotland Yard and a consultant on financial crime and piracy in East Africa. “That [ransom] pie graph is getting more and more cuts in it as the money is shared around. There is money for bigger engines and dhows to ply the sea carrying extra oil,” he added.

The pirates run what Mody called an “extremely business orientated” operation, similar to many organized crime syndicates around the world. The three to five major pirate groups that operate from bases on the Somali coastline are either self-funded or financed by external investors.

Via watchers in the likes of Dubai, the pirates are informed of when a ship leaves port and what cargo it is carrying, or information is easily garnered from reading the shipping news published in local newspapers. A crew of armed men on speed boats or on a mother ship then head out on the high seas to track down potential targets. If successful, the pirates capture a vessel and sail it to Somalia. There, said Davies, the pirate crew is replaced with another crew for negotiations to take place. The onus is then on the owner of the ship and insurance companies to cough up the ransom.

Due to the frequency of attacks ship owners have set up insurance cartels, with many owners paying into a pool that will then pay out in the case of a hijacking. Then the separate insurers of a ship's cargo, hull, and other forms of insurance get involved.

“If say a cargo of sugar costs $50,000, the insurer pays 10 percent of the ransom, the owner 15 percent, hull insurer 15 percent. If maybe $150,000 short, the cartel of ships pays up,” said Davies.

Then the drop off – usually in small denomination US dollars - takes place. Back in 2005, Mody said money exchanged hands in either airport lounges or hotels in Dubai. “A phone call was made and the vessel released. In 2008, the money was taken by security companies by boat to the captured vessel. This has been taken a step further. To make it safer for delivery, the money is now being air dropped on the vessel or nearby. This is how the delivery has progressed, as if you have a security person on-board he will automatically become a threat to the pirates. And sailing in with the money from say Djibouti or Kenya, you need to hire a crew, and the crew know there is $1 million on-board...The air drop has made it cheaper and safer.”

Getting rid of the loot

One spin off from the piracy business has been for sectors catering to the pirates, from arms dealers to boat outfitters, car dealers, and other enterprises. Business has also boomed catering to the hostages. “With Europeans captured, there is a burgeoning restaurant business [in Somalia] to cater to Western palates,” said Davies.

Mody said that living standards are going up due to “lavish spending by pirates, which is encouraging local industry to build up, and flashy new cars to be driven around because of the new money.”

While part of the loot is divvied out among the pirates, some is earmarked for investment in the next venture. But if the ransom money doesn't stay in Somalia, where does it go? There have been claims that the money is laundered in Dubai – a claim the Emirate has vigorously denied – and via Beirut. Mody said quite a lot of money gets siphoned into Kenyan real estate, where there has been a marked increase in Somalis buying properties in neighborhoods such as Eastleigh in Nairobi. Davies said money may also be laundered or invested in Iran, Yemen and the Emirates.

Indicative of the pirates' business savvy, there has been minimal violence towards captured crew members. “It is a business for them and any violence towards the crew will affect this business model. If violence increased, this would change the dynamic, and that could be a turning point in how nations look at piracy. Keeping that in mind, having a link to terrorism is also not in the best of their interests. If a link is established, there would be a very serious clamp down by certain external interests,” said Mody.

Photograph courtesy EUNAVFOR

Dangerous Air Maneuvers: Aviation Sanctions Have Ended for Syria, the Embargo Should Also End for Iran

Commentary - Executive Magazine

By Paul Cochrane in Beirut

Sanctions are one of those political issues that can make amiable dinner conversation turn unpleasant, as the battle lines are drawn down the table between those for and against. Sanctions have certainly had mixed success, starting with the first recorded case of a trade embargo some 2,400 years ago between Athens and neighboring Megara. The embargo failed and sparked a war.

Sanctions have never worked since then, argue some. That is too reductionist may come the reply, while others prefer to pick-and-mix examples from embargoes through the ages to argue their case. The more pragmatic approach would be not whether sanctions “work,” but when and under what circumstances.

Sanctions that are meant to oust a dictator but result in the deaths of thousands of innocent civilians – Iraq for instance – can be considered counter-productive. Sanctions preventing a particularly nasty regime from getting hold of say chemical weapons on the other hand would appear desirable and effective.

Indeed, in a report on the effectiveness of sanctions by the Washington DC-based Institute for International Economics, out of 211 cases from World War I to 2000, there was success in only 38 percent of sanctions. Some work, others clearly don't.

Sanctions on the aviation sector can fall under the questionable effectiveness category. Meant to impede a country's access to military aviation parts is understandable. For commercial aircraft it ranks as dangerous. In the Middle East, this applies to Iran and until July, Syria, when the United States ended sanctions on the export of goods to the Syrian aviation industry. Sanctions were first imposed against Syria in 1984 and tightened in 2004 by the Bush administration.

Aviation sanctions have long been considered a risk to air safety, with airlines that own American and European manufactured aircraft (Boeing and Airbus) unable to access spare parts, navigation equipment and upgrade technology in line with international safety standards. A report prepared for the United Nations' International Civil Aviation Organization has made this clear.

The dangers for aircraft and passengers was underscored in July when two Iranian commercial planes crashed within 10 days of each other, killing 184 people. Iran claims the sanctions were to blame, and Foreign Ministry spokesman Hassan Qashqavi came out to say the aviation sanctions that have been in place since 1979 by the West, “signifies a violation of human rights.”

While no Western lives were lost in the two crashes, it may only be a matter of time before citizens of the primary sanction imposer, the US, are also 'collateral damage,' whether on board a doomed aircraft, or having a picnic when a badly serviced plane drops out of the sky.

As Flight Commander General Hazim Al Khadra, Director General of the Syrian Civil Aviation Authority told me in Damascus a few years ago: “Sanctions are a big problem because US aviation interferes with the aviation industry, the spare parts for commercial airlines in particular, which maintain the safety of passengers. And these passengers aren’t only Syrians, but also Europeans, Americans and Asians.”

Perhaps there would have to be the rather ironic situation of a plane that lacked the spare parts or proper guidance system accidentally crashing into a US embassy or military facility, for Washington to truly wake up to the hazards of unsafe aircraft.

After all, it is curious that the Air France jet that crashed off Rio de Janeiro, and the US Airways plane that ditched into the Hudson River in New York earlier this year, garnered extensive media reports about aircraft safety, yet the aviation sanctions against Syria and Iran have not. Unsafe aircraft flying around the world are not safe for anyone, whether on the ground or in the air. Indeed, I had heard of people wanting to avoid flying altogether because of the Air France crash.
The US decision to end the sanctions against the Syrian aviation sector – which has rapidly opened up in recent years to include a handful of private airlines – is a step in the right direction. But the sanctions against Iran, and its aviation sector, still continue. In fact, it looks like the sanctions are going to be tightened even further, with America proposing a ban on Iranian airplanes from landing in Western airports, along with banning insurance on trade deals with Iran, and the imposing of sanctions on any company that trades with the Islamic Republic.

While the heightened sanctions are meant to put further pressure on the Islamic Republic to change it ways, the policy should be scrutinized as to what is effective and what is not. The sanctions related to the curbing of Iran's nuclear aspirations and funding to groups like Hamas and Hizbullah is a political minefield, with strong arguments from both sides of the political spectrum as to whether such a policy is working or not. Civil aviation however should be in a special category. It is a human right for people – civilians - to be able to fly and travel freely, and moreover, safely wherever they want.

Saudi Arabia's oil policy

Petroleum Minister Ali Al Naimi represents the oil technocrats and the interests of the king and the estimated 7,000-25,000 members of the House of Saud

By Paul Cochrane for Petroleum Review

With a quarter of the world's reserves Saudi Arabia is the most influential member of the Organization of Petroleum Exporting Countries (OPEC) and able to put an extra two million barrels of oil on the international markets within days. But the kingdom is notoriously opaque about its oil policy and reserves, with decisions made at the highest level by the ruling House of Saud. It is an elite that even the White House appears to have minimal influence over, and one that is keen to ensure its own survival in the face of growing domestic concerns and a changing geopolitical environment.

Since oil company Saudi Aramco was fully nationalized in 1980, the kingdom's oil policy has been relatively clear and consistent. Based on a low price band (between $18-$25 a barrel), Saudi aimed to maintain price stability through excess spare capacity, thereby avoiding price spikes, and ensuring the long-term profitability of its large reserves. But from 1999, the Kingdom's oil policy started to change course as internal problems started to mount: rising unemployment, a population that has grown 300 percent in 30 years, and an oil dependent economy seriously in need of diversification.

To boost revenues, Riyadh in conjunction with OPEC reigned in production to lower oil inventories. In a period of surging global demand driven by the emerging Asian economies, oil prices steadily rose, pushed further by speculation. As a result of this boon, the kingdom's accumulated some $500 billion in foreign reserves and was able to dismiss the Bush administration's calls for heightened oil production. But the global financial crisis in late 2008 caused oil prices and demand to drop. Pressure was again put on Riyadh, this time to keep prices low to stimulate economic recovery.

“Why did the Saudis let the price of oil go up and up, when they of all people would realize there would be a correction?” said Simon Henderson, director of the Gulf and Energy Policy Program at the Washington Institute for Near East Policy. “As the swing producer it would be left to Saudi leadership to get OPEC into line afterwards which, frankly, they have managed to do to everyone's surprise.”

In June, Saudi Aramco increased output to 12 million barrels per day (bpd) after three new projects came online, at the Nuayyim, Khurais and Shaybah fields. With an estimated 4.5 million bpd in spare capacity, Saudi Arabia's OPEC output is 8 million bpd.

The financial crisis has presented Saudi Arabia with major challenges. High oil prices are needed to fund economic diversification and infrastructure projects, while at the same time the country has a vested interest in the recovery of the global financial system. Equally, Saudi Arabia is aware of the growing importance put on alternative energies, which could in the long run lessen the West's dependence on the Kingdom, changing a relationship that since 1945 has been based on security in exchange for oil. Furthermore, given that the Saudis effectively subsidize oil sales to the US through discounted transportation costs, the Asian markets – especially India and China – are becoming increasingly attractive given their geographically proximity and willingness to pay international market prices.

Cementing the foundations of a long lasting relationship: King Saud with President Roosevelt in 1945

“Surging demand from Asia will almost certainly divert supplies east and unless Saudi supply keeps growing, it could mean a big reduction to the USA, unless we start paying a security premium, which I suspect China would top,” said Matthew Simmons, Chairman of energy consultancy Simmons & Company in the US, and author of “Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy.”

Saudi Arabia has worked particularly hard to foster warm relations with China, investing in refineries and the Chinese economy. “China is a secure market for Saudi Arabia, and will be in the future, so it is very clear it's not just exporting crude, but upstream and downstream activities are also being explored,” said Othman Cole, research associate at Cambridge University's Centre for Energy Studies in Britain.

This shift eastwards has been observed by OPEC. “The last full revision of the OPEC Masterplan in 2003-2004, estimated that by 2050 they didn't expect any Gulf OPEC member to be selling oil to the US. The entire Gulf market has been moving east for sometime,” said Kent Moors, an energy policy expert at Duquesne University in the US.

The current, and indeed long term, significance of the Asian markets was made crystal clear by King Abdullah's first overseas visit since ascending the throne in 2005. It was to Beijing, notably not to Washington. Next on the monarch's itinerary was New Delhi.

Saudi Arabia has been increasingly looking to the Eastern markets: King Abdullah with Indian Prime Minister Manmohan Singh in New Delhi, 2005

“Asia is a growing market for Saudi, and how that re-balance will effect the US influence and relationship is still unclear,” said Cole.

Any change in bilateral relations has not yet been reflected in current US foreign policy towards Riyadh, demonstrated during President Barrack Obama's visit in June.

“Relations are good between King Abdullah and Obama, that was the surprising thing, for Obama to have bonded with an Arab potentate with global views very different from European and US perspectives,” said Henderson. “Logically, Obama should have said, for God's sake, keep oil prices down, but gave them a pass, which I thought was a mistake.”

What is not clear is if the US and Saudi Arabia might actually be seeing eye-to-eye on the current OPEC price band of $75-$80 per barrel. Simmons thinks the West is tacitly supportive of higher oil prices. “Our government leaders now seem to understand that higher prices open all sorts of doors, such as creating alternate energy sources and helping create economic prosperity in the Middle East,” he said.

Such a policy would be to kingdom's advantage. “I suspect Saudi would love to see prices exceed $200 a barrel to pay for the seven new industrial cities and other critical expenses to modernize a kingdom soon to be 40 million people,” Simmons added.

Oil policy is decided by what Daryl Champion, author of “The Paradoxical Kingdom: Saudi Arabia and the Momentum of Reform”, said was an “an inner circle of elite decision-makers centered around the king and key princes.”

Within this elite, Simmons said two camps are emerging in regard to oil reserves and what that could mean for oil prices.

“One, as best expressed by many Aramco and Petroleum Ministry officials, is that none of the great fields have many problems and will last for many more decades. The other end of spectrum worry that these same fields are at risk of being overproduced and favour a new era of field-by-field production flow transparency. If they embraced transparency, I suspect the results would send oil prices far higher, benefiting the Kingdom,” said Simmons.

While Petroleum Minister Ali Al Naimi represent the oil technocrats, he also addresses the interests of the king and the estimated 7,000-25,000 members of the House of Saud. How a change in leadership will impact on policy when King Abdullah, aged 84, passes away is not evident. With Crown Prince Sultan in declining health, interior minister Prince Naif, 74, is considered next in line for the throne after being recently appointed second deputy prime minister.

Currently, Riyadh appears to be hedging against changes in the energy market, with Al Naimi acknowledging at a summit in Houston in February the need for nuclear power and renewable energy, adding that in the future Saudi Arabia would export the same British Thermal Unit (BTU) equivalent in electricity from solar power as present crude oil levels. The kingdom is also actively moving beyond the production process. “Saudi Arabia and Kuwait have put aside between $12 billion and $15 billion for controlling future energy from the Caspian region,” said Moors, “moving from the traditional approach of controlling the process, facilities and refineries, to being gate keepers to access and future projects. There has also been an increase of Saudi money to control tanker production facilities.”

But while Saudi Arabia is secretive about its oil policy and reserves, the kingdom does not necessarily have a firm grasp over where the oil markets are going.

“Many people assume senior Saudi officials have some magic crystal ball on oil, but they are just as puzzled as the folks at the International Energy Agency or [the US'] Energy Information Administration and most of everyone’s data comes from 'guesstimates'. The blind are really leading the blind,” said Simmons.