February 1989, Page 20

Trade and Finance

By John T. Haldane

Egypt Discovers More Oil in Gulf of Suez

A series of discoveries over a wide area of the Gulf of Suez has drawn attention again to the still considerable potential of Egypt's premier oil source. The Petroleum Economist reports that the main Gulf of Suez producer, Gulf of Suez Petroleum Company, has made a "significant" discovery of crude at the veteran El Morgan field. Development drilling is planned to determine the size of the reserve.

Further down the gulf, an Agip subsidiary, International Egyptian Oil Company, has found oil at al-Ashraflya, north of Hurghada, a few kilometers from the gulf's west coast. Several routes are being considered, for a possible production start-up in mid-1991.

The final discovery was made in Conoco's Hurghada concession at the southern extremity of the gulf where its waters meet those of the Red Sea. Although Egypt has begun tapping substantial gas associated with oil further up into the gulf, Conoco appears to have made the first substantial discovery of a substantial natural gas source in these waters.

Britain and Saudi Arabia Sign Offset Agreement

Britain and Saudi Arabia have signed a $1.8 billion agreement providing for British investment in the kingdom to offset part of the $30 billion arms packages of 1986 and 1988. The offset understanding relates to the Al Yamamah-1 and Al Yamamah-2 military projects, one of the largest military expansion programs outside the United States. British sales will include Tornado fighter-bombers, Hawk advanced trainers, as well as helicopters, minesweepers and base facilities.

The offset agreement is believed to be patterned on an earlier Saudi offset pact with the United States signed after the award of the $1.3 billion contract to build the ground control network for the kingdom's American built Airborne Warning and Control System (AWACS) aircraft. Under that agreement, Washington promised to offset 35 percent of the technical portion of the contract with investments in Saudi Arabia. What proportion Britain has agreed to offset has not been announced, but it may well be worth over $2 billion over a 10-year period. Riyadh is expected to invest a similar amount.

Britain has surpassed the United States as Saudi Arabia's major arms supplier. The value of the Saudi-British deals equals the total US arms sales and military construction contracts over the last 10 years.

Slow Growth in the Two Yemens

The 1988 Annual Report of the World Bank advises that the People's Republic of Yemen and the Yemen Arab Republic face serious economic problems. In the former, following the significant fall in economic activity in 1986, heavy expenditures on reconstruction and replacement contributed to a modest increase in real GNP despite a decline in workers' remittances. Bank experts estimate that economic growth is likely to remain moderate, with workers' remittances declining further, and pressure on the deteriorating fiscal position likely to continue. There is an urgent need for the government to initiate reforms to reverse current economic trends, including programs to diversify the economy, promote exports, and restructure public expenditure.

The economy of the Yemen Arab Republic has slowed considerably since the early 1980s, a consequence of government efforts to control expenditures and uncontrollable factors such as the effects of droughts through 1984 and 1985, a severe earthquake in late 1982, and a deterioration in external resources. However, the government now has implemented a program to restrain investment and recurrent expenditure, increase tax revenues, and reduce imports. Oil revenues will begin accruing to the treasury for the first time in 1988, based on oil discoveries made in 1984.

Israel Forced to Lift EC Trade Barriers

Tel Aviv has agreed to phase out a number of controversial import barriers which have been the subject of repeated protests by the European Community, Israel's most important trading partner.

The principal areas of contention were an import equalization levy, the "Tama tax," and the exemption of Israeli manufacturers from a purchase tax levied on imported raw materials and semi-finished goods.

The agreement follows an October pact which provided Israel with $73 million in European investment bank loans and some tariff cuts. The latter are vital to Israel if it is to maintain its volume of exports to the EC in the face of sharper competition from rival producers in Spain and Portugal.

API Issues White Paper

The American Petroleum Institute has issued a report entitled Energy Security White Paper: US Decisions and Global Trends which predicts increasing US vulnerability to oil shortages. A few highlights of the 117 page research paper follow.

Imported oil makes up 43 percent of the oil that the United States uses, up dramatically from 31 percent only three years ago. This is the highest in eight years and nearing the record 48 percent of 1977.

Increasing world reliance on OPEC oil—particularly from the Middle East—strengthens the relative power of these countries to control world oil prices. The point is not whether Middle Eastern OPEC nations will cut off or reduce supplies, but simply that they have the ability to do so. The history of the last 15 years suggests that price shocks and supply interruptions are increasingly probable as demand rises. Then any number of unpredictable developments around the Persian Gulf could directly, swiftly, and critically affect oil supply.

Western industrial nations today are highly reliant on large volumes of oil from the Middle East. The United States is going to be importing large quantities of oil during the 1990s. Imports inevitably will pass the 50 percent mark and, if continued low prices prevail, could climb past 65 percent. The issue is not whether the US will be dependent on OPEC, but how dependent.

Even if non-OPEC production should remain steady, all additional oil demand, whether in the United States or elsewhere, can be met only by OPEC countries, particularly the states in the Persian Gulf. And if non-OPEC production falls, then even more world demand will be shifted toward OPEC. All told, OPEC now possesses about 75 percent of the world's oil that can be produced at today's oil prices. According to the Oil and Gas Journal, at the beginning of 1988 OPEC countries had proven oil reserves of 670 billion barrels.

Oman Recovering From Recession

Oman's economy is recovering from the severe recession into which it plunged with the fall in the price of oil in 1986. Oman's oil earnings in 1987 were about $3.3 billion, somewhat higher than the previous year's $2.7 billion. Oil revenues are the key to Oman's financing, since they account for 80 percent of total revenues. Government officials expect the gross domestic product to grow by 2.5 percent annually for the rest of this decade.

Government efforts to gain control over the budget are proving successful. Expenditures are dropping, and the deficit is shrinking. Oman's foreign debt is regarded as manageable, and its credit rating remains good.

Planners promoting the diversification of Oman's economy hope that a downturn in trade and construction will stimulate Oman's private sector to undertake investment in agriculture, fishing and light industry.

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.