Last week, the New York Times reported that the ability of oil to hover around the $50/barrel mark for the past several months may have had less to do with the ability of OPEC to put an effective floor on the price of oil (although Roger Diwan of PFC Energy did attribute at least some of the cause of oil's remarkable stickiness to this) and more to do with the return of speculators to the market.
Before I launch all the way into this post, I want to be clear that speculation in commodity markets has been a long standing fact of life. Everyone from oil producers to farmers growing soy beans to airlines to power companies have traded in futures as a way to hedge against price disruptions, whether demand or supply driven. Before 2000, however, commodities were almost always traded by producers and end users through official exchanges, such as NYMEX or the Chicago Mercantile Exchange (now technically defunct.) In 2000, Enron successfully lobbied Congress to remove the Commodities Future Trading Commission's (CFTC from hereon in)ability to regulate over the counter trades. CFTC's ability to regulate the commodities markets was further weakened by its 2006 decision to allow a consortium of oil and financial firms operating in London under the moniker of "Intercontinental Exchange" to open terminals in the US to trade commodity futures. (The CFTC had no regulatory authority over ICE since it was based in London.) Here's a good summary of the regulatory changes that opened the door for wider participation in commodity trading. Remember, all the arguments that apply to oil also apply to most other commodities, such as agriculture in many cases.
Railing against "speculation" (I'll define it hear as commodity trading that is undertaken by non-end users or producers, such as institutional investors and hedge funds to make things a bit easier) became a favorite rant of OPEC last summer even though it was widely dismissed by most analysts and even the IEA at one point. That is, until the CFTC woke up to something fishy going on and formally launched an investigation into market manipulation in commodity markets. That investigation is still pending.
Even if all of the trading was above board, as I blogged at Open Salon last week (here's a link to the full post), there is in my mind something fundamentally wrong about allowing non-end users to make tremendous amounts of money off of commodity markets. At the risk of being unsympathetic to those who took a bath in the market recently, there is a significant difference between the paper losses of equity investors and end consumers of crude oil and agriculture (i.e., all of us who eat and have to rely on transportation everyday.) Speculation in food and fuel drove families of all race, stripe, and economic levels into potentially disastrous economic circumstances.
This fact has not been lost on the powers that be. In Feb, the Senate referred the "Prevention of Excessive Speculation Act" to the Committee on Agriculture, Nutrition, and Forestry. The bill looks to restore some regulatory authority to the CFTC by essentially empowering the group to report on OTC trades. In March, UNCTAD issued a report that called for the end of excessive speculation in commodity markets citing the devastating consequences of the sharp rise in food and fuel prices last year. Finally, OPEC, in a joint statement with consuming countries in Asia, called for greater oversight in commodity markets to prevent the kind of surge in oil prices that the world witnessed last year.
Sounds good if it weren't for the Times article. Sure, oil prices aren't close to $150/barrel like they were last summer, but $50/barrel also doesn't seem to reflect market realities with demand down and inventories growing. What we need now, before we see another run up in prices, is transparency in the market. Who is trading and why. Until then, most of us are left to rely on the B.S. that passes as market analysis these days. Analysts with big banks and private advisory groups will go on about "market fundamentals" until the cows come home but none of it equates with what's really going on in the market these days. Until transparency happens, we can't be sure $50/barrel is anymore "fair" than $150.
Monday, April 27, 2009
Wednesday, April 22, 2009
The crisis spreads
News of SABIC's losses in the first quarter yesterday (its first loss since 2001) weighed heavily on Gulf stock markets yesterday. While not surprising, the announcement serves as confirmation that even regional stalwarts not directly connected to oil, real estate, or finance- the three industries in the Middle East hit the hardest by the global downturn- are beginning to feel the impact of the slump.
Most regional governments have been prosaic about the matter- listing the loses and expecting recovery sometime in the latter part of this year, maybe next. Still, the pace of bad news or announcements of moderation remain a bit troubling for a region that was only just beginning to hit its stride. Today's Business Middle East led with a banner headline that said UBS expects Dubai real estate prices to decline by 70 percent. Capitala, a JV between Mubadala and Capitaland, Singapore, is going to concentrate on low income housing and not take on new projects. Victims of DAMAC scams in Egypt are surfacing, adding to the list of possible indictments from Dubai real estate magnates.
Sure, issues like these are happening all over the world so why should the Middle East be any different? I think I am most troubled by the crisis spreading so deeply and completely here because this is a region who had until recently resisted wide-scale reform and openness. Not a particularly great time to be bitten by globalization. Perhaps having spent too much time studying the Middle East, I would like to see them succeed and not return to the statist models that kept regional economies and governments barely afloat. I guess we'll just have to wait and see how deeply faith in a globalized system is shaken.
Some more interesting articles along these lines-
Diversified Economy Can Pay Strong Dividends
Dubai Chamber of Commerce and Industry Report, April 2009
Lastly, for anyone with access to FT archives, I'd recommend an article published on the 15th of April called "The Price of Globalization"
Most regional governments have been prosaic about the matter- listing the loses and expecting recovery sometime in the latter part of this year, maybe next. Still, the pace of bad news or announcements of moderation remain a bit troubling for a region that was only just beginning to hit its stride. Today's Business Middle East led with a banner headline that said UBS expects Dubai real estate prices to decline by 70 percent. Capitala, a JV between Mubadala and Capitaland, Singapore, is going to concentrate on low income housing and not take on new projects. Victims of DAMAC scams in Egypt are surfacing, adding to the list of possible indictments from Dubai real estate magnates.
Sure, issues like these are happening all over the world so why should the Middle East be any different? I think I am most troubled by the crisis spreading so deeply and completely here because this is a region who had until recently resisted wide-scale reform and openness. Not a particularly great time to be bitten by globalization. Perhaps having spent too much time studying the Middle East, I would like to see them succeed and not return to the statist models that kept regional economies and governments barely afloat. I guess we'll just have to wait and see how deeply faith in a globalized system is shaken.
Some more interesting articles along these lines-
Diversified Economy Can Pay Strong Dividends
Dubai Chamber of Commerce and Industry Report, April 2009
Lastly, for anyone with access to FT archives, I'd recommend an article published on the 15th of April called "The Price of Globalization"
Tuesday, April 21, 2009
Transparency- the Endless Work in Progress
A few recent interviews by local leaders in Egypt and UAE have confirmed for me how far even the region's most promising economic stars still have to go before truly reaching the "big league." Transparency and honesty before the public is something that most Arab rulers just don't get and, IMHO, it's an issue that will hold them back from further economic development even more than their lack of or progress towards democracy. Perhaps even sadder than the interviews themselves was that both Shaykh Muhammad bin Rashid of UAE and Gamal Mubarak of Egypt gave the interviews with the explicit idea that they [the interviews] were moves towards transparency. But in today's world, investors and consumers don't want to hear platitudes about local markets- they expect rulers to own up to problems and scope out solutions. Talking for the sake of talking does little these days.
UAE first since it's perhaps the more egregious case. On Sunday, Shaykh Mohammad sat down for an online interview (linked here is only part 1 of the interview) about the current global crisis and its impact on UAE through his website, UAEPM.ae. Billed as a landmark move in transparency, the questions and answers were all clearly scripted and carefully vetted. When asked about the crisis in Dubai, the questioners (attributed as members of the media) were always careful to lay the blame for the bad press UAE was receiving on the doorstep of "foreign media." Case in point- "Foreign media are reporting on "the bubble that burst". What would you tell the people who are endorsing this view?" Media reporting was also referred to in the questions as the "media campaign" with the clear implication being that a campaign was unfair. Shaykh Mohammad certainly didn't shy away from any questions and was, as to be expected, fairly effusive in his praise for Dubai and his country in general. He acknowledged the downturn but was upbeat time and again about his sense of the future.
The most offensive part of this exercise was not that Shaykh Mohammad didn't "own up" to any of his mistakes in developing Dubai or that he failed to acknowledge the deep hole his emirate was left in thanks to his ambitions. Overzealous honesty by those in charge is usually a bad thing- just ask Tim Geithner. More offensive was that the Shaykh's handlers believed that he could only handle the softest of softball questions. Even those that were designed to be tough were fluff- "Dubai has been recently criticised for its development strategy in the light of the global financial crisis. How do you perceive this campaign and how are you dealing with it?" And, "The media campaign has focused on pointing that Dubai is facing an economic crisis threatening the foundations of its economic development. What is the actual impact of the crisis on Dubai economically and socially?" If it's a scripted environment, let at least one question be hard hitting. Worse still, apparently believing this little show of ankle was too much for most people and might undermine confidence in the UAE, the interview was followed by a "reaction" piece in one of Dubai's daily business papers. The reactions were from local businessmen, explicitly in the pay of the Dubai government or probably paid off by MBR's office given the level of effusive praise for the exercise. It reminded me of the bad old days of the Saudi press when the King or Al Saud couldn't pass a dumpster without some rag commenting on how wonderful they were.
Second on the hit list is the interview Gamal Mubarak gave to the Wall Street Journal that was published yesterday. As a rule, I generally respect the quality of reporting out of the Journal but talk about buying into the demagoguery of the Mubarak family. The article prominently notes that Gamal once worked for Bank of America and attributes most, if not all, of Egypt's recent economic success to his leadership. Gamal acknowledges some recent weakness and the forecasted drop in GDP growth to 4 percent from recent highs of seven-plus percent growth, but he glibly brushes off criticism of the country's turnaround, including the lack of impact of growth on Egypt's lower classes, noting that there has been "some trickle down" effect. Of course, he gives no actual examples of this. Gamal also dismissed questions about his succeeding his father saying that such discussions as "good media stuff devoid from the issues of the day." In total, the article served as a ringing endorsement of Gamal and gave little, sometimes no, acknowledgement to the hard work and occasional setbacks of the country's prime minister, widely considered the architect of the country's turnaround.
Perhaps Roula Khalaf encapsulates this backwards/forwards movement of Arab leaders in her article in today's FT on government censorship of the media. The article focuses on a new media law in UAE that has yet to be signed by the country's ruler, Shaykh Khalifa. While liberalizing some aspects of the current UAE law on media, a central tenant of the new law- that is, that information that is deemed harmful to the country's economy or that disparages national leaders is off limits- is causing an uproar even among the local media outlets. (Clearly not among those who responded to MBR's interview, however.)
Learning to work with the media and developing a thick enough skin to tolerate the occasional critical article or editorial is a fundamental lesson that most Middle East leaders have yet to master. Until they do, sadly, most of the real progress and growth achieved by regimes will constantly be second-guessed.
UAE first since it's perhaps the more egregious case. On Sunday, Shaykh Mohammad sat down for an online interview (linked here is only part 1 of the interview) about the current global crisis and its impact on UAE through his website, UAEPM.ae. Billed as a landmark move in transparency, the questions and answers were all clearly scripted and carefully vetted. When asked about the crisis in Dubai, the questioners (attributed as members of the media) were always careful to lay the blame for the bad press UAE was receiving on the doorstep of "foreign media." Case in point- "Foreign media are reporting on "the bubble that burst". What would you tell the people who are endorsing this view?" Media reporting was also referred to in the questions as the "media campaign" with the clear implication being that a campaign was unfair. Shaykh Mohammad certainly didn't shy away from any questions and was, as to be expected, fairly effusive in his praise for Dubai and his country in general. He acknowledged the downturn but was upbeat time and again about his sense of the future.
The most offensive part of this exercise was not that Shaykh Mohammad didn't "own up" to any of his mistakes in developing Dubai or that he failed to acknowledge the deep hole his emirate was left in thanks to his ambitions. Overzealous honesty by those in charge is usually a bad thing- just ask Tim Geithner. More offensive was that the Shaykh's handlers believed that he could only handle the softest of softball questions. Even those that were designed to be tough were fluff- "Dubai has been recently criticised for its development strategy in the light of the global financial crisis. How do you perceive this campaign and how are you dealing with it?" And, "The media campaign has focused on pointing that Dubai is facing an economic crisis threatening the foundations of its economic development. What is the actual impact of the crisis on Dubai economically and socially?" If it's a scripted environment, let at least one question be hard hitting. Worse still, apparently believing this little show of ankle was too much for most people and might undermine confidence in the UAE, the interview was followed by a "reaction" piece in one of Dubai's daily business papers. The reactions were from local businessmen, explicitly in the pay of the Dubai government or probably paid off by MBR's office given the level of effusive praise for the exercise. It reminded me of the bad old days of the Saudi press when the King or Al Saud couldn't pass a dumpster without some rag commenting on how wonderful they were.
Second on the hit list is the interview Gamal Mubarak gave to the Wall Street Journal that was published yesterday. As a rule, I generally respect the quality of reporting out of the Journal but talk about buying into the demagoguery of the Mubarak family. The article prominently notes that Gamal once worked for Bank of America and attributes most, if not all, of Egypt's recent economic success to his leadership. Gamal acknowledges some recent weakness and the forecasted drop in GDP growth to 4 percent from recent highs of seven-plus percent growth, but he glibly brushes off criticism of the country's turnaround, including the lack of impact of growth on Egypt's lower classes, noting that there has been "some trickle down" effect. Of course, he gives no actual examples of this. Gamal also dismissed questions about his succeeding his father saying that such discussions as "good media stuff devoid from the issues of the day." In total, the article served as a ringing endorsement of Gamal and gave little, sometimes no, acknowledgement to the hard work and occasional setbacks of the country's prime minister, widely considered the architect of the country's turnaround.
Perhaps Roula Khalaf encapsulates this backwards/forwards movement of Arab leaders in her article in today's FT on government censorship of the media. The article focuses on a new media law in UAE that has yet to be signed by the country's ruler, Shaykh Khalifa. While liberalizing some aspects of the current UAE law on media, a central tenant of the new law- that is, that information that is deemed harmful to the country's economy or that disparages national leaders is off limits- is causing an uproar even among the local media outlets. (Clearly not among those who responded to MBR's interview, however.)
Learning to work with the media and developing a thick enough skin to tolerate the occasional critical article or editorial is a fundamental lesson that most Middle East leaders have yet to master. Until they do, sadly, most of the real progress and growth achieved by regimes will constantly be second-guessed.
Wednesday, April 15, 2009
Kuwait and the battle for democracy
At the risk of sounding like a Wall Street Journal junkie, the paper ran a somewhat interesting front page piece on Kuwait's democratic struggles last week. The basic gist of the story is this- Kuwait's emir dissolved the National Assembly yet again after the cabinet resigned on parliamentarians' motion to grill the prime minister. As the Journal article notes, the elections to be held this spring for a new assembly represent the sixth government for Kuwait since 2006.
Despite it's being rated as the most free country in the Middle East in terms of political rights by Freedom House, there's very little that's going right in the country. Kuwait has taken a large hit in the recent global economic downturn because of bad bets and investments undertaken by its local banks. It has the dubious honor of being home to the only bank in the region that has so far defaulted on its outstanding obligations. This despite the fact that the government sits on enough reserves to bail out the country several times over. It only passed a stimulus package for the financial sector after the emir dissolved the National Assembly. The measure will need to be returned to a newly elected Assembly which is sure to delay action until after its legislative recess over the summer.
Even before the current crisis, Kuwait was missing out on economic expansion largely because of its dysfunctional democracy. As countries as wildly erratic as Libya, Lebanon, Syria, and Sudan were attracting tens of billions of foreign direct investment from other Gulf, Asia, and European firms, Kuwait had an investment outflow between 2002-2008. Even its ambitious JV deal with Dow Chemicals had to be shelved over National Assembly objections. Sure, Kuwaitis were getting richer by the day on a per capita basis during this period on the back of high oil prices. But in the meantime, their infrastructure was crumbling and their university students were being segregated based on a demand from a few organized and vocal National Assembly members.
So one has to ask, as many Kuwaitis themselves already are and the Journal does in the above linked article, democracy at what cost? What does it benefit the country to go to the polls every few months only to have the government completely unable to effectively carry out most mandates? Kuwait continues to fall behind many of its neighbors when it comes to economic development and diversification. This particularly irritates Kuwait's upper classes who remember when the country was a regional leader. A US academic from George Washington recently speculated at a conference I attended the possibility of Kuwait revisiting its constitution to try and fix the system. But what can the country do? Few would want to see a return to autocracy (it's unlikely the Sabah who have always been seen more as a "ruling family" vice a "royal family" like its neighbors would be able to pull such a move off) but the ethnic and socio-economic status of most voters in Kuwait will likely ensure that regardless of the number of elections the country has, the general composition of the National Assembly will remain unchanged. And that composition ensures government stagnation.
Will Kuwait's sad downturn have ramifications for the rest of the Middle East? The Journal seems to think so but I have mixed feelings on this one. Kuwait's experiments in democracy have long been dismissed by other countries across the Middle East as exactly what not to do. They see the moribundity of the system and its failure to effectively get things done as an excellent example of why they don't want unfettered democracy. So it's not as if this current crisis will make them lose hope they don't have.
More troubling, though, is the implications that Kuwait's failed experiment has for US policy. Even if the Obama administration abandons or lessens the democratization push of the Bushies, US foreign policy is led by US ideology and that ideology more or less ensures that some sort of advocacy for democracy remain part of the plan. In the past, the State Department has always gotten around this by focusing on institution and civil society building. But when you look at the problem in Kuwait,neither institutions nor civil society seem to be the problem. The National Assembly is a pretty good institution- it's enshrined in the constitution, it has free and fair elections, technically anyone can run for office, it has the power of the purse, the right to question ministers, etc. So how do we promote democracy when democracy is so spectacularly failing in the most free country in the Middle East?
I hope someone smarter than me might be willing to take this on...
Despite it's being rated as the most free country in the Middle East in terms of political rights by Freedom House, there's very little that's going right in the country. Kuwait has taken a large hit in the recent global economic downturn because of bad bets and investments undertaken by its local banks. It has the dubious honor of being home to the only bank in the region that has so far defaulted on its outstanding obligations. This despite the fact that the government sits on enough reserves to bail out the country several times over. It only passed a stimulus package for the financial sector after the emir dissolved the National Assembly. The measure will need to be returned to a newly elected Assembly which is sure to delay action until after its legislative recess over the summer.
Even before the current crisis, Kuwait was missing out on economic expansion largely because of its dysfunctional democracy. As countries as wildly erratic as Libya, Lebanon, Syria, and Sudan were attracting tens of billions of foreign direct investment from other Gulf, Asia, and European firms, Kuwait had an investment outflow between 2002-2008. Even its ambitious JV deal with Dow Chemicals had to be shelved over National Assembly objections. Sure, Kuwaitis were getting richer by the day on a per capita basis during this period on the back of high oil prices. But in the meantime, their infrastructure was crumbling and their university students were being segregated based on a demand from a few organized and vocal National Assembly members.
So one has to ask, as many Kuwaitis themselves already are and the Journal does in the above linked article, democracy at what cost? What does it benefit the country to go to the polls every few months only to have the government completely unable to effectively carry out most mandates? Kuwait continues to fall behind many of its neighbors when it comes to economic development and diversification. This particularly irritates Kuwait's upper classes who remember when the country was a regional leader. A US academic from George Washington recently speculated at a conference I attended the possibility of Kuwait revisiting its constitution to try and fix the system. But what can the country do? Few would want to see a return to autocracy (it's unlikely the Sabah who have always been seen more as a "ruling family" vice a "royal family" like its neighbors would be able to pull such a move off) but the ethnic and socio-economic status of most voters in Kuwait will likely ensure that regardless of the number of elections the country has, the general composition of the National Assembly will remain unchanged. And that composition ensures government stagnation.
Will Kuwait's sad downturn have ramifications for the rest of the Middle East? The Journal seems to think so but I have mixed feelings on this one. Kuwait's experiments in democracy have long been dismissed by other countries across the Middle East as exactly what not to do. They see the moribundity of the system and its failure to effectively get things done as an excellent example of why they don't want unfettered democracy. So it's not as if this current crisis will make them lose hope they don't have.
More troubling, though, is the implications that Kuwait's failed experiment has for US policy. Even if the Obama administration abandons or lessens the democratization push of the Bushies, US foreign policy is led by US ideology and that ideology more or less ensures that some sort of advocacy for democracy remain part of the plan. In the past, the State Department has always gotten around this by focusing on institution and civil society building. But when you look at the problem in Kuwait,neither institutions nor civil society seem to be the problem. The National Assembly is a pretty good institution- it's enshrined in the constitution, it has free and fair elections, technically anyone can run for office, it has the power of the purse, the right to question ministers, etc. So how do we promote democracy when democracy is so spectacularly failing in the most free country in the Middle East?
I hope someone smarter than me might be willing to take this on...
The Oil Conundrum
The Wall Street Journal on Monday ran an intriguing article on Monday entitled, "Oil Industry Braces for Drop in US Thirst for Gasoline." The article makes the argument that several important factors are contributing to a permanent decline in US demand for gasoline- a decline in driving distances, increasing use of ethanol in gas mixtures, and advances in engine efficiency. These factors will lead to a 22% decline in US gas consumption between now and 2030, according to Exxon-Mobil estimates cited in the article. These estimates are of course absent any additional move to find new and renewable resources for transportation and/or further federal mandates towards engine efficiency. It also largely assumes the vehicle fleet will remain its current mix of cars, SUVs, and pick-ups.
The Journal article explores the implications of this possibly permanent drop in demand on the US, particularly local governments who rely on taxes on gas consumption to fund local transportation projects among other things. But there is another important ramification that the article doesn't touch on that strikes me as equally unsettling: our prestige in the Middle East, particularly with the oil producing countries.
The possible future downturn in US oil consumption likely will not be replicated in the developing world, particularly in India and China. In fact, Exxon-Mobil is expecting passenger vehicle fuel demand in China to triple by 2030. Exxon-Mobil is so sure of this shift in global oil consumption that it is actively looking to get out of the retail gasoline business in the US but is building a refinery complex in China that will feed 750 gas stations throughout the country. If Exxon-Mobil, a US incorporated company, sees this shift, one can only imagine what oil producing countries think.
Much has been written about the gradual shift of the Middle East/Persian Gulf's orientation towards the East so I don't really think it's necessary to repeat here. Instead, I'd like to posit the following: US influence in the Persian Gulf almost entirely stems from our importance as a customer. Sure, since 1990, we've added the role of protector and security guarantor and, more recently, trade and investment partner. But what got us into the region and what keeps us there is our consumption of Gulf oil. And even for those countries that don't export directly to us (in fact, only Saudi Arabia counts the US as a primary customer), our consumption levels keep global demand up and prices higher since oil is fungible and priced on a market, not customer, basis. So local governments are willing to make some concessions towards US policy, in the past have been willing to fund US ventures or adventures overseas, buy US weapons systems, and play a good cop role in the region in order to keep us happy and keep us buying.
But what happens to that flexibility when US consumptions starts to fall? Will the Gulf be so keen to court us once our position as preeminent oil consumer begins to deteriorate? Historians and foreign policy experts will argue that the shared history between the US and the Gulf of the past 80 yrs, a general cultural antipathy still present between East and Middle East, the continued centrality of the US economy in global markets, and the dominance of US military capabilities compared to other countries, will bolster the relationship between the US and the Gulf for years to come. This is possibly and likely true. But in certain ways, Gulf governments and societies remain deeply mercantilistic. They are traders by nature and are willing and able to seek out the best customers. And they like to keep them. It's the only way I can sufficiently explain why the Gulf producers have been so pliable to US requests over the years even when they don't appear to be on the surface to be in those countries national interests. I wonder as the eastward shift of global oil consumption continues if we might not see policies and allegiances also begin to shift more definitively that way as well.
Perhaps the consequences of such a shift won't be quite as dramatic as they may have been. Certainly, we've moved away from the Cold War necessity of having the Gulf producers fund anti-communist movements. And as the Obama administration contemplates bringing far enemies closer in (today's papers indicate that Iran might be willing to table a new suggestion for restarting talks on its nuclear program), the need to use the Gulf as buffer from other regional aggressors might also be waning. Still, China's interests don't line up quite as neatly with ours as we would perhaps like to think. And it would be more comforting than not to know that you have natural resource producers with endless commodity supplies and significant cash reserves on your side.
The Journal article explores the implications of this possibly permanent drop in demand on the US, particularly local governments who rely on taxes on gas consumption to fund local transportation projects among other things. But there is another important ramification that the article doesn't touch on that strikes me as equally unsettling: our prestige in the Middle East, particularly with the oil producing countries.
The possible future downturn in US oil consumption likely will not be replicated in the developing world, particularly in India and China. In fact, Exxon-Mobil is expecting passenger vehicle fuel demand in China to triple by 2030. Exxon-Mobil is so sure of this shift in global oil consumption that it is actively looking to get out of the retail gasoline business in the US but is building a refinery complex in China that will feed 750 gas stations throughout the country. If Exxon-Mobil, a US incorporated company, sees this shift, one can only imagine what oil producing countries think.
Much has been written about the gradual shift of the Middle East/Persian Gulf's orientation towards the East so I don't really think it's necessary to repeat here. Instead, I'd like to posit the following: US influence in the Persian Gulf almost entirely stems from our importance as a customer. Sure, since 1990, we've added the role of protector and security guarantor and, more recently, trade and investment partner. But what got us into the region and what keeps us there is our consumption of Gulf oil. And even for those countries that don't export directly to us (in fact, only Saudi Arabia counts the US as a primary customer), our consumption levels keep global demand up and prices higher since oil is fungible and priced on a market, not customer, basis. So local governments are willing to make some concessions towards US policy, in the past have been willing to fund US ventures or adventures overseas, buy US weapons systems, and play a good cop role in the region in order to keep us happy and keep us buying.
But what happens to that flexibility when US consumptions starts to fall? Will the Gulf be so keen to court us once our position as preeminent oil consumer begins to deteriorate? Historians and foreign policy experts will argue that the shared history between the US and the Gulf of the past 80 yrs, a general cultural antipathy still present between East and Middle East, the continued centrality of the US economy in global markets, and the dominance of US military capabilities compared to other countries, will bolster the relationship between the US and the Gulf for years to come. This is possibly and likely true. But in certain ways, Gulf governments and societies remain deeply mercantilistic. They are traders by nature and are willing and able to seek out the best customers. And they like to keep them. It's the only way I can sufficiently explain why the Gulf producers have been so pliable to US requests over the years even when they don't appear to be on the surface to be in those countries national interests. I wonder as the eastward shift of global oil consumption continues if we might not see policies and allegiances also begin to shift more definitively that way as well.
Perhaps the consequences of such a shift won't be quite as dramatic as they may have been. Certainly, we've moved away from the Cold War necessity of having the Gulf producers fund anti-communist movements. And as the Obama administration contemplates bringing far enemies closer in (today's papers indicate that Iran might be willing to table a new suggestion for restarting talks on its nuclear program), the need to use the Gulf as buffer from other regional aggressors might also be waning. Still, China's interests don't line up quite as neatly with ours as we would perhaps like to think. And it would be more comforting than not to know that you have natural resource producers with endless commodity supplies and significant cash reserves on your side.
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