Trade and the Arab World
The Arab World heavily depends upon export of oil resources. The importance of the region can be explained by the unique position of the region in the world economy. The region combines two important features: (1) proper resource allocation (2) a degree of economic development.
The region has a very good strategic location. When speaking about the strategic location of the region the following four major factors can be identified. First, the region serves as a bridge between three major continents. These include Europe, Asia, and Africa.
The second factor is concerned with the relatively high level of region development that for a long time has been the place for export of numerous manufactured goods that were transported to other parts of the world. The analysis of the recent history of the region showed that the region’s natural and geographic resources had played an important role in international trade. The most important natural resource was oil. In fact, oil shaped the role of region. A fourth important factor that defines the region’s strategic position is the tradition of free trade. Of particular importance is Kuwait’s adherence to an unimpeded market economy.
Since the World War II till the third quarter of the last century crude oil prices show almost no change. Beginning of the 1970s was characterized by a substantial increase in oil prices. The increase had a negative effect on the development of world economy. The 1973-1974 and 1979-1980 – were the years of crises. This period was followed by the 1985-1986 inverse shock. The years 1998-2000 were accompanied by 130% increase occurred in oil prices. The major increase has occurred after the year 2000. (Berument, Hakan, Hajan Tasci 2002, pp.45-49).
A persistent upward trend in oil prices can be explained by demand and supply factors.
The oil price increase has occurred during the year 2003. It seems that the period of oil s
hocks was over. The explanation of the differences in oil price increase results from the influence of both demand and supply factors. The factor of demand has been influenced by a robust global growth. This growth has been supported by the rapid economic expansion that took place in emerging Asia. The process has been accompanied by a fundamental break with past, particularly demand from China and India.
On the supply side market participants also decided to change their policy. Supply of the production helped the society to respond to higher prices, given low levels of investment. Under the circumstances like these many big oil companies are faced with the challenge to find new ways to replenish their reserves.
The analysis has been carried through the period of eleven years. During this period of time, the oil has been discovered barely for commercial purposes.
Oil prices showed sensitivity to the level of OPEC oil spare capacity, which has fallen to very low levels. In addition, oil prices showed strong correlation to the geopolitical events and armed conflicts.
The table below shows the world energy supply sources. The table shows that oil has the largest share in world energy supply.
One more table below shows the statistical properties of oil between the years 1980-2007.
The transmission mechanisms had a strong impact in the activities of the countries engaged in oil transportation. Kuwait is not exclusion. The country is characterized by the supply side effects. These are related to crude oil that has all rights to be regarded as a basic input to production. The increase in oil prices is the process that will lead to a rise in production costs. (Walters, 1995, p.56).
The major feature of the regional trade is a strong emphasis that has been put on external commerce. As for the inter-Arab trade, it has represented a small share of the overall trade of all Arab countries. The main feature of the inter-Arab export is that it had not exceeded 6-7% of the total exports of the Arab countries. As for the inter-Arab imports, it has reached a maximum of 8.4% of total imports since 1985. Regional economic activity of the country is concentrated on services and on the extraction of raw materials. (Jimenez-Rogriguez, 2008, p.51)
Arab countries can be classified into four major trade groups. The group includes a list of member countries of the Gulf Cooperation Council (GCC). Kuwait is the member country of this group. The country represents the most open and trade-dependent economies in the Arab World.
The GCC domestic markets are basically focused on the resource endowment. This feature is present in addition to a commitment to open markets. The tendency goes back into history. During the recent times, the region has become a strong adherent of the concept of free trade.
Special attention should be paid to the export characteristics of this group of countries. In general, the exports of this group of countries can be characterized as very unstable. The tendency lasted over the last two decades. The instability has occurred due to shifts in the world demand for export. Kuwait is an established member of the group. Some members of this group combine people from Kuwait. This group of people has been seeking to stabilize their economies. The major objective was achieved through diversification of the economic base.
The expansion into downstream oil activities also brought many changes in various parts of the world. The list of the Northern Arab countries, includes Syria, Lebanon, Jordan, Iraq and to some extent Egypt. These countries are characterized by large populations and medium levels of per capita income. The main feature of these countries is central planning. This fact helped to change the nature of the countries thus reducing the degree of openness of some of these economies to the outside world.
The group of low-income countries of the Southern Arabian Peninsula and East Africa is the group of the countries that are characterized by low levels of income. The economies of these countries are controlled by the state. Strict control is introduced into various aspects of economic life and trade. The force group of the countries consists of the Arab countries of North Africa. This group of countries traditionally had strong trade relations with the countries of Southern Europe. Weak and unstable commercial relations are established with the remaining Arabian countries. The small share of inter-Arab trade is connected with the resource allocation and establishing a certain degree of development. Serious effort has been made to promote such trade in the past. (Jimenez-Rogriguez, 2008, p.109)
A number of the efforts have been taken with the aim to create the economic fundamentals capable to sustain inter-Arab trade. When combined together, these economic fundamentals are able to clear up quite a big number of financial impediments, many of which are concerned with the activities of the Arab countries. Many countries that are located on the territory of the region are still heavily dependent on the import of manufactured goods from industrial countries. The countries from this group tend to finance these imports through exports of raw materials and some services.
Kuwait has all rights to be regarded as a vast reserve of oil. The country is a place of massive overseas investments, what makes it strong and active economy. The oil production in the country accounts for 95 per cent of government revenues. About 91 per cent of export earnings and 50 per cent of GDP are received as a result of the extensive trade in oil. In other words, the revenues of the country are largely dictated by oil prices. (Lardic, Sandrine and Valerie Mignon, 2006, p.76)
The US is Kuwait’s largest trading partner. The area is characterized by a big dependence on oil prices. High prices in oil necessitated Kuwait building better ties with other Islamic countries in the region. The country manly exports oil and oil-related products. Other exports include such products as fertilisers and industrial materials. (Lardic, Sandrine and Valerie Mignon, 2006, p.88)
Kuwait and OPEC countries
The Kuwaiti economy had a form of free-market economy, in the basis of which there were such activities as trade and pearl diving. After oil was discovered in the middle of the 20th century, the main focus of the economy shifted to the international trade of oil. The economy of this country is relatively open with self-reported crude oil resources that amount to approximately 96 billion barrels that makes up 10% of world reserves. (Lardic, Sandrine and Valerie Mignon, 2006, p.88)
About half of GDP, 95% of export revenues, and 80% of government income are reported to be based based on petroleum. (Krichene, Noureddine, 2008, p.77) Due to high prices on oil Kuwait’s budget, trade surpluses and foreign reserves have been formed in recent years. This favourable fiscal situation explains lack of the need for economic reforms and new governmental initiatives.
The main exported products of Kuwait are crude oil, refined oil products, and natural gas. Among its main customers there are such countries as: Japan, India, South Korea, Taiwan, Philippines, Singapore. As for Foreign Trade Control, Kuwait can be defined as a country that uses relatively liberal trade policy, that is to say, its market is open, and foreign trade policies are known for their flexibility. In the sphere of international trade there are practically no quantitative restrictions.
Regarding import policy, only few products are prohibited. There are some requirements for importers to practice international trade exchanges. For example, at least 51% of the importing company capital must be under control of people of Kuwaiti nationality and they must register at the importers register. As for exported products, there are practically no regulations.
Oil undisputedly has become an indicator of wealth of all countries, including China and USA. They take superior position in consuming the world’s oil production. They consume about 30 million bbls crude oil per day, which makes 35% of the global production. (OPEC, 2008, Annual Oil Report) Until 1993, China used to be a net exporter of oil, but nowadays, similarly to the USA, it is a net importer. Industrial production of these countries is impossible without oil. Thus, oil seems to provoke future conflict between the east and the west.
Both, China and the USA are trying to find security of energy supply, but they use different principles. The US controls over 20% of world oil production for it has considerable influence in the Middle East, Saudi Arabia; it has forces in Iraq and military bases in Qatar and Kuwait. Moreover, it plans to take under control 5% from Iran’s oil production and it aims at the strategic shipping point, the Strait of Hormuz. (OPEC, 2008, Annual Oil Report)
The US decides which country will receive oil and also determines its price. Afghanistan is regarded by the US as a future energy passage for shipment of oil from Central Asia. Due to the fact that Afghanistan is surrounded by other countries, the US shows more interest to Pakistan in terms of geopolitics. Pakistan is important for the US in its war on terrorism as long as the menace of al-Qaeda and Taliban are removed. In case the plans of the US, EU and NATO referring the Middle East, Afghanistan and Iran are successful, they might get control of more than a half of global resources of oil and its production.
What is noticable is that the US imports less than 10% of the Middle Eastern Arab oil production, which amounts to 20 million bbls a day from Saudi Arabia. It gets 60% of its crude imports from such countries as Canada, Venezuela, Mexico, Nigeria and Libya. Nevertheless, it intends to have more than 50% of the global oil production and reserves under its control. On the contrary, China gets almost half of its total imports, which amounts to 3.8 million bbls oil a day, from such countries as Saudi Arabia, Oman and Iran. The rest of its crude imports are supplied by Angola, Russia and Venezuela.
Unlike the US, which tries to maintain energy security through occupation, China tries to make it through investments. While the US has gone through transformation from democracy to a capitalistic oligarchy, China is being transformed from oligarchy to socialist capitalism. Another difference between these countries is that the US is an indebted country, while China is a lender country. Moreover, lack of incentives and cultural ideology from their government leads to the fact that Americans are getting lazy, extravagant and poorer. On the contrary, incentives and a cultural ideology from Chinese government make its people hard-working, thrifty and richer. Chinese investments have been made in such countries as Canada, Africa and Central Asian countries.
The US aims at restraining China because America considers it cause a future threat to its position as an empire. The US sees that the only way to solve the problem is to take control over the oil. Chinese government understands the situation and tries to make sure that sea lanes from the countries that produce oil are not hindered, especially the Strait of Hormuz, Indian Ocean, the Straits of Malacca between Malaysia and Indonesia and the South China Sea. Besides, China has made investments in Gwadar port in Pakistan, Sitwi port in Myanmar, Hambantota port in southern Sri Lanka, and Marao in Maldives pursuing the aim to establish naval bases and listening posts.
As for Japan, it is the third world’s largest consumer of oil. It oil industry largely depends on oil production from countries, which are members of OPEC. In spite of the fact that Japan has reduced its oil consumption by a third since the mid-1970s, oil is still its main source of energy. Thus, one of the Japanese government’s priorities is oil supply.
Japan has signed Free Trade Agreements with many countries. The first FTA was signed with Singapore in 2002. The second FTA was signed with Mexico in 2004, the third FTA with Malaysia last year. Moreover, Japan lead negotiations with the Philippines, Thailand, with South Korea, Indonesia and the 10-member Association of Southeast Asian Nations (ASEAN), Vietnam, Chile. It also intends to sign FTAs with India, Australia, Switzerland and South Africa.
Being Iran’s third biggest oil customer, Japan reduced its Iranian oils imports because of “Tehran’s nuclear dispute with the West,” (ITPBusiness, 2006). According to Fumiaki Watari, who is a Nippon’s chairman: “Japan’s largest refiner, will cut its purchases of Iranian crude oil by 15% this year” (ITPBusiness, 2006). Japan plans to increase oil supply from other countries to avoid conflicts.
Until 2000, Japan’s Arabian Oil Co. (AOC) had used two field of the Saudi-Kuwait Divided Zone, namely Khafji and Hout, with 300,000 bbl/d in production. In January 2003, AOC entered into agreement with Kuwait to buy 100,000 bbl/d of crude for the next 20 years. As the result of AOC operating in the Divided Zone, 80 percent of revenues used to go to AOC and 10 percent each to Saudi Arabia and Kuwait. ChevronTexaco operates three onshore fields in the Divided Zone, namely in Wafra, South Fawaris, and South Umm Gudair. Saudi Arabia demanded Japan to increase investments in Saudi Arabia along with their oil imports from Saudi Arabia in return to renew drilling rights of AOC in the Divided Zone. Saudi Aramco took under control operation of the fields, where AOC used to operate, because Japan refused to invest in Saudi Arabia (Country Analysis Brief: Saudi Arabia, 2005)
Oil continues to be the main source of energy in Spain. Nevertheless, it shows tendency to decrease its oil consumption. To compare, in 1979, oil consumption reached 50 million tons, whereas in 1985 it declined to 39 million tons. In 1985, Spanish industry tended to use coal and natural gas instead of oil. Thus, it saved $260 million that year.
The biggest oil supplier of Spain in 1985 was Mexico, providing 19.7 percent of Spain’s petroleum imports. In the mid-1980s oil supplies from Latin American countries amounted to about one-quarter of its imported oil. Oil supplies from Nigeria were reduced from 36.5 percent in 1985 to 29.3 percent in 1987. Nevertheless, oil supplies from Middle East rose in those years: from 27.4 percent in 1985 and 29.6 percent in 1987. The share from Western Europe increased from 10.6 percent in 1985 to 16.5 percent in 1987. In those years Spanish government intended to reduce dependence of the country oil from Middle East by increasing its imports from Mexico. In the 1980s, there were eight ports through which petroleum was imported to Spain.
Spain is known to possess a small domestic oil production capability. The production of this country has amounted to 1.6 million tons in 1987. A sizable exploration effort did not bring too many results. Spain discovered only a few small fields and two medium-sized ones. The most important of oil fields is the Casablanca oil field. The filed was discovered in 1983, and yielded 90 percent of Spain’s domestic oil production in 1987. The fall in oil price in 1980s reduced the country’s exploration efforts.
Pakistan’s economy is growing at a steady pace. The main specific of the country is that it facing higher energy requirements that need to be correlated with the industrial development challenges. The other event implies on the fact that the energy demand vastly exceeds its supply. It means that the country needs to secure and diversify its energy resources.
Kuwait international trade in oil over the past 20 years
The era of oil began after World War II. Since that time, oil has become the main export product of Kuwait. The huge revenues from oil sales helped the government to accumulated surplus money and invest the money abroad. Many of these reserve investments were cashed in during the Iraqi occupation. The changes were has been brought during the liberation period. During that period the expenses of Kuwait were met with those of the allied coalition.
Transportation of oil has become the predominant feature of the industry. The oil trade helped to create the conditions that helped to change the structure of Kuwait’s imports. The focus on oil transportation proved to be beneficial for the state that created a boom economy with higher consumer purchasing power. The country was also successful in building an adequate infrastructure for development.
Today’s industrialized world can be characterized by a big dependency on oil transportation. Under such circumstances oil transportation has become the main source of income for the low-developed countries. Historically, Arab region has become the most abundant and secure supply of oil. The other characteristics that make that region very popular among the foreign importers were the presence of relatively low priced oil and gas resources.
Oil importers and exporters are the groups that are inextricably tied together. The same can be told about the importing countries that need the oil to maintain their standard of living. The other advantage is the ability to fuel their economic growth. As for the other oil exporting countries these countries are critically dependent on oil revenues that are extensively used to sustain their economies. Kuwait, Venezuela, Nigeria, Algeria, Saudi Arabia and several other nations are reported to earn 90% of their export earnings from oil sale.
The analysis of the recent data also shows that the demand of oil will increase at a steady rate. The present state of the market brings negative implication for the region. Unfortunately, production from the super majors can be characterized as simply flat. It means that many energy companies are pumping less oil today that they did during the previous times. Shell’s quarterly profits ranged from $ 4 bn up to 54% year-over-year. This fact helped the company to increase its sales growth. It means that the company has pumped 5% less oil and gas than it did during the previous years.
ConocoPhillips’75% profit jump coincided with the fall of its production. The production of the company fell 5%. The projections for the future indicate that the GCC region will meet most of the growth in future oil demand. The other important thing is that the majority of the countries have stringent self-imposed restrictions. These restrictions are imposed on their ability to invite foreign companies to assist them in developing their hydrocarbon resources.
The recent estimations show the world demand for oil will increase in the course of few years. It means that the price for oil will increase from the current level of 80 million bpd to 120 million over the next 25 years. As for the Middle East, it holds half of the world’s oil reserves.
Kuwait has many prospects for future. The process will require an in capacity from Kuwait. Developing Kuwait’s Upstream Oil Projects will play a key role for the further sustainable development of the country. The key role in the process is played by securing the escalation of the supply.
The Kuwait’s oil sector’s expansion plans are projected to spend some $ 40 Billion over the next 15-20 years. Since that time Kuwait signed many contracts that were worth billions of dollars.
The year 2004 was characterized by a deep change in the oil sector. The major changed occurred with the record oil prices. As a matter of fact, prices for oil continued to steadily grow. The price escalation has occurred because of the concurrent geopolitical conflicts. These have been accompanied by unforeseen environmental calamities, diminishing spare capacities, and an increase in demand for hydrocarbon supplies.
The oil industry has all rights to be regarded a strategic inflection point. It means that the industry has the long implications for future. The major changes in the system had a lasting effect on its further development. The major change occurred with the decision to create OPEC in 1960. As for the business itself, it can never be the same. It means that the fundamentals of the business are often reshaped.
The essence of the business often remains the same. As for the companies, they have to reshape their structure and to accommodate themselves to the changing realities of the business. The same principle pertains to the functioning of the international oil companies, national oil companies and host governments. These organizations have to adapt themselves to the changing environment.
New times bring many changes to the very structure of the oil industry that is being shaped by the following factors: (1) globalization in production and trade (2) economic growth and surging demand (2) declining oil production in the OECD countries. The above mentioned things helped the authors of the project to reopen many areas that have been prohibited to foreign investors.
These areas created the conditions for new energy equation. The equation was coherent with the numerous forms of agreement and a rethinking of resource policies and regulations.
The last decades were marked by the fact that for various economic and political reasons, Iran, Iraq, Kuwait and Saudi Arabia were pushed to search actively for mechanisms able to facilitate foreign investment in their upstream oil sector. The group is comprised of four countries. These countries collectively, possess over 53% of the world’s proven oil reserves. The country currently provides 23% of the world’s oil production. It is also is expected to supply 31% of the global oil requirement by 2020. (OPEC, 2008, Annual Oil Report)
The analysis of the data shows that the Middle East is projected to play an important role in the development of energy resources. The research also show that this region is destined to play a much larger role on the world stage of energy than it did during the next twenty years and likely longer.
The research brings a number of serious implications. The main implication of the research is that a majority of these countries face stringent self-imposed restrictions. The restrictions are put on the ability of the countries to invite foreign companies to assist them in developing their hydrocarbon resources.
The strategic choice that of the resource-rich countries is the he inclusion of foreign oil companies in the development of their resources. In fact, the oil industry needs additional capital, managerial capabilities, and cutting-edge technology. These things help the country to meet the world’s future energy demands, as well as, the socio-economic and political expectations of their people.
Kuwait & Modern Times
At present, Kuwait has to shoulder a number of industrialized countries in their quest for oil. As a result, the country will have to increase its oil production rates by some additional 2mmBOPD. The prices on oil are projected to rise. The price escalation occurs mainly due to concurrent geopolitical conflicts, unforeseen environmental calamities, and diminishing spare capacities. When combined together, these factors can increase the demand for hydrocarbon supplies.
Kuwait is now entering the phase that is being shaped not only by globalization. It means that the country is now experiencing the growth in production and trade. One more positive thing is the economic growth and surging demand. The oil production has decline, oil production was reopening in many that initially were prohibited to foreign investors. The above mentioned factors are creating the ground for a new energy equation. At present, the country is rethinking its resource policies and regulations.
Kuwait’s giant Oil Fields are known to produce oil for over 40 years. Times when the oil fields have been working at their maximum capabilities have past. Today some of these giant oil fields are reported to have reached their half life. The rest of the fields will require greater effort and effective reservoir management.
The involvement of International Oil companies can be described as a mutually agreeable, risk balanced, contractual agreement. The agreement can minimize the risk on Kuwait in capital projects.
At present Kuwait is seeking retains the ownership of oil by the country. The country is reported to provide a sufficient incentive to numerous international oil companies that are cooperating with Kuwait. Costs minimization may help to maximize the production of the country.
Since the establishment of OPEC, Kuwait proved to have a good record in the company. The activities of the country are based on a strict commitment to maintaining the OPEC quota. The country is determined to maintain that image for a long time. The model that has been chosen by the country will enable Kuwait to contain enough flexibility for Kuwait to meet its commitment towards OPEC. The production targets are also likely to be preserved. Change in production targets will results in the rise of the strategic needs of the country.
The model is leaving room for change. Kuwait is likely to change its production targets and strategic needs. The country is strongly recommended to carry on the research that is projected to find new ways of using oil without affecting the environment. In other words, the country has to take time and effort to make the oil industry environmental friendly. Under the circumstances like these the environment would become an excellent area of potential long term relationship. Some advices are of legal nature. Kuwait is strongly advised to change its focus and to direct it on the legislative framework.
Kuwait is also strongly advised to develop new partnership. These partnerships must combine the following features: modern technology, management skills and large reserves. When combined together, these features are likely to contribute to the long-term changes that will inevitably lead to the development of viable oil prices and supply/demand environment.
To conclude, oil plays a critical role in the development of Kuwait’s economy. Oil industry plays a meaningful role in terms of revenue generation and contribution to the GDP. At present, Kuwait has very ambitious expansion plans. These plans cover the activities of all sectors. The country expects to spend some $ 40 Billion over the next 15-20 years. The other objective that has been posed by the country is to maximize the effectiveness of the investment. The objective can be met by the utilization of the Kuwait’s workforce, local goods and services. The companies take time and efforts to understand the drivers of the companies they are trying to attract. Kuwait is also recommended to create an amiable environment for foreign oil companies. The process will requite the involvement of the international oil majors, including both local and international contractor/supplier.
This study analyzes the relationship between oil prices and economy growth of the countries engaged in oil transportation. The increase in oil prices was experienced during 2003. Kuwait was one of the countries who contributed positively from the oil export. The rise in oil prices was also the process that has primarily impacted oil exporters. The study was based on the analysis of numerous charts and graphs. The final outcome of the study shows that Kuwait has many prospects for further development.
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