Some companies will go wherever the oil is—even if that means venturing into war-torn areas. Junior explorers ahead of the game can generate major shareholder value for investors who don’t place a circle-slash over the entire Middle East. If you’re ready to enter the fray, Macquarie Capital Markets Analyst David Popowich can help you plan your attack. Get his debriefing on Egypt, Kurdistan and which junior explorers to watch for in this exclusive interview with The Energy Report.
The Energy Report: David, investors need to see big potential returns before they’re prepared to shoulder jurisdictional risk. How do you recognize a quality story outside of the typical North American investor’s comfort zone?
David Popowich: We look for extraordinary production and reserve growth potential. It’s true that the risk is greater in the international oil and gas space than it is domestically. Therefore, the potential returns should justify the higher risk. Investors looking for near-term appreciation need to watch the operational catalysts, which usually coincide with drilling events. Sometimes a small- or mid-cap producer can prove up material reserves with just a single well.
TER: What are the dynamics between the seniors and the junior firms moving into former war zones?
DP: This is where junior exploration and production (E&P) companies typically enjoy first-mover advantage. Juniors tend to enter frontier exploration areas first, and once they reduce exploration risk and prove up resources, the deep-pocketed seniors come in, often through partnerships or acquisitions of the junior companies.
TER: Let’s talk about Egypt. What is the ownership dynamic between the Egyptian government and foreign oil and gas companies?
DP: You could almost describe it as a partnership, as both parties have a vested interest in successful exploration and development. Oil and gas companies operating in Egypt enter into production sharing agreements (PSAs) with the Egyptian government for each block that the company has an interest in. Terms are laid out under the PSA highlighting the share of production that each party will receive, and this can vary across blocks with royalties and taxes paid out of the Egyptian government’s share. Oil and gas producers in Egypt are currently awaiting the results of the 2012 Egyptian General Petroleum Corporation (EGPC) bid round, in which the government tendered 15 blocks. Bids have been submitted by interested parties and results are expected by the end of the summer.
Egyptian politics have been in the global headlines quite a bit since last year’s revolution, culminating in the recent election of President Mohamed Mursi. But while the presidential election generated a lot of news coverage, it has had little to no operational impact on Egypt’s oil industry. TransGlobe Energy Corp. (TGL:TSX; TGA:NASDAQ), a company that I cover, reported minimal impact to its operations, even at the peak of the revolution. The company drilled 47 wells in Egypt last year and grew production by 22% year over year. This year, TransGlobe will probably grow production by another 55%.
TER: Could the EGPC bid to increase TransGlobe’s land base in the West Gharib area move the stock?
DP: Yes, I would definitely expect it to move the stock. All year, we have been highlighting the EGPC bid round as what will probably be the single-biggest operational catalyst for TransGlobe in 2012. The company could nearly double its existing land base in Egypt, for very little cash outlay. This could be a potential game-changer for the company.
TER: Let’s move on to Kurdistan. Now that it’s opening up for exploration and development, what is the political climate like for explorers?
DP: Political risk should certainly be a consideration for people looking to invest in oil companies with exposure to Kurdistan. The Kurdistan Regional Government (KRG) halted oil exports through Iraq over four months ago after it alleged that the Iraqi central government owed more than $1.5 billion to oil companies operating in the Kurdistan region. We have seen encouraging signs recently, however, as the KRG has recently resumed oil exports, albeit at a reduced rate. The KRG is trying to build confidence with the central government as it resolves outstanding oil and gas issues.
Nonetheless, the resource potential of Kurdistan is thought to be immense. The U.S. Geological Survey estimated that Kurdistan holds more than 40 billion barrels (40 Bbbl) of proven oil reserves, and 25 Bbbl of potential reserves. There are not many other opportunities around the world to secure this kind of resource potential. Several material discoveries have caught the attention of the world’s oil giants, which have started to acquire land positions in the relatively underexplored region. Most if not all of the prospective land has been taken, leaving new entrants with little choice but to acquire existing blocks in the area. This is occurring through corporate acquisitions or deals with the KRG. In other words, Kurdistan is increasingly becoming the domain of the supermajors.
TER: Are any juniors making waves there?
DP: WesternZagros Resources Ltd. (WZR:TSX.V) is our top pick in Kurdistan. It looks like it’s sitting on what is potentially a billion-barrel discovery at Kurdamir, which the company is currently testing. WesternZagros has also topped up its bank account with a $56 million ($56M) cash infusion from Gazprom (OGZD:LSE; GAZ:FSE; GAZP:MCX; GAZP:RTS; OGZPY:OTC) and a $57M private placement by Crest Energy International (private). This should allow the company to execute an expanded capital program through 2013.
TER: Let’s leave the Middle East and shift gears to Southeast Asia. What’s the situation there for E&Ps?
DP: Thailand is not traditionally regarded as a global oil powerhouse, but Coastal Energy Co. (CEN:TSX.V) has operations in offshore Thailand, and it’s one of our top international E&P picks right now. Coastal also recently entered Malaysia, where it signed a small field risk service contract with Petronas, Malaysia’s national oil company.
Coastal made a significant (potentially more than 200 million barrels) discovery at Bua Ban North in 2011. We think there is good visibility for Coastal to grow into a 30,000 bbl/d producer from this discovery, which could increase on further exploration success. Coastal is about to recommence high-impact exploration drilling, beginning with the Buried Hill prospect.
TER: Is the international oil and gas space suitable for retail investors?
DP: Every investor has a different risk profile, so you should carefully consider your personal situation before investing in more speculative oil and gas stocks. Generally speaking, global success rates for frontier exploration are 20% or less. You should do your research to make sure you will be rewarded with a symmetrical return if you are prepared to absorb this kind of risk. Keep an eye on company press releases, and potentially its partners’ press releases. If a company is successful, it will make sure the market knows about it! I also look for signs of insider buying, which are positive in that they indicate management views their own company’s stock as a good investment.
TER: Thanks for talking with us, David.
DP: Thanks for having me.
David Popowich has covered Canadian-listed international explorers and producers for Macquarie Securities in Calgary since September 2009. He has worked in the investment industry with Tristone Capital, prior to its sale to Macquarie, since February 2006.
The political turmoil in Tunisia and Egypt that precipitated the abrupt end of decades of political dictatorships that governed the vast majority of countires in the MENA (Middle East and North Africa) region. The political revolution, influenced by democratic upheaval in Tunisia and Egypt, facilitated the attempts to overhaul the autocratic regimes in Bahrain, Syria, Yemen and Libya.
One of the most interesting and highlighting puzzles to resolves is which features contributed to the rise of democratic revolutions sweeping across the entire region. In fact, MENA region is world’s largest exporter of oil, enjoying the largest oil reserves in the world. Saudi Arabia, Qatar, Algeria, Libya and Kuwait constitute more than 42 percent of world oil reserves. In recent decades, MENA region experienced a growing degree of macroeconomic stability with low and stable inflation rate and steady economic growth. Large oil inflows, driven by the growing oil consumption in emerging markets such as China and India, boosted local currency appreciation and current account surpluses. The rates of growth in recent decade were remarkable, reflecting the growth of domestic demand as well as robust investment as the engine of growth. Countries in the MENA region also enjoyed favorable demographic conditions with low old-age dependency ratio and high share of working-age population, resulting in a demographic dividend which brought robust economic growth.
The indices of political change in the MENA countries prior to the outburst of the political protests in Tunisia and Egypt were nearly impossible to predict since a variety of macroeconomic, demographic and structural indicators facilitate the course of political change in developing countries, shifting from authoritarian political leadership towards a democratic political institutions with free press, free election and a vibrant civil society. Prior to the onset of the protests against authoratic governments in the MENA countries, the latter experienced benign levels of economic freedom. In the MENA region, the majority of countries experienced rampant corruption, heavily regulated labor markets, financial underdevelopment and inefficient legal systems. Bahrain, Qatar and Saudi Arabia enjoyed the highest degree of economic freedom in the region while Yemen, Syria and Algeria were already suffering from institutional paralysis and bad governance which brought these countries on the brink of failed states. If political change could be predicted on the basis of the level of overall economic freedom, Yemen, Syria, Algeria and Libya would experience the highest likelihood of political protests that would eventually lead to the political change.
Prior to the independence from France, MENA countries have been plagued by authoritarian governments given the extensive reserves of oil and natural gas. The absence of market institutions based on the rule of law under good governance and independent judicial systems eventually intensifed the rise of hybrid political regimes prone to corruption and poor governance. Even though corrupt military rule and political dicatorship precipitated the rise of the protests against authoratic rule, the pattern of structural change could be easily seen from the changing demographic landscape across the MENA region.
For most of the 20th century, countries in the MENA regions experienced rising income per capita levels. In fact, the growth of per capita incomes in North Africa surpassed the regional average given the fact that North African countries enjoyed high relative levels of income per capita at the beginning of the 20th century compared to Sub-Saharan Africa. For instance, in 1913, Tunisia enjoyed higher per capita income than Mauritius. The change in the demographic structure of the population began after 1950s. In all countries of the MENA region, the fertility rate decreased substantially. In Syria, the fertility rate almost halved between 1950-1955 and 2005-2010, from 7.30 to 3.29. The same trend in the fertility rate swept across the entire region. In Libya, the fertility rate between 2005 and 2010 fell below 3 children per women while Tunisia’s fertility rate dropped below 2 children per women in the same period. The astounding drop in fertility rates strongly reflected the growth in per capita incomes which boosted domestic consumption of durable and non-durable goods. In addition, oil-exporting countries such as Libya and Bahrain have experienced a substantial increase in export earnings. Large inflow of oil earnings, in fact, unleashed the income effect, brining higher spending on education and infrastructure. The distribution of literacy rates across countries (link) shows that literacy rates in MENA regions are remarkably high. In fact, Bahrain and Turkey boast of 88 percent literacy rate. Libya remained the North African leader in literacy rate (86.8 percent), ahead of Tunisia, Egypt and Algeria which, given the fragmentation and dichotomy of the population, enjoy literacy rates below 80 percent of the total population.
Countries from the MENA region differ substantially in the demographic projections of old-age dependency ratio. The estimates by the UN suggest that by 2030, the dependency ratio in North Africa and the Middle East is expected to experience a persistent rise. In fact, under constant fertility rates, the share of the population 65+ is expected to increase by 25 percentage points in Bahrain, 24 percentage points in Libya, 23 percentage points in Tunisia, 20 percentage points in Algeria, 15 percentage points in Syria and Saudi Arabia and 14 percentage points in Egypt. In Turkey, favorable fertility assumptions predict 7 percentage point increase in old-age dependency ratio until 2030. The empirics behind the clear explanation of fertility dyanmics across the MENA region reveals a persistent shift towards rapidly aging population across the entire region. The expedience of high fertility rates boosts the demographic dividend alongside the growth in income per capita until the break-even point when the pressure of aging population raises public pension expenditure and the introduction of social security schemes. These schemes, in fact, do not pose a systemic threat to the long-term solvency of public pension system as long as high fertility rates boost stationary population growth. The remarkable decrease in the fertility rates in the MENA is partly beared by the increasing amount spent on education. For instance, Tunisia’s education spending amounted to 7.2 percent of the GDP. The ratio is higher than in many advanced countries in the world. In 2007, Italy spent 4.3 percent of GDP on education, the same ratio as Algeria in the year later. The increasing amount of education expenditure, in both absolute and relative sense, reflects robust literacy rates for middle-income countries of the MENA region. In fact, the increasing amount of education expenditures per inhabitant boosted the information awareness by driving up reading, mathematical and computer literacy. Higher literacy rates, compounded by free access to various Internet applications, could substantiate hypothetically greater awareness of the public demanding political liberties, freedom of assembly and free press.
The demographic transition in the Middle East and North Africa is remarkably uneven, reflecting the variation in income per capita across the region. One of the key drivers of the demographic adjustment is the changing immigration landscape. Traditionally, North African countries have boosted one of the highest outward migration rates, particularly into Italy and France where Muslims account for about 9 percent of the population, the highest share in Western Europe. In addition, with 2.01 children per women, France enjoys one of the highest fertility rates in Europe. A brief overview of the ethnic fertility rates in France shows that French women of the Muslim origin boost significantly higher fertility rates compared to immigrants from Western countries. For instance, the fertility rates for women of Algerian and Moroccan descent exceed the fertility rates of Spanish and Italian immigrants by almost three times. In the next decade, income per capita across the Arab world is expected to increase robustly. Higher incomes would mean a shift towards the increasing amount of expenditures on durable goods. The change in the consumption pattern would be accompanied by a robust decline in the relative amount of income spent on food and other non-durables. Hence, the assumed fertility rates would converge to the Despite the prolonged decline in fertility rates across the Arab world, the demographic transition could precipitate the subsequent decline in robust economic growth rates which exacerbate the rapid rise in per capita incomes in the MENA region.
The peculiar feature of the majority of countries within the MENA region with the exception of Turkey is the presence of natural resource barriers. The abundance of natural resources, such as oil, phosphate and natural gas, is a major constraint on the quality of public sector governance replaced by the seizure of the state by powerful political elites such as the military regime during the Mubarak rule in Egypt prior to the 2011 revolution. Unless accompanied by democratic institutions and systemic constraints on the executive power, the political revolution can eventually result in the organic evolution of the failed state with a strong persistence of the old elites pushing for the status quo to protect the privileges preserved under the old system. The Arab awakening signaled the beginning of the demographic transition with decreasing fertility rates and slowly growing old-age dependency ratios. Hence, diminishing returns to demographic dividend and the gradual relative decline of the share of the working-age population both indicate a tendency towards greater democratic governance.
Interview With Jim Willie
An interview with Jim Willie where we discuss the potential of bank failures emanating from the Middle East and rippling throughout the world being the catalyst for the next round of the credit contraction.
TRACE MAYER: Hey this is Trace Mayer and you’re listening to the 50th episode of the RunToGold.com podcast (mp3)and today I’ve got a special guest with me – Jim Willie from GoldenJackass.com. Hi Jim!
JIM WILLIE: Hi, good to be here.
ENEMIES AT THE GATE
TM: Yeah, good to have you with me. I know we communicate every now and then about lot of the very important things. And you have just posted a really important article about five minutes ago. Can you give us a brief overview about what this article is about?
JW: Sure. The article is entitled “U.S. Bank Enemies at the Gate“, I wanted to take off on that wonderful title about the Siege of Stalingrad, but you know there’s a lot of attention, Trace, that US Banks are doing this and interest rates kept low, liquidity is strong and blah, blah, blah. And what they’re missing is that foreigners have their own agenda. They have their own bank failures. They have their own failed construction projects and their own failed-nations if you will, like Spain. I think we may see a threat to the U.S. banking system come from outside. Like for instance Persian Gulf bank failures just span across the United Arab Emirates and Kuwait and Saudi Arabia and before you know it – London and New York, so maybe there is a threat outside and we have got too much attention on the inside.
TM: Yes. Because we are seeing really high inflation rates in many middle eastern countries and they are also engaging in their own type of bailouts and stimulus packages, although they might be named differently. And so you are thinking that we may see perhaps a major bank failure come out of the middle east which will affect one of our large London or New York banks?
JW: Yeah. What I am hearing that the Dubai construction projects with all the pictures of magnificent bridges and unbelievable architecture for high rise buildings may look good but are failing at an unbelievable rate – the construction boom has turned into a magnificent bust and the bailouts have come from Abu Dhabi, the financial center, is like the London of the entire Persian Gulf. So, they are bailing out these construction firms, billions are changing hands, and the currency of choice that is being loaded up on all kinds of balance sheets is Treasury Bonds. So they will start liquidating and they have already begun this and if they continue the liquidation process then we are likely to see more bank failures just from lower values.
And you know, they have to deal with their own reality. They do not have a Plunge Protection Team there, they do not have phony stress tests there, they do not have phony accounting standards board. I go into more details in the article and even more detail in my August Hat Trick Letter member’s only which is a great source of information.
There is a lot of stinking stuff coming down the pipe and if we see some bank failures string across the Persian Gulf then there is no way it does not reach London and New York because they own a lot of bank stocks for the giant U.S. Banks. Now, there is a threat that you are just not catching in the financial networks in the U.S.
FAILED REAL ESTATE
TM: Right. Interest rates regulate production over time. By keeping the interest rates artificially low, we stimulated this huge commercial real estate bubble here in the U.S., but if we think the US commercial real estate bubble is a mess then just look at what has happened in Dubai. They built all this commercial real estate and what underlying economy do they have in Dubai; sand. There is no real underlying economy there to support any of these loans on the bank’s balance sheets.
So now they have built all these giant skyscrapers that are all like white elephants of dehydrating debt in the dessert. There are these huge buildings and they are all completely empty; are they not? Of course we are going see many bank failures coming out of Dubai. Do you think that is going to start impacting the U.S. banks here because like Prince Alwaleed, a big shareholder in Citigroup, for example might want some New York banks to subsidize these failed projects with bailout fund?
JW: Well, I think that could be the sequence that happens and there are a lot of unknowns. There is one particular construction project that I think of all the time when somebody says, “Oh, the big Dubai construction boom”. Well, there is a big property with all kinds of housing and it is laid out from shaped like a big palm tree. If you are looking down from 5,000 feet it is a beautiful, beautiful thing.
What I have heard is that it is entirely empty. It has failed with no income stream. Now, I would like to just to make a quick point here and it is not like their economies are based on processing sand. They have an oil industry and a petro-chemical industry. They make refined gasoline, chemical products, have feed stock, crude oil and natural gas.
Saudi Arabia actually has the most diversified economy in the Persian Gulf. I do not think they make their own pharmaceutical aspirin pills or razor blades or soap but maybe some. But as for other Persian Gulf nation like Kuwait, U.A.E. and Bahrain, they do not have a diversified economy but they do have a petro-chemical industry and that is it. Banks and Petro-chemical.
So, beware of the threat from the back door where you have some bank failures as this is not just a liquidation of Treasury Bonds, I am talking about bank failures – large, large Persian Gulf banks that go bust and as a result there is a vast liquidation that takes place which ripples into New York and London. That is what I think could happen.
TM: Yeah, and then we see the next round of this credit contraction start because, as you know, we had the first shocks last year and we had a little bit of shaking and we saw couple of buildings go down – Lehman Brothers and AIG, but as I have written about in my book The Great Credit Contraction, which you like, is that this is just getting started. And we are seeing the collapse of a multiple centuries old monetary system. We are in for the next round and I would not be surprised if we do see the next shock-waves emanate from the Middle East.
JW: But we are getting shock-waves that happen from the inside too, Trace. Look at the FDIC today. FDIC came out and says four hundred and sixteen troubled banks, well try a thousand.
TM: Or four thousand!
JW: And their fund is dead, so they raised some fees earlier this year on member banks within the system. But they are going to have to raise it again and the bank industry has said this will reduce earnings and it is going to reduce liquidity which decreases their ability to lend. So, the FDIC itself is going to be a wet blanket on the banking industry even if they appeal to Congress for the increased funds and that is going to cause the insolvency of more banks and add pressure to the U.S. government and the Dollar. So the threat is outside the gate.
The point my article is that we have got many threats inside the economy and I agree with you completely-we are about to the second round of the monetary banking credit crisis. Perhaps September or October, probably September, but there are a lot of factors that point to the next few weeks. The FDIC announcement may be one of those factors. The summer vacation is another, they have to increase the Federal Debt limit beyond $12.1 trillion and look for Congress to come back with an attitude of responsibility when they cannot afford to stop the printing press. So, we a lot of factors coming in right now.
WHAT TO DO
TM: And so, what do people do, obviously my site RunToGold, I like the monetary metals – Gold, Silver, Platinum – what do you suggest people do, to protect themselves and to protect their capital?
JW: Well, on a smaller scale, if you only have a few thousand dollars that you want to protect, and you are not huge saver from the last twenty years from your career then I would suggest getting some gold coins or silver coins. But I would avoid the century old, you know, like the Morgan Silver Dollars. But you do not want to be buying fifty thousand dollar coins. You want bullion coins like the Silver Eagle, Kruggerand, Mable Leafs, Gold Eagles, etc. Get the standard coins because you get a lot more bullion for the price. But I do not think buying $150,000 worth of coins makes too much practical sense. You have to store them.
I believe that GoldMoney as you do, is a fine institutions, and there are others like the BullionVault, etc, but I like GoldMoney because of the way it is run and the payment features that they have.
I recommend buying gold and silver bullion bars whether 1 kilogram, 5 kilograms, 10 kilograms and etc. The real lesson that we are seeing in this credit contraction, economic failure and banks system insolvency is that because for a full generation the money has been been paper and now what survives will be not paper. It will be the metal.
TM: Yes. And in most cases, it is not even paper that is the currency supply but just little digits on a hard drive which is even less real than paper. We might even see a rush to the physical paper notes before we see a rush from the physical paper into the physical metal.
JW: The electronic money trade makes not only possible paper counterfeit but electronic counterfeit and where you can have computer programs counterfeiting your bonds, I mean imagine, this is why we have got trillion dollar frauds. One of the points I make in this article is something that Karl Deninger said that we need a new resolution trust corporation. But that is totally of the mark. We are never going to see it because because many properties are tied to different mortgage bonds and the fraud. And you cannot have an RTC if they go and buy a mortgage bond and then they have got to pay it out three times. It will not make any money and so there will not be a new RTC. You are going to have a top down solution with more and more fraud like TARP solutions, etc.
TM: Well good interview. I know that we are pretty short on time so I would like to thank you for coming on and sharing a little bit with our RunToGold.com listeners. Once again, you have been listening to Jim Willie of the GoldenJackass.com and thanks Jim.
JW: It has been my pleasure and watch this case that is likely its going to go the Supreme Court where the Federal Reserve is going to defend itself against the Freedom of Information Act. It is going to be the private Wall Street Syndicate versus the People. This will be quite interesting.
TM NOTE: Be sure to pre-order a copy of End The Fed by Ron Paul which debuts on 16 September 2009 and help Raze The Fed. With enough pre-orders it will make its appearance as #1 on Amazon and perhaps be a bestseller on the New York Times list which will cause even more pain for the Federal Reserve and Tim ‘tax cheat’ Geithner regarding House Resolution 1207. He was extremely uncomfortable in his Digg.com interview with the Wall Street Journal.
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The hospitality industry is often the first victim of economic slowdown – when times are hard, businesses and individuals make cuts to their travel arrangements. Yet, despite the gloomy outlook elsewhere, the Middle East’s hospitality industry has thrived.
In fact, the industry has actually benefited from the crisis. As other regions became unstable, the Middle East became a safe-haven for international business, a trend ultimately reflected in their travel trade. “Bookings have really held up during the crisis,” explained Rohit Talwar, CEO of Fast Future Research and author of a study on the future of travel and tourism in the Middle East. “Especially from business travelers as more and more people switch their business focus to the Middle East.”
However, things could be about to change as the Middle East finally feels the pinch.
Not So Invincible
Since the beginning of the credit crisis, the Middle East has remained impervious. There was even doubt over whether this “western problem” would affect the region at all because countries in the region were able to build up large cash reserves while oil prices were high. The theory was that even if the slowdown affected the region, there would be enough liquidity to cushion the blow.
Yet, at the end of October, the crisis claimed its first Gulf billionaire. Bassam Alghanim, chairman of Kuwait’s second-largest lender, resigned after the bank reported losses of $800 million.
In a story now so familiar in the west, government intervention soon followed. As the Kuwaiti authorities stepped in, the United Arab Emirates injected $32 billion into its banking system and placed government guarantees on bank deposits. Even Saudi Arabia has made moves to minimize the economic impact of the slowdown and reassure concerned investors.
“As the scale and pace of the global turndown increases, it is becoming clear that the Middle East is not immune from either financial uncertainty or economic slowdown,” explained Talwar. “The downturn is moving from Wall Street to Main Street and firms are beginning to cut back as demand slackens. This is almost certainly going to flow through to the region’s travel sector.”
A Fragile Industry?
To make matters worse, the Middle East’s hospitality industry has been affected by a number of external factors. As nearly all food products are imported into the Middle East, the combination of high food and oil prices has really affected the profitability of food and beverage operations across the region.
Also, oil prices have made it more expensive for foreigners to travel to the region and a reduction in business travelers could force airlines to reconsider their schedules. “Airlines were already on course for a $5 to $10 billion loss globally,” confirmed Talwar, “and the downturn in the region could make this picture even bleaker. Schedule reductions, route closures and staff redundancies are inevitable. This in turn will affect the viability of many airports.”
This could be a major blow to the region’s travel industry. By 2020, there are plans to build over 200 new hotels across the Middle East and invest over $3 trillion into the industry and supporting infrastructure. The impact of the credit crisis on this long-term vision remains to be seen.
“A prolonged downturn will lead to some projects being less viable with higher finance costs – ultimately, these projects could get cancelled,” concluded Talwar. “Bigger chains will slow their investment and expansion plans and owners will look to asset managers to try and increase yields from their existing properties.”
Based on a September 18 Times (UK) report regarding the meeting of Middle Eastern finance ministers, the question was asked about the veracity of a plan for a single currency for the Middle East based on oil.
The answer is both true and false and maybe.
Yes, the immediate goal of the meeting last week was to establish a single currency for the Mideast. In that sense, the new currency would be similar to the euro, where various countries have joined under a common umbrella.
No, there were no (public or published) talks of an oil-based currency, which would effectively replace the U.S. dollar as the principal currency of oil trade.
Maybe? The idea of replacing the US dollar with an oil-based currency is not new. The late Saddam Hussein, various Iranian leaders and others have often broached the idea.
As early as 1987, financier George Soros in his book The Alchemy of Finance outlined just such a plan.
A single, oil-based currency would require the agreement of the various Middle Eastern heads of state as well as further agreement by OPEC.
Recent U.S. financial disasters do not rule out such an eventuality. However, the cumbersome and institutional process required should not add fuel to existing speculation.
The single currency issue addressed (without the use of oil) is planned for slightly more than two years hence. However, instability in world financial markets may prompt more rapid agreement to reach the goal.
The Arab oil ministers meeting agreed in principle to establish a single currency. While there was no mention of oil or another commodity backing the potential currency, there is some speculation that the euro, rather than the U.S. dollar, could be designated for oil trades.
Stephan is a former department chair for economics and taught at various colleges and universities at both graduate and undergraduate levels. If you would like Stephan to answer your economics-related questions, read his post “Got an Economics Question?” and submit your questions in the comments area there.