The Coming ARAB BUST !****

The Coming ARAB BUST !****

Postby ali5196 » Mon Apr 17, 2006 9:03 pm

http://www.arabworldanalysis.com/blog/a ... di_arabia/


With oil prices seeming to maintain a long-term holding pattern near or above $60/barrel, Saudis have more money than they know what to do with, quite literally.

Yet it is reasonable to ask whether the vast sums of wealth are creating a speculative "Arab Bubble" which could become an "Arab Bust," either with or without a drastic reduction in oil prices. The following op-ed, published in today's Wall Street Journal, addresses that issue. I have edited it down and highlighted some key points.

Edward Chancellor
The Wall Street Journal, Seven Pillars of Folly
March 8, 2006; Page A20

The oil exporters of the Persian Gulf are flush with cash. Some of that money is going towards acquiring P&O, the British shipping concern, thus sparking off the heated controversy over foreign control of U.S. ports. This has led people to worry that Arab petrodollars might be scared away from the U.S. In fact, unlike during the last oil boom of the late 1970s, relatively little of the current Arab oil surplus has been directly invested in U.S. assets or even deposited in the international banking system. This time much of the oil money has remained at home where a classic speculative mania is now being played out.

Lawrence of Arabia took the title of his celebrated book from a passage in the Book of Proverbs: "Wisdom hath builded her house, she hath hewn out her seven pillars." In homage to Lawrence, we identify the seven pillars of folly upon which the Great Arab Boom has been weakly constructed.

• The first pillar is liquidity: OPEC members have earned around $1.3 trillion in petrodollars since 1998, according to the Bank for International Settlements. The extra liquidity injected into the Gulf economies by the oil price hike since 2002 is estimated at around $300 billion by HSBC. Some of this money has been spent on building up foreign currency reserves and on the acquisition of foreign companies, such as P&O. Arab takeovers of European and U.S. firms totaled $30 billion last year. Some money has even been invested in hedge funds and gold. However, a great deal has stayed in the Gulf region.

This has contributed to an extraordinary explosion of bank credit in Saudi Arabia and its neighbors. Since the member countries of the Gulf Cooperation Council link their currencies to the U.S. dollar, they have also enjoyed the Federal Reserve's easy money policy. The Saudi government has recently repaid around $100 billion of outstanding debt, further contributing to domestic liquidity...

• The second pillar is the new economy: The Gulf economies are growing rapidly, along with corporate profits. Returns on equity in the region are approaching 20%, calculates Credit Suisse. Saudi Arabia has recently joined the World Trade Organization. Kuwait is selling off some state-owned businesses. A new era of permanently high oil prices and perpetual prosperity has been hailed.

The Gulf rulers are seeking to reduce their economies' dependence on oil. This is spurring a massive investment boom. Dubai is attempting to transform itself into a leading financial center and tourist resort. Saudi Arabia intends to become a world leader in fertilizer production. A bridge costing $3 billion is proposed to span the Red Sea. A new economy is coming into being. The current oil boom, unlike former ones, won't be followed by a bust, say the believers. This time it's different.

• The third pillar is the stock market: The recent performance of Arab stock markets makes the Nasdaq of the late 1990s look like a slouch. Since January 2002, the Egyptian, Dubai and Saudi stock markets are up respectively by over 1,100%, 630% and 600%. Only four years ago, Gulf companies were priced at around twice book value. Today they trade on an average of 44 times historic earnings and at over eight times book value. Gulf banks are valued at over nine times book value, according to Credit Suisse.

Sabic, a Saudi conglomerate, is currently ranked among the world's 10 largest companies by market capitalization. The Saudi stock exchange has a market cap of around $750 billion. That's roughly three times the country's GDP. By comparison, the U.S. stock market reached a peak of 183% of GDP in March 2000...

• The fourth pillar is an IPO boom: In the late 1980s, the Japanese authorities kindled a speculative mania by floating telecom giant NTT. In unconscious imitation, the Gulf states have stimulated their mania with privatizations and IPOs at bargain prices. It is not unknown for stocks to climb 500% on the first day's trading. Applications for new issues have been oversubscribed by up to 800 times. One IPO in the United Arab Emirates attracted aggregate subscriptions greater than $100 billion, a larger sum than the UAE's GDP.

• The fifth pillar is a property boom: Dubai is the fastest-growing city in the world. Hundreds of new buildings are under construction, including what is planned to be the tallest building ever, the Burj Tower. Cynics point out that the capping of the world's highest property, from the Empire State Building to the Petronas Towers in Malaysia, has occasionally in the past coincided with economic crises. Reports suggest that the majority of new Dubai properties are being acquired for speculative purposes, with only small deposits put down. They are being flipped in the contemporary Miami manner.

• The sixth pillar is market inefficiency: Financial information in the Gulf is totally inadequate. The Saudi megacap conglomerate Sabic attracts no domestic financial analysis, says Nomura's Mr. Fadlallah. Companies report their results in a rudimentary fashion. It is against the law to sell short overpriced stocks in the Saudi market. And foreigners' financial sophistication is absent since only Gulf nationals can purchase Saudi stocks. Instead, speculators operate in an information vacuum in markets reportedly dominated by insider trading and practiced manipulation.

• The seventh pillar is the madness of crowds: Newspapers gleefully report stories of police called to protect banks from overeager IPO subscribers... The education minister has warned teachers to stop day-trading at schools. People are quitting their jobs to trade...

The Gulf Arabs are likely to be rudely awoken from their speculative dreams. In fact, the Arab markets are beginning to crack: Dubai has fallen 40% from its November peak, and the Saudi market is down by around 12% in the past few days...

The political consequences could be more serious. Arab rulers have deliberately encouraged the boom in the hope that rising asset prices and a strong economy would distract their youthful populations from religious fundamentalism. This strategy could backfire. History teaches that when speculative bubbles burst and the public loses large sums, there is normally a political backlash. This was true of the U.S. in the 1930s, and to a lesser extent in the early 2000s, and of Japan in the 1990s. It's not hard to imagine Islamists capitalizing on a future bust with denunciations of stock-market gambling. Some of today's young Arab day-traders could well turn into tomorrow's al Qaeda recruits.

If such a scenario plays out, and the Arab gulf bubble bursts, then it is certainly reasonable to suggest that the governments will face their toughest public accountability test yet. When oil prices were low in the late 1990s the gulf states, especially Saudi Arabia, were struggling, but they weren't facing the winds of change that they face post-Bush. I am prepared to predict that Kuwait, Bahrain, the UAE, Oman and Qatar will probably weather the storm, in part because some of them have already initiated moderate political reforms, in part because all of them have engaged in genuine diversification, and also because of special circumstances (Bahrain isn't oil dependent in the first place, and Qatar is the king of natural gas). But the Kingdom of Saudi Arabia could face some significant upheaval, or depending on social trends between now and then, possibly a genuine push for liberalization. Regardless, the busting of the bubble is something for which to look.
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Postby Adadeh » Wed Apr 19, 2006 9:51 am

http://news.nationalgeographic.com/news ... nergy.html
The End of Oil? Breakthrough Turns Coal Into Clean Diesel
Sean Markey
for [url=http://news.nationalgeographic.com/National Geographic News[/url]

April 18, 2006

With the price of oil topping a wallet-busting U.S. $70 a barrel yesterday, the search for alternative fuels keeps heating up.
Last week, scientists announced what may be a new end-run around the oil problem: producing diesel fuel from coal, natural gas, and organic material.
Reporting in the current issue of the Journal Science, researchers say they have developed a way to shuffle the carbon atoms derived from cheap fuel sources like coal to form more desirable combinations, such as ethane gas and diesel fuel.
In their study, scientists scrambled the makeup of hydrocarbons—organic compounds found in fossil fuels—using two chemical processes, one of which earned last year's Nobel Prize in chemistry.
The reaction produced ethane gas and diesel fuel.
The synthetic diesel "is much cleaner burning than conventional diesel, even cleaner burning than gasoline," said Rutgers University chemist Alan Goldman.
Goldman co-developed the process with Maurice Brookhart, a chemistry professor at the University of North Carolina at Chapel Hill.
"It's a very clever idea," Robert Bergman, a chemist at the University of California, Berkeley, told Science in an accompanying news report.
"I don't think this will be an industrial process tomorrow. But conceptually, it is important."

Nazi Germany

The technology might one day wring more diesel fuel and ethane gas from hydrocarbon byproducts produced by oil refineries.
But the new chemistry's greatest potential may be as a follow-up to an 80-year-old technology known as Fischer Trospch (FT) synthesis.
Developed by German scientists Franz Fischer and Hans Tropsch in the 1920s, FT synthesis converts carbon from coal, natural gas, or wood into hydrocarbons, including propane-like gas and diesel fuel.
Nazi Germany used the technique during World War II to manufacture synthetic fuel from coal, churning out 124,000 barrels a day by 1944.
Today oil-poor South Africa uses FT synthesis to distill most of the nation's diesel from its extensive coal deposits.
One downside to the process, however, is the output of so-called mid-size hydrocarbons—molecules with 4 to 8 carbon atoms—which can't be used as fuel.
Hydrocarbons consist of hydrogen and carbon atoms. The number of carbon atoms (anywhere from 1 to, say, 99) determines whether a particular hydrocarbon is a gas, liquid, or solid and whether it's the proper weight to burn as fuel.
Goldman says his new method can convert the otherwise low-value byproducts of the FT process into high-value fuels.
He says, for example, that two mid-size hydrocarbons with six carbon atoms each could be broken up and reassembled into a two-carbon molecule (ethane gas) and a ten-carbon molecule (diesel fuel).
The chemist thinks the breakthrough could deliver U.S. energy independence.
"The United States, for example, has 40 times as much energy in coal than we do in oil, and we have even more than that in oil shale," Goldman said.
"So I think Fischer-Tropsch chemistry is really the key to energy independence for the U.S., China, [and] India."

Key to Energy Independence?

In the U.S. the governors of Pennsylvania and Montana, both coal-rich states, have touted FT technology as a future source of homegrown diesel fuel.
Last September, Pennsylvania governor Edward Rendell said his state's government would buy fuel from a planned FT plant in the state designed to convert waste coal from mining operations into low-sulfur diesel.
Montana governor Brian Schweitzer has expressed even more ambitious plans. He believes Montana's 120 billion tons (109 billion metric tons) of coal could supply the nation's gas, diesel, and jet fuel needs for the next 40 years.
Because FT plants are expensive to build and maintain (an entry-level plant falls in the range of 1.5 billion U.S. dollars), the higher cost of FT synthetic fuels have made them too pricey for U.S. markets in the past.
"When oil was $20 a barrel, it really wasn't considered economical," Goldman, the Rutgers University chemist, said.
But today's high oil prices are now tipping the scales in favor of alternative fuels.
[url=http://magma.nationalgeographic.com/ngm/0406/feature5/?fs=www7.nationalgeographic.com(See National Geographic magazine's "The End of Cheap Oil.")[/url]
"Our hope is that what we've discovered will lead to something a little bit more economical [and] efficient," Goldman said.

Environmental Impact

One thorny issue is the net environmental impact of coal-based synthetic fuels.
According to the U.S. Environmental Protection Agency, FT fuels are cleaner burning than petroleum-derived products, producing fewer particulates and less dangerous nitrogen oxide.
But as FT fuels burn, they also release carbon dioxide and other greenhouse gases.
According to the U.S. Department of Energy's National Renewable Energy Laboratory, coal-based synthetic fuels may produce twice the greenhouse gas emissions of petroleum-based fuels.
Experts say one alternative may be the use of carbon collectors derived from animal waste, plants, and other organic material, which trap carbon from the atmosphere.
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