<a href=www.menafn.com>Middle East Economic Survey - 26/05/2003

The following article was submitted for publication in MEES by Professor Wulei of the School of International Relations at Yunnan University, Kunming, China.

In the run up to the Iraq conflict, China's top leadership paid full attention to the developments in the conflict and the essence of Sino-US relations was illuminated by the diplomatic maneuvering that occurred in the days before fighting started. US Secretary of State Powell's late February visit to Beijing failed to win China's support with regard to the Iraqi question. On the contrary, Chinese leaders insisted that weapons inspection in Iraq be continued, adding that that was the consensus of the international community. Shortly after Powell's Beijing visit, China and Russia issued a joint declaration opposing a war on Iraq led by the US and Britain. China has, on various international occasions, stuck to the stance that the Iraqi issue should be settled by peaceful means under the UN framework. Yet China's position on this issue was and is more flexible than that of France, Ger-many and Russia. This indicates China's contradictory attitude toward Sino-US relations. China's policy on the Iraqi issue is backed by substantial international interests, one being China's interest in Middle East oil, which is rapidly becoming the core framing China's Middle East strategy.

The Iraqi issue has in fact affected China's oil security although China imports little oil from Iraq and no reports of oil imports from Iraq for the year 2002 are to be found in China's National Customs Administration. Yet, oil price rises related to Middle East tensions inevitably lift China's oil imports bill. According to customs statistics, China witnessed its first trade deficit in its foreign trade history in January 2003 due to the rise of the oil price. In January, China's import of crude oil amounted to 8.36mn tons, up 77.2% from the corresponding period last year1, with an average import cost up by 51% resulting in a net import cost increase of $1.10bn. The rapid growth of oil imports and the rise of oil prices are the major elements behind the trade deficit.

In recent years, Middle East oil exports to China have become more and more prominent even though China does not have any strategic interest in this area. Nevertheless, the Iraqi issue has posed an enormous test, the first of its kind in the new century, to China, a country attaching more and more importance to energy security. China imported a total 89.75mn tons of crude oil and oil products in 2002, out of which crude oil accounted for 69.41mn tons, up by 15.2% from the previous year with an import amount reaching $12.757bn. Oil products im-ports reached 20.34mn tons or $3.799bn. Statistical figures clearly show that nearly 60% of China's imported crude oil is from the Middle East with Saudi Arabia, Iran and Oman being the top three, or 11.53mn tons, 10.73mn tons and 8.31mn tons respectively, making it a total of 30.57mn tons accounting for 43.3% of China's import of crude oil1. In other words, China imports over 700,000 b/d from the Middle East. The war on Iraq ex-posed China's import of at least 700,000 b/d to direct war threats and exposed the country's sources and chan-nels of oil imports to war risks.

China was also concerned that the Iraq war would cut off oil shipments from the Gulf. Moreover, now that China's oil market is part of the international oil market, oil price rises have serious consequences for the Chi-nese economy. It is estimated by the government that the rise of the oil price by $10/B will cut China's economic growth by 1%. For example, the international oil price rise in 2002 reduced China's GDP growth by 0.5%.

In strategic terms, China had good reason to be opposed to or at least not in favor of the US-led war against Iraq. It is concerned that a US victory over Iraq would give the US a tighter grip on Middle East oil, with oil from Iraq, Saudi Arabia and Iran, another key source of China's oil import, all increasingly contained by the US. As China's reliance on Middle East oil increases, the Middle East gets more strategically important to China, hence China's worries and concerns. The observations above give rise to the theme of this paper: Will there be any conflicts over oil between China and the US? There have been too many differences, frictions and even conflicts between the two countries. Will oil be the next one? American political and academic circles have long been concerned about China's burgeoning "oil hunger", be-lieving that China's oil "prosperity" will have a tremendous impact upon international oil security and the na-tional interests of major Western countries. The US and other Western countries' concern about China's oil de-mand is twofold: one is that China's increasing demand for oil is likely to worsen international oil supply, stimu-lating oil prices to go up; the other is that China's unilateral energy diplomacy will result in the export of China's arms and military technology, thus creating regional tension and conflicts, which is harmful to international oil security. Amy Jaffe wrote in Survival that China's global pursuit of oil is affecting its attitude toward US foreign policy and, "the change to China interests and orientations also poses challenges for the West: in effect, the in-dustrialized oil-consuming countries of the US, Europe and north-east Asia must convince an ambitious, energy-hungry China that secure supply for all requires a cooperative foreign policy. So far, unfortunately, China is tak-ing a different tack. It is pursuing a decidedly bilateral approach to energy security, courting on its own behalf major oil producers such as Saudi Arabia, Iraq, Iran and the Sudan. The implications of such efforts are worry-ing. When oil markets are as tight as they have been in the past two years, bilateral deals can invite demands for political accommodations in exchange for stable supplies. At worst, this might mean increased demands of Chi-nese deliveries of weapons-of mass-destruction-related technology to these politically sensitive markets."2 Apart from this, China is speeding up its modernization drive, especially that of the navy, to ensure its oil transport security, causing the concern of the US and other Western nations. All these are related to oil.

In the eyes of some Chinese scholars, American scholars have exaggerated the so-called Chinese oil threat, pos-sibly to nurture the atmosphere needed by the US government to contain China in its energy politics in the fu-ture. Such a containment approach is more stealthy and effective and at the same time serves well Washington's overall foreign policy strategy toward China. In the early days of the George W Bush administration, US policy toward China was hard and strong and what Bush said against China was not merely repeated terminology. US politicians, congressmen and scholars, whether they are democrats or republicans, tend to push for a policy of watching and containing China. The anti-China force in the US is so strong that it will surely be reflected in the issues of energy. The 11 September events did draw the two nations closer together mainly because the US needed China's aid and assistance in its global counter-terrorist campaign, but the mutual cooperation is still limited and the fundamental and structural differences are still there.

Differences in political systems, ideology and values are just superficial and traceable to history. The American element affecting China's oil security is felt more in the geopolitical struggle. In essence, as China grows stronger and its demand for strategic resources (including oil) gets greater, a competitive relationship between China and the US will take shape first, making geopolitical struggle inevitable. Secondly, also because of the dif-ferences in political systems, ideology and values, geopolitical struggles would probably develop into some sort of "hot war" such as frictions and conflicts, rendering China's oil supply chain under direct US political and military threat. "In the short-run, Sino-American relations are unlikely to deteriorate and may even improve. In the longer term, however, the rivalry between the two powers will probably intensify, fed by the unforeseen consequences of recent, tragic events."3 In a relatively long period of time, China can not be a competent rival for the US and therefore the development of Sino-US relations in general will, to a large degree, affect China's oil supply security.

Since the end of the Cold War and the fall of the Soviet Union, while China's diplomacy has been aimed at en-suring and maintaining the stability and security of the Euro-Asia Continent (neighboring countries, former So-viet republics in particular), adequate attention is also diverted to the encircling trend resulting from the US con-tainment of China by establishing and fortifying its spheres of influence along China's borderline and coastline. As the curtain of the 21st century draws open, China's diplomatic achievement is remarkable in terms of its friendly relations with its European and Asian neighbors. Taking the advantage of the Shanghai Cooperation Organization (SCO), China has established political, economic and security relations with Russia, Kazakstan, Tajikistan and other former Soviet Republics. Meanwhile, China's relationship with India has also improved without hurting its traditional friendship with Pakistan. Nonetheless, after the 11 September events, China's se-curity environment is more symbolic than realistic The US-led anti-terrorist war in Afghanistan brought US in-fluence into Central-Asian nations; agreements reached between the US and Russia on energy and other areas seem to indicate that a more cooperative relationship between the two countries has been built up with regards to issues like NATO's expansion eastwards, anti-ballistic missiles and the transfer of sensitive technology. The US has set up a bridgehead in China's southwest backyard, posing a serious direct threat to China's political, economic and military security and a potential threat to China's energy security. Under this circumstance, oil supply to China from Central Asia is much affected by the US.

The Chinese government is well aware that some American scholars and congressmen are keen on advocating such a "China Threat" to incite Asian countries, creating tension in northeast Asia and at the same time, oblivi-ous to China's opposition, amending the US-Japan Defense Guidelines, and expanding the sphere of US-Japanese military cooperation. All these are detrimental to China's reunification program and the stability in east Asia. After the accomplishment of containing China by the two wings, eastern and western, the US turned to strengthen its diplomatic antenna in southeast Asia in an attempt to ensure an absolute control over the oil in this area. The logical deduction is quite evident: to control oil in the Middle East and Central Asia, you have to control South Asia first because it is an important doorway to Central Asia and a sideways door to the Middle East. The control of India is the control of the throat of oil import by Asian and Pacific countries; the control of Pakistan is the control of the entrance of Central Asian oil into the Gulf. Now, the US has succeeded in seizing the initiative of the geopolitical struggle in the two important regions.

To the US, the control of the Middle East and Central Asia means the control of world oil; the control of oil means the control of the world. So therefore, it is of vital importance for the US to control shipping routes from the Gulf, southward to the Arabian Sea, westward to the Indian Ocean, through the Strait of Malacca and the Strait of Taiwan and finally to China and other oil-consuming countries. The US-Japan "Defense Cooperation" has already included China's Taiwan in its coverage as a peripheral area. China, once at a loss to control the de-velopment of the Taiwan issue, will be at a loss to control entry points into the sea even within its own sover-eignty, being once again thrown into an island-rim encirclement. On the other side of the issue, the US has taken a series of military measures to ensure oil security in the Middle East and Central Asia: keeping a large army permanently in the Middle East; maintaining military bases in the Gulf for military demonstration, deterrence and peace-keeping in peace time and for military operations in war time. If needed, enforcement from troops stationed in Europe and East Asia is quickly available. Readjusting theatre command systems is another impor-tant step of the US military. Early in October 1999, the US Defense Department transferred the commanding power of the US forces in Central Asia from the Pacific Theatre to the Central Theatre. This symbolizes the trans-formation of the US strategic focus. Today, after the US-led war on Iraq, China is more concerned over its oil security. Once the Sino-US relationship is out of control, China's oil supply will have to face up to the possibility of being cut off by the US. The fact that China's oil import has to be undertaken in the eyes of the American mili-tary forces in the Middle East and Southeast Asia worries China most.

Ever since China became a net oil importer, it has been gravely concerned over its oil security. Both being oil importers, China and the US are finding more common interests with regard to energy security. Both countries face similar problems: the exhaustion of domestic oil supply; domestic oil production falling short of demand, increasing need for oil imports and external oil security environment. Both countries hope for a stable supply and price in international oil markets. The two countries have a lot in common in terms of maintaining a reliable, safe and constant oil supply globally and preventing international oil supply from being disrupted and oil prices from going up too sharply. Nevertheless, a huge disparity lies between their respective oil security environ-ments as viewed from such perspectives as energy structure, degree of reliance on foreign supply, security envi-ronment and related insuring measures. Generally speaking, China's oil security environment is no better than that of the US and this is one of the key reasons why China has to take a contradictory attitude toward the US.

Difference In Energy Structure

China is a developing country with coal as the number one option, although oil is playing an increasingly im-portant role both politically and economically in the country. At the moment, coal accounts for as much as 67% of China's energy consumption while oil accounts for less than 20% and natural gas under 3%; whereas in the US, the proportion of oil and natural gas in the energy structure are 48% and 27% respectively. Even though by 2020, China's oil consumption is expected to slowly rise to 24%, coal will still take at least 60% of market share. Little change is expected of US energy structure in 20 years to come. The conclusion is that the US is more de-pendent on oil than China is and consequently it receives more pressure in the field of oil security.

Difference In Oil Consumption And Import Dependency At present, China's consumption of oil is around 3.8mn b/d, 36% of which is imported from outside the country. In the US, oil consumption is as high as 19.70mn b/d and 60% of it is dependent on imports. Based on these fig-ures, it can be inferred that the US now has more of a reason to be worried about oil security than China does. But, according to the scenarios of the International Energy Agency (IEA), in 20 years' time, China's consump-tion of oil will reach 11mn b/d, pushing the dependence on imported oil up to 76.9%. In the corresponding pe-riod, US oil consumption will spiral up to 26mn b/d but its dependence on imported oil will remain almost what it is today4. That is to say, in 20 years, China will have more of a reason to be worried about oil security than the US or at least equally so.

Difference In The External Environment For Oil Security

Though there exists a huge disparity between the US and China in terms of the levels of economic development and oil dependence, it is difficult to say which one is better than the other in this area. As a matter of fact, in the near future, China will find itself at least equally perplexed by this problem. At present, China is getting more and more dependent on oil from the precarious Middle East and it has to continue to do so in the foreseeable future. The US case at the moment is that of all the oil it imports, 80% is from its neighboring counties (Mexico and Venezuela, for example) and West Africa (an area also known as the Atlantic Basin) and only 20% is from the Middle East (mainly Saudi Arabia). In the future, the US can still rely on oil imported from the countries in the Atlantic Basin. It is estimated that by 2020, the percentage of US imported oil from the Middle East will re-main almost the same as what it is now (around 20%) while for China, that percentage will rise to over 80%5. Obviously, China's external environment for oil security will be much more serious than that of the US.

Difference In Oil Security Guarantees

Oil security is guaranteed by a range of political, economic, military and diplomatic measures applied compre-hensively and these are of vital importance in the present-day world. In this endeavor, China lags far behind the US. US oil security is built upon a strong state power supported by its extensive alliance with major Western industrialized countries and important oil producers in the world (Saudi Arabia, for example). These allied na-tions take common measures, policies and strategies to guarantee the oil supply needed for their social and eco-nomic development. The IEA is a long-term project of international cooperation in this field. Apart from this, the US keeps military forces permanently in oil-producing and strategically sensitive areas, as a guaranteed meas-ure. Furthermore, the US enjoys a comprehensive system of laws and regulations in dealing with oil crises. The establishment and development of strategic oil reserves is the cornerstone for the guarantee of US oil security and this practice has been a great success. It should be mentioned that the US is quite efficient in collecting, ana-lyzing and processing information concerning the international oil market and making scenarios about oil prices. In contrast, China either lacks such institutions or falls short of the necessary guaranteeing measures in this key issue.

The fact that China's oil supply is more and more dependent on shipment by the sea and the possibility6 that the US might cut off China's marine routes as a result of the deterioration of Sino-US relations are attributable to China's modernization drive of its navy and air force. Every country will follow this path to ensure its oil trans-portation, not least China, a rising power. The question is: What will happen to Sino-US relations once there is an outbreak of conflicts over the oil issue? One thing must be made clear: China is not like Iraq and Korea. It will, when confronted with serious threats to its oil security, mobilize all its military and political resources to ensure its oil supply security, or to interfere in the oil supply of the US and its allies like Japan and the Republic of Korea in key transport routes such as the South China Sea, the Strait of Malacca or even the Strait of Taiwan. China's operations would consist of "containment and threats". Actually, the compromise and commitments China made in arms control and technology transfer are conducive to the stability and security of Middle East oil. The US and its Western allies should continue to encourage China to do so because only by strategic coop-eration can the two sides avert frictions and conflicts.

On the other hand, China should actively rather than passively maintain and expand its coordinative relations with the US. In fact, as long as the US does not embarrass China on the Taiwan issue, it is possible for the two sides to carry out all-round dialogue and even cooperation. After all, common interest in stabilizing oil supply and price makes it necessary for the two countries to exercise strategic cooperation and diplomatic coordination.

It is true that China has not given serious consideration as to whether it should carry out multilateral coopera-tion with other major oil consuming countries, namely, the application for membership of the "oil club" consist-ing mainly of Western oil consumers. Since China's entry into the WTO, it has found more and more common interests that can be shared with the Western nations by strictly fulfilling the commitments made under WTO agreements. The US, accordingly, should gradually lead China on to the right track in a sense of creating a se-cure international oil environment with substantial institutions and organizations by, for instance, inviting China into the "oil club", the IEA, in order to turn China's unilateral energy policy into a multilateral one. This may help eliminate US distrust about China on the issue of energy security and commit China to more interna-tional obligations and observation of the IEA Charter as required of the full members: 1) Under the IEA frame-work, China will have to set up strategic oil reserves as specified by IEA to minimize, in case of emergency, a state's political and economic vulnerability; 2) Through effective cooperation with the IEA, China will be able to prevent or curb the incidence of oil crisis; 3) China's membership in the " oil club" will enable China to obtain or share oil market information , which is helpful for China to coordinate with the US and Western countries in oil matters; 4) Cooperation with the West facilitates China with energy-tapping technology and energy investment knowledge and environment protection knowhow and, more importantly, through international energy coop-eration, China and the US can reduce their frictions and conflicts over oil and eventually, for the sake of interna-tional oil security, put the importance of energy security on the agenda, all for a better future of Sino-US rela-tionship.

1. See monthly statistics of China's national customs (in Chinese), February 2003.
2. Amy Myers Jaffe and Steven W. Lewis, Beijing's Oil Diplomacy, Survival, Vol 44, No 1, Spring 2002, p 115.
3. Aaron L. Friedberg, 11 September and the Future of Sino-American Relations, Survival, Vol 44, No 1, Spring 2002, p 45.
4. IEA, World Energy Outlook 2000, OECD/IEA, Paris, 2001.
5. AEI, Annual Energy Outlook 2001: With Projections To 2020, December 2002.
6. Jonathan Rynhold, China Cautious New Pragmatism in the Middle East, Survival, Vol 38, No 3, Autumn 1996, p 111.

<a href=www.arabnews.com>Arab News Tariq Ali, The Guardian

LONDON, 25 May 2003 — Unsurprisingly, the UN Security Council has capitulated completely, recognized the occupation of Iraq and approved its re-colonization by the US and its bloodshot British adjutant. The timing of the mea culpa by the “international community” was perfect. On Thursday, senior executives from more than 1,000 companies gathered in London to bask in the sunshine of the re-established consensus under the giant umbrella of Bechtel, the American empire’s most favored construction company. A tiny proportion of the loot will be shared.

So what happened to the overheated rhetoric of Europe vs. America? Berlusconi in Italy and Aznar in Spain — the two most right-wing governments in Europe — were fitting partners for Blair while the Eastern European states, giving a new meaning to the term “satellite” which they had previously so long enjoyed, fell as one into line behind Bush.

France and Germany, on the other hand, protested for months that they were utterly opposed to a US attack on Iraq. Schroeder had owed his narrow re-election to a pledge not to support a war on Baghdad, even were it authorized by the UN. Chirac, armed with a veto in the Security Council, was even more voluble with declarations that any unauthorized assault on Iraq would never be accepted by France.

Together, Paris and Berlin coaxed Moscow too into expressing its disagreement with American plans. Even Beijing emitted a few cautious sounds of demurral. The Franco-German initiatives aroused tremendous excitement and consternation among diplomatic commentators. Here, surely, was an unprecedented rift in the Atlantic alliance. What was to become of European unity, of NATO, of the “international community” itself if such a disastrous split persisted? Could the very concept of the West survive?

Such apprehensions were quickly allayed. No sooner were Tomahawk missiles lighting up the nocturnal skyline in Baghdad, and the first Iraqi civilians cut down by the Marines, than Chirac rushed to explain that France would assure smooth passage of US bombers across its airspace (as it had not done, under his own premiership, when Reagan attacked Libya), and wished “swift success” to American arms in Iraq. Germany’s cadaver-green Foreign Minister Joschka Fischer announced that his government, too, sincerely hoped for the “rapid collapse” of resistance to the Anglo-American attack. Putin, not to be outdone, explained to his compatriots that “for economic and political reasons”, Russia could only desire a decisive victory of the US in Iraq.

Washington is still not satisfied. It wants to punish France further. Why not a ritual public flogging broadcast live by Murdoch TV? A humbled petty chieftain (Chirac) bending over while an imperial princess (Condoleezza Rice) administers the whip. Then the leaders of a re-united North could relax and get on with the business they know best: Plundering the South. The expedition to Baghdad was planned as the first flexing of a new imperial stance. What better demonstration of the shift to a more offensive strategy than to make an example of Iraq. If no single reason explains the targeting of Iraq, there is little mystery about the range of calculations that lay behind it. Economically, Iraq possesses the second largest reserves of cheap oil in the world; Baghdad’s decision in 2000 to invoice its exports in euros rather than dollars risked imitation by Hugo Chavez in Venezuela and the Iranian mullas. Privatization of the Iraqi wells under US control would help to weaken OPEC.

Strategically, the existence of an independent Arab regime in Baghdad had always been an irritation to the Israeli military. With the installation of Republican zealots close to Likud in key positions in Washington, the elimination of a traditional adversary became an attractive immediate goal for Israel.

Lastly, just as the use of nuclear weapons in Hiroshima and Nagasaki had once been a pointed demonstration of American might to the Soviet Union, so today a blitzkrieg rolling swiftly across Iraq would serve to show the world at large that if the chips are down, the US has, in the last resort, the means to enforce its will.

The UN has now provided retrospective sanction to a pre-emptive strike. Its ill-fated predecessor, the League of Nations, at least had the decency to collapse after its charter was serially raped. Analogies with Hitler’s blitzkrieg of 1940 are drawn without compunction by cheerleaders for the war. Thus Max Boot in the Financial Times writes: “The French fought hard in 1940 — at first. But eventually the speed and ferocity of the German advance led to a total collapse. The same thing will happen in Iraq.” What took place in France after 1940 might give pause to these enthusiasts.

The lack of any spontaneous welcome from Shiites and the fierce early resistance of armed irregulars prompted the theory that the Iraqis are a “sick people” who will need protracted treatment before they can be entrusted with their own fate (if ever). Such was the line taken by David Aaronovitch in the Observer. Likewise, George Mellon in the Wall Street Journal warns: “Iraq won’t easily recover from Saddam’s terror” — “after three decades of rule of the Arab equivalent of Murder Inc, Iraq is a very sick society”. To develop an “orderly society” and re-energize (privatize) the economy will take time, he insists. On the front page of the Sunday Times, reporter Mark Franchetti quoted an American NCO: “’The Iraqis are a sick people and we are the chemotherapy,’ said Corporal Ryan Dupre. ‘I am starting to hate this country. Wait till I get hold of a friggin’ Iraqi. No, I won’t get hold of one. I’ll just kill him.’”

No doubt the “sick society” theory will acquire greater sophistication, but it is clear the pretexts are to hand for a mixture of Guantanamo and Gaza in these newly occupied territories.

If it is futile to look to the UN or Euroland, let alone Russia or China, for any serious obstacle to American designs in the Middle East, where should resistance start? First of all, naturally, in the region itself. There, it is to be hoped that the invaders of Iraq will eventually be harried out of the country by a growing national reaction to the occupation regime they install, and that their collaborators may meet the fate of former Iraqi Prime Minister Nuri Said before them.

Sooner or later, the ring of corrupt and brutal tyrannies around Iraq will be broken. If there is one area where the cliche that classical revolutions are a thing of the past is likely to be proved wrong, it is in the Arab world.

— Tariq Ali’s new book, Bush in Babylon: Re-colonizing Iraq, will be published by Verso in the autumn.

<a href=www.menafn.com>MENAFN Middle East Economic Survey - 19/05/2003

Total OPEC oil production in April was little changed from March, falling 0.4% or 98,000 b/d to 26.902mn b/d from 27mn b/d in March, MEES estimates show (MEES, 21 April). OPEC-10 (OPEC without Iraq) production, however, was up by 3% or 782,000 b/d from 25.97mn b/d to 26.752mn b/d as Iraqi production shut-in during April due to the conflict was mostly replaced by other members of the organization. Aside from Iraq, where production fell to an average of just 150,000 b/d in the month, production from Iran and Indonesia was slightly lower in April while all other member countries, with the exception of UAE whose output was flat month on month, increased output.

The data showed that lost Iraqi production was replaced by increased flows of 450,000 b/d from Venezuela, where production levels continue to increase after the strike, with Saudi Arabia, Kuwait and Libya also each lifting output by 100,000 b/d in the month. Venezuela production includes some 380,000 b/d of syncrude. Nigerian output rose 50,000 b/d from March's low as shut-in production capacity was brought back on-stream after civil disturbances in the country eased. Algeria also lifted output by 50,000 b/d, reflecting the gradual increase in upstream and midstream capacity as the Ourhoud development production is ramped up and work on export pipeline expansion nears completion. MEES sources indicate that Iran's output comprised 2.242mn b/d of exports and deliveries of 1.45mn b/d to domestic refineries.

At OPEC's Consultative Meeting on 24 April, the organization agreed to cut production by 2mn b/d effective 1 June, set new quotas for members and thereby raise the ceiling from 24.5mn b/d for the OPEC-10 to 25.4mn b/d (MEES, 28 April). The move was aimed at consolidating prices within the organization's preferred $22-28/B price band and laying the groundwork for a possible return of Iraqi production in the coming weeks.

OPEC Crude Oil Production 2H 2002-April 2003 (MEES Estimates - '000 B/D) Quota 2003 2002 1 Feb Average Apr Mar Feb Jan Dec Nov Oct Sep Aug Jul 2003 2002 Algeria 1,200 1,150 1,150 1,050 1,050 900 1,000 900 870 860 782 883 Indonesia 1,050 1,090 1,050 1,110 1,100 1,120 1,100 1,100 1,120 1,120 1,270 1,117 Iran 3,692 3,730 3,950 3,713 3,750 3,740 3,500 3,700 3,350 3,560 3,597 3,470 Iraq 150 1,030 2,430 2,550 2,270 2,370 2,420 1,820 1,500 1,830 2,014 Kuwait* 2,400 2,300 2,100 1,900 1,820 1,800 1,800 1,920 1,910 1,910 1,966 1,853 Libya 1,500 1,400 1,400 1,350 1,330 1,340 1,330 1,330 1,320 1,320 1,312 1,317 Nigeria 1,850 1,800 2,150 2,150 2,100 2,000 1,980 2,000 1,950 1,900 2,018 1,978 Qatar 760 750 750 720 700 680 670 660 650 630 635 640 S Arabia* 9,500 9,400 9,200 8,400 8,000 7,800 7,850 7,700 7,600 7,550 7,963 7,551 UAE 2,250 2,250 2,200 2,100 2,000 1,970 2,000 1,960 1,990 1,970 2,138 1,952 Venezuela 2,550 2,100 1,500 620 1,000 2,970 3,200 3,100 3,000 2,700 2,819 2,635 Total 26,902 27,000 27,880 25,663 25,120 26,690 26,850 26,190 25,260 25,350 25,409 OPEC 10** 26,752 25,970 25,450 23,113 22,850 24,320 24,430 24,370 23,760 23,520 24,500 23,394

• Includes 50% share of Neutral Zone output, which averaged 600,000 b/d in April, steady with 1Q. Neutral Zone output averaged 597,500 b/d in 2002. ** Excludes Iraq.

Demand Recovery Imminent, Says Hetco Markets always appear weakest when they are about to turn, and the market's turning point should be about now, according to Edward Morse of Hess Energy Trading Company (Hetco). In the report May: It's Another Turning Point, published on 12 May, he says: "From now on, global product demand will be on a relentless seasonal increase that should continue through August. On average, OECD product demand grows by 1.7mn b/d between May and mid-summer, with the rest of the world kicking in another 500,000-600,000 b/d. Similarly, OECD refinery demand for crude also increases seasonally from May to August by an average of 1.7mn b/d, with the rest of the world adding another significant increment as well." Seasonal demand projections are central to the report's optimistic viewpoint: "2Q demand is invariably lower than 3Q demand, given the impact of summer driving in the northern hemisphere and of increased demand for oil in power generation to fuel air conditioning. On average 3Q demand rises by 1mn b/d over 2Q demand in the OECD. More striking, however, is the rise in demand between the low point in May and its peak in July/August. Since 1990, the average increase between May and mid-summer has been 1.735mn b/d in the OECD. There have been two years when the increase was significantly lower (1991 and 1995). But there have also been years when the increase has been significantly higher. In most of the 13 years between 1990 and 2002, the increase in OECD demand between May and mid-summer has hovered around or exceeded 2mn b/d. Our own projections foresee a demand increase in the OECD of 1.9mn b/d between May and mid-summer, about at the median of demand increases over the past 13 years." The report says that there are currently plenty of bears among market analysts, who point to 2Q as the low demand season, supported by indications that global demand was 1.8-2.0mn b/d lower in April than March, and that May is expected to be even lower: "Added to this sentiment are concerns about the impact of SARS on the Asian demand growth engine and generalized weakness in the global economy. They also point to OPEC's continuing overproduction along with expectations that Iraq could be back in the market quickly and robustly. But OPEC watchers should know better than to read ministers lips, in a world in which actions speak louder than words. OPEC appears to be taking an appropriate amount of oil out of flows in May and June. Iraq aside, the OPEC 10 appear ready to produce about 26.3mn b/d in May, or 440,000 b/d under April levels. They also appear ready to reduce flows by another 300,000 b/d in June, reining in output to about 26.0mn b/d, a mere 600,000 b/d above the quotas set for June (25.4mn b/d)." Mr Morse expects a "reasonable" build in stocks during 2Q, in the region of 1.6mn b/d: "That's just under the historical average for 2Q and will at best barely replenish global stocks toward the normal range by the beginning of 3Q." The real question mark over the market is not OPEC, the report says, but Asia: "It relates to Asian demand, real and apparent, and whether it will decline because of SARS and a cautionary, huge stock build in Asia over the past half-year." The report adds: "On the supply side there looms a very large unknown: extra stocks bought and hoarded in Asia from August 2002 through April 2003, to deal with a potential supply disruption from Iraq. Will the estimated 100mn barrels of extra stock build come back onto the market? If so, when?" On the demand side the report says that the largest estimates of the impact of SARS saw a demand reduction of 300,000 b/d for two quarters: "That is probably not enough to have a tangible impact on inventory levels, oil trade or prices, because there are two countervailing factors at work. These countervailing pressures include Japan's continuing problems with getting Tepco's nuclear reactors re-started and running. Current estimates focus on 200,000-300,000 b/d of incremental fuel demand for running thermal plants to replace nuclear energy through 3Q. They also include fuel switching in the US, which is resulting in at least 200,000 b/d of oil substitution for natural gas through 3Q as well. This depends on natural gas prices remaining higher than product prices on a BTU-equivalent basis, which now seems highly likely."

<a href=www.middle-east-online.com>Middle East Online

IISS says Washington encourages privatisation of Iraqi oil sector as alternative to Saudi Arabian supply.

LONDON - Washington has encouraged the privatisation of the Iraqi oil sector as it seeks to reduce its dependence on Saudi Arabia for oil since the September 11 attacks, the London-based IISS security think-tank said Tuesday.

Since the al-Qaeda attacks in Washington and New York in 2001, the United States has also sought oil-supply alternatives to the Middle East, particularly to Saudi Arabia, the International Institute for Strategic Studies said in its annual evaluation and forecast of world affairs.

"The neo-conservative gameplan that would reshape Iraq in the aftermath of the US military campaign into a market-reforming economy" has prominent supporters inside the US administration, IISS's strategic survey said.

"This influential group... takes the position that change in Iraq could be steered to bring more democratic principles to the Middle East, while leveraging expanding Iraqi oil production to undermine the dominance of other oil producers and render OPEC less important," it said.

"This is a highly optimistic and arguably unrealistic scenario," IISS said.

"While no one can say with certainty how democratic change in Iraq might alter the region, autocracy has always been a dominant feature of the Middle Eastern political landscape," the report said.

More than 60 percent of the world's proven oil reserves are concentrated in the Middle East region, which currently answers a third of the global demand. One quarter of all oil reserves are found in Saudi Arabia.

Iraq, Iran, Syria, Sudan and Libya, - so-called "countries of concern" to the United States - produce about 10 percent of the world's oil supply, the IISS report said.

A second trend in Washington "calls for a major grassroots initiative in energy source diversity", such as encouraging renewable energies, the report said.

A change in Iraq's status meanwhile could unleash competition among oil producers within the Organisation of Petroleum Exporting Countries (OPEC) that has been dormant for years, the IISS said.

Elsewhere OPEC faces a different picture with Venezuela's capacity constrained by well shut-ins, reservoir damage, and with civil unrest in Nigeria.

How the oil landscape will look in the five-to-10-year horizon is hard to predict, given the wide range of variables including geology, global environment politics, technological change and the shifting geopolitical relationships of the post-September 11 world, the survey said.

"Russia and the newly independent states of its southern flank are ranked second in undiscovered oil potential after the Persian Gulf, holding about 27 percent of the world's oil reserves," IISS said.

The region ranks first globally in undiscovered natural gas, it added.

But, IISS said, Russia has a long way to catch up with Saudi Arabia's oil in terms of exports.

"Thus, although Russia will be increasingly important to the US plans to diversify oil supply, a more varied strategy is still needed," the survey concluded.

<a href=www.arabnews.com>ArabNews.com

Question: The Emir of Qatar announced recently in a formal speech that political democracy and economic democracy are inseparable. To what extent does such a position support your view of a new economics in the Middle East?

A: In answer to the first question about political and economic democracy being important, our country strongly supports democracy in the Middle East — both political and economic democracy.

On Dec 12th 2002, Secretary of State Colin Powell gave a speech in which he referred to the Middle East partnership initiative. He stated that the United States is going to seek to support the economic and social participation in the Arab countries by the people of these countries.

Really what led to that speech was, as you know, the United Nations Arab Human Development Report by about thirty Arab scholars under the United Nations.... That report found that Arab countries seem to lag behind other areas of the world, and their income levels also, and education and civic institutions as well.

This Middle East Partnership Initiative recognizes that the Arab World is very diverse and that the way in which public participation in Arab society will occur is going to be different for each country. So what we are simply trying to do is say that we are interested in these principles.

As Secretary Powell put it: “There is a job gap, an education gap and an opportunity gap.” We want to find ways to empower the people in those countries to empower women and to revive economic opportunity, but it has to be done in the way that each country wants it done.

We are saying that we support these goals, we are here to help you, tell us and we will support it.

Q: Are you asking the governments or the people?

A: The government is the representative of the people in a theoretical sense. We make the request but we don’t stay simply with that, so we will be writing some pieces in some of your newspapers here in the Kingdom expressing our support of these goals, of these objectives, and asking the people to come to us.

Q: From what I hear the budget you appropriated for the project has been criticized for being so meager.

A: No, that was only for the first year, and I think there has been some misunderstanding about that — in the first year it was $29 million — but for the next year we are asking for several hundred million, and because the speech came in the middle of our budget cycle, that was all the money there was available that had already been appropriated by congress.

Now we are going back to Congress, the representatives of the people in our democracy, to approve several hundred million for the coming year; we’re optimistic that we’ll have that kind of money.

Q: That’s for the Arab World?

A: That’s correct. The Arab world is the only area we are directing this money to.

Q: Many expect the US to use Iraq to dismantle OPEC. From your perspective, are these concerns founded?

A: There is no plan to dismantle OPEC. What we’re trying to do is to remove the UN sanctions from Iraq and quickly phase out the oil for food program, which right now is the only real way Iraq can sell its own oil. As the Iraqis establish their own government, it’s going to be up to them to decide what international institutions, if any, they want to participate in.

Q: Will you put pressure on them or try to influence or persuade them to participate?

A: I don’t think there are any specific plans in that regard — it is something that the Iraqi people are really going to have to come to terms with, and I am sure they are going to want to explore participation — but they are going to want to explore other options as well, and we support the result that is consistent with the wishes of the Iraqi people.

Q: Gulf oil producing states have huge financial and real estate investments abroad, especially in the US and Europe, estimated to exceed $2.75 trillion. Do you expect a reorientation of these investments toward Europe as a result of local worries?

A: We are not concerned about the loss of investment from this part of the world in the US. Wealth investors invested billions of dollars all around the world. They are very sophisticated and the decisions they make on their investments are based on risk and return. They are going to put money where it is safest and where there is the best chance of making the smartest investment.

The US is the largest and the fastest and most transparent of the three major financial markets in the world, the US, the EU and Japan. I am completely confident that the US will continue to attract a very large percentage of the investment dollars from abroad.

Q: But don’t you agree that some lawsuits do frighten investors, such as the one filed on behalf of the victims’ families against the alleged Arab supporters of Sept. 11 terrorist?

A: I don’t want to comment directly on the lawsuit, but I think it is safe to say that we have a very transparent legal market and system — your money cannot be seized in the US without what we call “due process of law.”

We have to have a proper court procedure, so any individual investor would not be subject to losing their investment merely because someone has filed a lawsuit against someone else in the US. We want to make it very clear that investment opportunities will exist under a very clear rule of law.

This is something that distinguishes the United States from many other countries.

Q: The US started a PR campaign to win Arab and Muslim hearts and minds before the war. Now the war is over and in the light of Arab and Muslim reaction to it, what changes do you envisage to the original plans?

A: I’m not sure I would say we have a PR campaign as such. We obviously want to get information out to the public about what we are trying to do, and I don’t think we need to change those efforts. The reaction to the liberation of Iraq so far has been mixed.

Q: We are talking about the campaign directed toward the Arab world — do you still have plans to put out “useful information” to Arabs?

A: Yes, and this goes back to the Middle East partnership initiative and what Sec. Powell announced on Dec. 12th. We want to explain ourselves to the Arabs in a way that shows we are partners — that’s why we call it a partnership initiative.

Q: Disarming Iraq of WMDs was a US main objective in this war. Still, the US seems reluctant to allow the UN to send back inspectors to do a neutral, credible search. From a legal point of view, how can the world verify any US claim in this case?

A: First of all, I think that sometimes we get caught up in labels. There is nothing about the UN that says that the finding of WMD by a UN inspector is more legal than finding WMDs by someone else. In fact, the US has hired former UN inspectors to help us in this search. The question that should be asked is not whether there is some label attached to the people conducting the search but: Have they found those weapons, and how persuasive is it that they have made that discovery?

Q: Why not the UN inspectors?

A: We’re putting a thousand people in the field — that’s many times more than the UN had — they did not succeed during the efforts they made previously.

We are on the ground now, we’re building the organization, we are already there, we can move more quickly and we have the expertise of the former UN inspectors available to us, so it makes much more sense to us to proceed along this basis as we are moving into areas that have, in some cases, been subject to heavy fighting, and a destabilized environment. We have our ability to provide security, and at the same time we engage in the search for the weapons.

It’s also important for us to be able to interrogate some of the former regime members who may be able to lead us to those WMDs — that is something that the UN is not currently organized to do. There are individuals we are pursuing, detaining and interrogating.

Q: When you find something, what do you do? Do you bring the UN to verify or the journalists to see what you have found?

A: I can’t predict the exact mode or method in which it will be done, but we will do it in a way that ensures the maximum credibility and reliability so that the people of the world will know for certain that these are actual weapons that have been discovered.

Q: How does the US justify deciding alone who gets what of the contracts to rebuild Iraq? How do you explain giving certain companies huge contracts worth tens of billions without due competitive process? How could other non-US/British companies participate? Would Saudi companies be allowed to take part?

A: It’s important to understand that these first contracts are essential emergency contracts. The people have many urgent needs right now. These are contracts that are going to be paid for out of the US treasury, this is not Iraq’s money that is being used at this point. If it’s the US treasury that is involved, then it’s fair to look at US contractors to lead the effort.

Q: You are not going to take that from Iraq’s oil?

A: These contracts that have been awarded to US general contractors have not been taken out of Iraqi oil money. It’s from the US Treasury.

Q: And it never will be?

A: No, not on these contracts. At the same time, these contracts are awarded to general contractors who are going to hire sub-contractors — and this could well involve Iraqi contractors, Saudi or other contractors from other parts of the world.

Q: Are you including France and Germany?

A: I don’t know specifically what contractors are being considered for which projects right now, but I am sure we will see the best people selected for the task at hand; this is US money that’s being used.

Q: Syria received prior assurances that it won’t be next on the US list and was thanked for its help during the previous Gulf War and the War on Terror. How do you explain the sudden change of attitude?

A: First of all, there’s no list. Our government’s made it very clear, there is no list. For many years, Syria has been identified as a state sponsor of terrorism by the United States. We have expressed a lot of concern that Iraqi war criminals were making their way into Syria, and in fact several have been captured as they were making their way toward the Syrian border. But we are very pleased that Syria has stated that it’s not going to let the Baathist regime leaders into Syria.

There is no great change in our position at all. We have had some successes in the war on terror with Syria, but we have also had a great concern that we have expressed very consistently for a number of years over their sponsorship of terrorism and more recently their inviting their country to these war criminals.

Q: Would you expect more assurances about their support of Hezbollah and Al-Jihad and others?

A: We are extremely concerned about Hezbollah and their role in arms shipments and other means of support for terrorists, and so I am sure we will continue to have a dialogue with them on this very serious and important topic.

Q: How does the US view the recent meeting of Iraq’s neighbors? Does the US appreciate these countries’ concern regarding the religious and racial re-mapping of the geopolitical map?

A: Regional stability is extremely important to the US — we believe that all countries in the region ought to be interested and involved in the reconstruction of Iraq. We applaud that interest. We don’t think that the US should determine what role these countries should play in the reconstruction of Iraq.

Q: Were you consulted about the meeting?

A: We were advised that the meeting was taking place, but they certainly didn’t need our permission to conduct the meeting and they would not seek that permission.

Q: Did you give them a message — for example not to interfere in Iraq’s politics?

A: The group that met in Riyadh didn’t need any instruction from us and they were very capable about making their own determination about not interfering in the internal affairs of Iraq. And I think they made a statement after that meeting that was their intent. We support their interest in maintaining the territorial integrity of Iraq and that the will of the Iraqi people can be accomplished, and so we were very much in tune with their interests in that regard.

Q: Has there been interference or meddling from concerned countries — e.g. Iran?

A: We have expressed our interest and so did the meeting of the neighboring states in Riyadh, that no individual state should attempt [to interfere] in the internal affairs of Iraq as they move through this critical period of establishing a new government. This ought to be something decided by the Iraqi people.

Q: How does the US value the Saudi Government’s stand in this war and the war on terrorism in general? What is expected of Saudi Arabia in the near future?

A: First of all, we deeply appreciate the role that Saudi Arabia has played in the War on Terrorism. We both have interests in this region — they are not identical interests, but I think the length and depth of our relationship with Saudi Arabia has allowed us to have differences yet at the same time to respect each other’s position. I have personally worked with many Saudi officials on the war on terrorism, and it’s important — not simply because the US expects this help, but because it’s important to Saudi Arabia as well. This is an area where our interests are very similar. We both hate terrorism, we both hate the idea of the threat of terrorism to any of our people. Terrorism threatens the people of Saudi Arabia and it threatens the security of the region. What we expect is Saudi Arabia to continue its efforts to confront extremists wherever they are found — and this is very much a common interest that we both share.

Q: We hear media reports about US demands for changes to the educational system, and watching some preachers. Is it true?

A: We have made no demands of any kind on the Saudi government in that regard. If the education system is to be changed or if the government is going to deal with religious extremists, then that’s because the Saudi government believes that’s in their best interests, not doing it to do us a favor of any kind. It’s simply a matter of internal decisions by the Saudi government itself.

Q: Also we hear that there is some kind of pressure on the government about women and human rights.

A: We have made no secret of the fact that we support human rights and religious freedom. Each year we publish our statement of religious freedom and we provide this information to the Saudi government. And we continue to express our support for ways in which women can participate more fully in any society and have rights consistent with their status.

Q: Many here suspect that what you have in mind is liberal freedom equal to what you have in the West, which means that women can go in bikinis or go without hijab — things like that. I don’t know if that’s true or whether this represents your official attitudes, but at least that is what many of the US-based women’s organizations say. What is your government’s stand on this?

A: We are very respectful of the traditions of the Arab world and the traditions of the religion of Islam. The men and women of Saudi Arabia will ultimately have to decide for themselves on how they want to adjust to the evolution of women’s rights. But what we are really talking about is ways in which women can participate in the economy, the society, so that they have the ability to decide for themselves what environment they want. At least have the ability to participate in those decisions. I think it trivializes the importance of this issue to suggest that any manner of dress or any way in which they present themselves defines this participation. This is not about wearing abayas, it’s about having a role in their own future.

Q: Do you have any details on this?

A: The US has always stood for religious tolerance; you can come to America and it’s one of the few countries in the world where you can worship any God you wish. No one will tell you how to worship or whether to worship. That’s something that really just needs to be accommodated and dealt with by each country. We’re just saying that we don’t think it’s appropriate to discriminate against individuals because they are Shia, any more than it’s appropriate to discriminate because they worship in some other creed. If the Shia don’t have the right to participate in the government, then we view that as a problem, quite frankly. I am pleased to see that in Saudi there is a Shia ambassador to Iran for example, there is some Shia representation on the Shoura Council, there is some representation, of course, Shia in business and other endeavors...

Q: In the future in Iraq, if they choose anti-American parties, will you respect the result?

A: Democracy doesn’t simply mean being pro US. Democracy means respecting the will of the people. This means having a system in place that means you can realize the will of the people. We certainly would hope that the two countries would have good relations, and we believe that if a democracy is instituted in Iraq, it does respect the will of the people, then we hope that the people of both countries would work hard to have good relations, and I would expect us to have good relations.

Q: Arafat was also elected by a democratic mechanism. America didn’t like him and objected to his election — will this happen again in Iraq, if the same mechanism produces someone like Arafat?

A: I hesitate to speculate — certainly not that far down the road. Our concerns about Mr. Arafat had a great deal to do with his support for terrorism and his refusal to use the power at his disposal to stop terrorist activity at a time when the Palestinian people were crying out for leadership and an opportunity to move forward.

Q: But for example a leader who is very much influenced by neighbors like Iran and who is really Anti-American but is produced democratically — like what happened in Algeria, for example, when some Muslim parties won the election. As a matter of principle, if you don’t like them, will you object to them or accept them?

A: I think that saying that we don’t like someone is a little bit of an oversimplification. There are certainly democratically elected leaders in the world with whom we have had disagreements from time to time. I don’t want to name names, but recent history can give you a few suggestions. It doesn’t mean that we don’t have a great deal in common and common interests, either with the leadership or the people of those countries. So, I would expect in any democratic environment, you are going to have issues on which you agree and issues on which you disagree.

Q: In the case of Venezuela, for example, which has no support for terrorism or anything, you just didn’t like the leader and you objected to him — and there was some kind of support for the revolution against him, at least in the beginning — how do you explain that?

A: I don’t think we have ever agreed that we support a revolution against the leader of Venezuela — we may have disagreements from time to time, but we are very much committed to the determination by the people of any particular country of who their leadership to be. That doesn’t mean that we won’t have vigorous disagreements from time to time, and that when we do, we try and diplomatically work them out as we are trying to do in so many areas of the world right now.

Q: Will the US publish the original peace map, and if Israel continues to object and demand modification, what will be your stance? How much investment and involvement will the US continue to make in this process?

A: First of all, we will publish the road map, we are simply awaiting the approval of the final Palestinian Cabinet by the Palestinian Legislative Council. We’re encouraged that that can be done soon, and we are vigorously committed to moving forward on the road map. President Bush and National Security Council Advisor Condoleezza Rice have both said that the road map is not negotiable. This is a plan that is a guideline on which we expect the two parties to sit down and develop.

Q: There are some speculations that since the US administration is going into elections soon that they might be reluctant to make pro-Israel groups angry. And that is why they might agree to some modification to the plan as Sharon wanted.

A: The president is very much known as a man of his word and he has made it very clear that the principles set forward in the road map are critically important. At the same time, at some point in the process, the parties involved, the Palestinians and the Israelis, are going to have to sit down and they are going to have to negotiate.

Q: But if the Palestinians agree to the map “as is,” and demand that is what we want, would they be forced to negotiate on this if the Israelis objected?

A: I think the president has been as clear as he can possibly be. The road map is the road map.

• Arab News Features 1 May 2003