Middle-east Arab News Opinion | Asharq Al-awsat

Saudi Arabia’s forward looking strategy for global growth | ASHARQ AL-AWSAT English Archive 2005 -2017
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London, Asharq Al-Awsat- I would like to add my condolences to those of the British Foreign Secretary William Hague who expressed our government’s condolences following the passing of Saudi Arabia’s Crown Prince Naif bin Abdul Aziz Al Saud. Prince Naif served Saudi Arabia for many years with great dignity and dedication and his contribution to the prosperity and security of the Kingdom will be long remembered in Britain as well as in Saudi Arabia.

Two major events are taking centre stage this week: the G20 Summit at Los Cabos in Mexico and the second Greek election. Saudi Arabia is participating in the G20 Summit and continues to promote a forward looking and pragmatic stance on global growth. Saudi Arabia understands how an intricate progression of interrelated actions is needed to bring back confidence: and without confidence there will be little recovery. The price of oil is a core component.

After last week’s OPEC meeting in Vienna it is clear there are two distinct approaches to global oil pricing: oil importers see two schools of thoughts in Vienna. One school, the forward looking and positive approach that Saudi Arabia is promoting, is categorical that high oil prices are one of the primary reasons for the weak conditions in the economies of the US and Europe; the other school, the less constructive tactics sponsored by the Iranian/Russian positions, holds that the global economy has built up enough resilience to absorb oil price hikes due to stronger demand from emerging economies and more enlightened Central Bank policies.

We should all embrace and support the forward looking and positive approach that Saudi Arabia is promoting and reject the less constructive tactic sponsored by the Iranian/Russian positions. There is always geopolitics in these events, but the developed world and the developing world should both thank Saudi for its robust stance in looking to stabilise the oil price at a level that will restore investment confidence and stimulate global growth.

Saudi understands the needs of both the producers and the buyers. The other school, the Iranian/Russian school, seems only to be interested in the producers and their actions would only prolong the recession while simultaneously reducing their own oil income.

India’s oil minister, S Jaipal Reddy, at last week’s OPEC meeting set out a number of important points. India is the world’s fourth-largest oil importer after the United States, China and Japan. All these countries are experiencing negative or limited growth. Level-headed oil prices are fundamental to sustainable global recovery. India buys all of its major supplies from OPEC member nations – Saudi Arabia, Iraq and Iran. Given what is occurring from a global macroeconomic standpoint, Reddy has called upon oil producing and consuming countries to work together to build trust and share market data to establish demand certainty in international oil markets. This is very much a focal point of the Saudi approach.

Unsurprisingly, Reddy admitted that in an oil-importing country like India, higher oil prices lead to domestic inflation, increased input costs, an increase in the budget deficit which invariably drives up interest rates and slows down economic growth and recovery. That applies to many European countries as much as it does to India. Countries inside the eurozone, of course, cannot use the same fiscal policy as Britain as they are not in control of their own interest rates and that can have a devastating impact on competitiveness. You may recall that a couple of weeks ago I mentioned that the competitiveness crisis in Europe is potentially the most damaging of the three parallel crises. Sustainable and affordable oil prices are another tool in improving competitiveness.

The Iranian/Russian school seems to think that emerging economies will be able to compensate for loss of oil consumption in the developed world. That is the thinking of the foolish and represents a rapid downward spiral to the bottom. Where do they believe that the emerging economies sell the produce? There is far too much ill-considered expectation in that argument. It is wildly optimistic for anyone to image that the emerging economies will absorb North America’s and Europe’s, the world’s largest economies by a long way, purchasing capacity in the foreseeable future. Without recovery and confidence in the developed economies the emerging world is unlikely to emerge! This is borne out by a statistic at the OPEC meeting. Mr Reddy said, “There could not be a more direct cause and effect relation than high oil prices retarding economic growth of oil-importing countries,” Reddy said adding that a sustained US$10 per barrel increase in crude prices reduces growth in developing countries by 1.5%.

So what is Saudi promoting? Firstly Saudi Arabia is keeping political and economic pressure on Iran and Russia. Regional stability is essential for stable oil production and stable affordable oil prices. Secondly Saudi Arabia, almost alone in OPEC, is reminding the world that it understands the importance of stable and affordable oil prices for the good of every nation and is prepared to act. Saudi is reminding the rest of the world that it can cover any production shortfall, and so restore some confidence which may encourage more investment in other countries. This is important and in effect Saudi can stabilise the market price for oil by adjusting production to compensate for the loss of production from international sanctions imposed on Iran. Thirdly Saudi understands the market economics of different technologies in hydro carbons. Above a certain price level deeper sea production becomes highly attractive as does shale oil extraction and subsequently reliance on OPEC is greatly reduced. Fourthly Saudi, as a responsible global partner, is promoting its pragmatic attitude to oil production and pricing so as to encourage recovery and to help the rest of the world to come out of the current recession. Saudi by acting as a reliable friend to many nations is re-establishing some of the confidence that the markets have been lacking.

The second event is the second Greek visit to the polls which can be viewed as a virtual referendum on euro membership. The various parties in Greece are making their last pitch for votes as I write this article today ahead of that election. Greece’s future in the eurozone is entirely in the hands of the Greek people. The world’s economic problems are not just about Greece and it is naive to think so. The most dangerous thing would be panic so European leaders have made plans this weekend to keep the markets calm should Greece elect a government that will reject its austerity package.

In Britain at his annual Mansion House speech, Mr Osborne the Chancellor of the Exchequer said: “We are not powerless in the face of the eurozone debt storm. Together we can deploy new firepower to defend our economy from the crisis on our doorstep.” Within weeks George Osborne will rush out two more schemes to boost the British economy on top of a £140 billion lending kick-start unveiled last Thursday night.

Measures to boost house-building and major infrastructure projects by underwriting lending will be announced in the next month or so. The Bank of England will start pumping up to £100bn of cheap credit into the UK economy – at least £5bn a month – within the next few days. This is on top of its £325bn quantitative easing programme. The schedule is for the Extended Collateral Term Repo Facility auctions – which are reminiscent of the ECB’s LTROs. And under a new “funding for lending” scheme, worth up to £80bn, the Bank will provide cheap loans to banks for several years, at below market rates, in exchange for the banks lending the money to households and small and medium-sized businesses.

Bank shares jumped on the announcement of cheaper lending for businesses and homeowners. Royal Bank of Scotland and Lloyds shares leapt almost eight per cent on Friday.

Returning to the thoughts of Mr Reddy in India, we subscribe to the Saudi view and hold that very high and volatile oil prices will continue to weaken global efforts for an expeditious recovery to global growth. The forward looking and positive approach that Saudi Arabia is promoting is what is required and we thank them for standing against the less constructive tactics sponsored by the Iranian/Russian positions.