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The essential difference between rich and poor nations (say the less-developed countries) is the percentage between the purchase price of an ounce of raw cocoa in West Africa and the selling price of a Hershey bar in New York (or, indeed, Accra). The poor nations get only the fluctuating price of the raw commodity, determined by outside buyers. The rich countries receive the value added by transporting, manufacturing and packaging the commodity into an end product, along with all the jobs and industry created - from shipbuilders and wax paper manufacturers to advertising agencies.
Poor nations naturally wish to produce the candy bar in West Africa, near the source of the raw material that makes it all possible. Developed countries say this doesn't make economic sense; they have invested huge amounts of capital in shipping lines and chocolate factories; they already have the necessary trained tasters and candy-wrapping work force, and can do the job better than the poor nations ever could. The Third World replies that the developed countries - grouped in the Organization for Economic Cooperation and Development (OECD) - control this whole industrialization/manufacturing process and that the LDCs must break into it if they are ever to gain higher living standards and some economic independence. At issue are all the concerns of industrial and trade politics: the transfer of technology and capital, surplus productive capacity in Western industries, access by LDCs to OECD markets, jobs, tariffs, protectionism, economic autarky or dependence, self-esteem, power.
Now, for the first time since the breakup of the old colonial empires and the reemergence of Japan as an industrial producer after World War II, a group of less-developed countries in the Middle East and North Africa are moving to break into this industrialization cycle. Their weapon is not chocolate but their huge resources of oil and natural gas. Rather than simply shipping crude oil to the West and Japan, they are attempting to move downstream to produce and export refined petroleum products and petrochemicals - the basis of items from synthetic fibers, fertilizers and plastics to rubber and pharmaceuticals. Gas is not only important as an energy source and chemical feedstock, but is also the basis for new methods of steel-making and aluminum and copper smelting.
Thus, in the fall of 1977, Libya brought a methanol plant on stream and the Organization of Arab Petroleum Exporting Countries (OAPEC) opened its Arab Shipbuilding and Repair yard in Bahrain. In the spring of this year, Saudi Arabia started up a lube-oil plant in Jeddah, Qatar inaugurated a steel mill, and the Iranians saw the opening of a copper smelter, a fertilizer plant and a significant extension to the Abadan refinery. By early 1979, a further wave of projects should either be on stream or on the verge of completion: steel ventures in Iraq and (quite extensively) in Iran; aluminum in Iraq and Dubai; more fertilizer plants in Qatar, Iran, Algeria and Egypt; and huge petrochemical ventures in Algeria and Iran.
With the exception of the Libyan, Iranian and perhaps the Algerian projects, none of these is designed for the export of significant quantities of products to the OECD world. Both Saudi Arabia and Iran, however, have on the drawing board a number of giant petrochemical complexes and refineries that will clearly look to the industrialized economies for much of their markets. There is thus growing concern that the current wave of Middle Eastern industrialization - now primarily of regional importance - will prove the forerunner of a later wave of projects that will be aimed at world markets in the 1980s. Is this likely? What are the policy implications for both the industrialized and oil-producing worlds as the latter strives to become a world force in oil- and gas-based industries of the 1980s and beyond?
We concentrate in this article on Saudi and Iranian ambitions in petrochemicals and refining, on the grounds that these are the two leading oil producers within OPEC, and that it is within these two chosen industries that the Saudis and Iranians are most likely to emerge as significant exporters of industrial products.
There is an impressive list of corporations seeking to help these countries enter such industries. Mobil and (U.S.) Shell are joint front-runners - each is to construct an ethylene-based petrochemical complex and oil refinery with the Saudis.1 Other U.S. companies involved in planning chemical or refining ventures in Saudi Arabia include Exxon, Chevron, Texaco, Celanese, Texas Eastern, W.R. Grace and Dow Chemical. European companies have generally been conspicuously uninterested in such ventures with the exception of some minor chemical projects in Iran. Otherwise, it is the Japanese who are the main corporate players. Mitsubishi is currently considering two separate ventures in Saudi Arabia (one in conjunction with C. Itoh), but it is Mitsui that has proved the bravest of all these companies. Its joint venture with Iran's National Petrochemical Company has actually started constructing a petrochemical complex at Bandar Shahpur, which in size and number of products is notably more ambitious than any of the other projects under consideration by OECD-based corporations. Finally, by way of setting the scene, Taiwanese interests are seriously considering a joint venture with the Saudis to produce fertilizers.
At first glance, the logic of placing such plants in the Middle East seems very clear. Vast amounts of gas there are currently flared for want of anything better to do with them, so it would apparently make sense to take this free resource and use it as a feedstock for turning into petrochemicals such as ethylene. Similarly, as world oil markets tighten, turning crude oil into higher value products in the producing country seems a logical step. The Saudi Minister of Industry, Dr. Ghazi al-Qusaibi, recently put the argument this way: "The world is at present witnessing an historic and fundamental transformation in the field of energy-intensive industry. In the past energy went to industry. Now, when energy is running short and prices have risen, industry is going to energy. It is no longer acceptable for us to export energy and have it come back to us in manufactured form at an exorbitant price. But it is logical for the processing of energy to be carried out in our country and for us to be partners in the processing operation."2
The corporations who are potential partners in such industrialization would be delighted if they could also perceive the immediate real world as simply as that. In practice, we are struck by the extreme caution with which all the companies - with the exception of Mitsui - are moving in their negotiations with the two Middle Eastern governments. Certainly, they are all involved in detailed feasibility and pre-engineering studies; what they are proving very shy of is actually committing themselves to start building any of these projects. Some of these delays stem from simple negotiating uncertainties - the Saudis, for instance, are still not too explicit about the exact price they will charge for the gas needed by these industrial projects, nor is it entirely clear under what circumstances the foreign partners will be supplied with guaranteed amounts of crude oil as an added incentive to involve them. Most of the corporations' reluctance, though, stems from the fact that short- to medium-term economic realities do not favor the kind of switch in the location of hydrocarbon-based industries which the oil-producing nations expect.
To put it bluntly, at this point in time the generation of export-oriented projects we are discussing is of questionable international competitiveness. If we look into the mid-1980s, we can see circumstances in which selected projects might be marginally profitable by the criteria the Saudis are setting themselves. It is rather more difficult to see the Iranians becoming internationally competitive during the coming decade - especially as they will be working under tighter financial constraints than the Saudis, and thus will have less freedom to subsidize the construction of major capital-intensive projects.
The economic arguments can be put quite simply. Of the six most important variables that will affect the ultimate profitability of such petrochemical and refining projects, four are currently working against the Middle Eastern states. In descending order of importance, these are: until well into the 1980s, there is going to be considerable overcapacity in large parts of the world's petrochemical and refining industries, thus making it an extremely risky proposition for any corporation to start construction today on a plant that will come on stream in, say, 1983 (when Mobil's ethylene complex is officially planned to begin); construction costs for plants run relatively high in the Middle East as compared with costs in Europe or North America; operating costs will be relatively high until expensive Western and Japanese expatriate managers can be replaced by equally reliable indigenous or Third World managers; and, finally, since the Middle East is remote from industrialized markets, transportation costs will be an added, if relatively unimportant, burden.
Against these disadvantages, both Saudi Arabia and Iran can offer assured supplies of relatively low-priced oil and gas; in the Saudi case, the authorities can also offer capital at interest rates well below world levels. Prospects are that the bigger foreign partners will be borrowing as much as 60 percent of their capital needs from Saudi sources at a minimum of three percent per annum. Second, while neither Iran nor Saudi Arabia has a desire to become a "dirt haven" for huge, aesthetically displeasing and potentially dangerous refineries and chemical plants, large, lightly populated industrial sites are available in both countries. Thus, environmental problems that have played havoc with industrial site expansion in the OECD countries should have only minimal impact in the Middle East.
The worst problem - marketing the products from these plants in the 1980s - is not one facing the Middle East alone. It will, however, affect the enthusiasm with which foreign partners are willing to commit themselves to construction, since the companies will ultimately be responsible for placing the products from these ventures on world markets. However, it is the interplay of the other variables (construction, operating, transportation, feedstock and capital costs) that will determine whether the Middle East really is the natural location for the generation of export-oriented, hydrocarbon-based industries planned for the coming decade. The trouble here is that the level of construction costs (which, coming early in a project's life, are weighted heavily by any discounting technique) is difficult to assess; there have been no equivalently sized plants built recently in the Middle East by foreign partners whose equity stake gives them a lot to lose if costs get out of control.3
On balance, we believe that the construction problem disadvantages are not so great that they cannot be substantially negated by a combination of cheap loans and cheap feedstocks (most negotiations seem to be settling round a demand of 35-50 cents per million BTU for gas supplies, which is under a fifth of what U.S. consumers are being asked to pay, c.i.f., for imported Algerian gas). We are not totally convinced, however, that policymakers in the two Middle Eastern countries concerned have fully faced up to the scale on which they will be required to use gas pricing as a subsidy to render these industrial ventures more viable. However, assuming they do write off the huge infrastructural development costs, provide cheap gas, and, in the Saudi case, throw in entitlements to a few hundred thousand barrels a day of crude oil on the side, then we are fast approaching the day when the first major foreign partner with the Saudis announces that it is willing to start construction on one of the petrochemical complexes under consideration.
At that point, we would not expect all the remaining foreign corporations to rush to the construction stage themselves. For one thing, with plants of this size, the construction of one temporarily spoils the market for succeeding projects, so that corporations try desperately not to construct such plants simultaneously. Second, these are truly major construction tasks, and however much the Saudi infrastructure is improving, the spreading of the construction load will be desirable for purely logistical considerations.
To sum up the Saudi prospects, we think they will be doing well if their first ethylene complex comes on stream by 1985, with the second one beginning operation a couple of years later. Further ethylene-based activities may have to wait until the 1990s. We would not be surprised, however, to see the construction of two or three other major projects under consideration (say, one of the methanol plants and one of the export refineries) in the short-term future.
Iranian developments will be less dramatic as far as world markets are concerned. In the early 1980s, Iran will be forced to export because it will take two or three years from the completion of the Mitsui-Iranian complex before investments in the necessary downstream processing plants will allow the fast-increasing domestic Iranian demand to absorb the bulk of this complex's products. Mitsui is committed to marketing this temporary surplus. From then on, given its relative (by Saudi standards) shortage of capital and large domestic market, it is an open question whether Iran will be a significant net exporter of chemicals during the rest of the decade. Its planners seem to be fully aware of the alternative uses to which gas can be put, and the petrochemical industry will thus have a harder fight than its Saudi counterpart to get gas at concessionary prices. Again, their plans for exports will inevitably be affected by how they see Saudi plans developing.
Finally, the Iranians will be unable to offer the kind of financial inducements to the foreign investor that the Saudis currently do. One suspects that if any further major export projects do get off the ground in Iran during the 1980s, they will do so because a government like the Japanese (which still has its eyes on a joint Iranian-Japanese export refinery on the Gulf sometime in the early to mid-1980s) decides that its wider interests in Iran would be helped by the construction of an economically marginal plant.
The fate of these projects does not just turn on economics. There are very strong political considerations as well. The governments of the oil-producing states, for instance, feel that they must industrialize, whether for reasons of development, security or national prestige. Remaining as mere exporters of unprocessed crude oil is politically intolerable when it is technically feasible to build sophisticated industries on oil and gas feedstocks. Furthermore, they know that if they cannot make a success of such refining and petrochemical industries, then they will probably never succeed in any industry at all. But they believe they must make a success of such industrialization; one day their oil will run out and their fear is that without an industrial structure in place waiting for that day, their countries will revert to poverty.
Most OECD governments are fully aware of these considerations, and have reasons of their own for encouraging such projects, which can only help OECD economies by encouraging the oil producers to recycle their oil income into ventures that offer jobs to work forces from the OECD world.4 Again, national authorities see gains in having some of their own corporations involved with these Middle Eastern products; in a time of rapid economic flux, companies with a good track record of serving the Saudis should be well placed for the era in which Saudi oil makes up the world's largest source of production. All this holds particularly true for the Japanese, who are heavily dependent on Middle Eastern oil and have a long history of concern over their dependence on imported commodities. It is no accident that the largest Middle Eastern petrochemical venture actually going ahead has a Japanese company as the foreign partner.
The multinational oil companies are also only partly motivated by short-term economic considerations. They know that their power to produce, transport and sell crude oil will continue to diminish as state oil companies grow in knowledge and experience, and that, however fast they may seek to turn themselves into mineral or energy corporations, oil will remain the heart of their business until well into the 1990s. The name of at least part of their game remains getting access to crude; they are even more aware than governments that Saudi Arabia's pivotal role will grow, not decline. If one way of gaining the goodwill of Saudi Arabia and other leading oil producers is to help these countries industrialize, then so be it. The corporations are not going to throw money away, but will simply be rather less rigorous in their short-term calculations about profitability than they would be in many other parts of the world, particularly as the Saudis are willing to sweeten the incentive by offering guaranteed access to a daily quarter- or half-million barrels of oil, even if at world prices. When the world's oil supply again tightens, the company with access to such guaranteed supplies will have a tremendous advantage over competitors.
All of these factors make it likely that economic considerations will be modified quite heavily by the political perceptions of the relevant actors.
What are the policy implications stemming from the desire of oil-producing states such as Saudi Arabia and Iran to become major industrial powers?
At the superficial level, it might appear that there can be few objections to such countries building a few capital-intensive industrial plants. Every extra billion dollars spent this way makes an added dent in the fast-falling petrodollar surplus and contributes to world monetary stability without adding to the world's supply of armaments. A further, more Machiavellian, consideration is that the bulk of the petrochemical projects will run on natural gas, which, in turn, is generally produced in conjunction with crude oil. The result is that cutbacks in crude oil production will at some point lead to such a shortfall in associated gas production that dependent industrial projects will be crippled. Kuwait already has this problem, given the amounts of gas used for desalinization, electrification, etc. Each new project in Saudi Arabia and Iran thus reduces these countries' ability to slash oil production drastically in some future political crisis without affecting the rest of their economies.
Against these gains for the OECD world's peace of mind, at least one genuine security issue is involved that needs some consideration, namely, that the kind of OPEC-OECD trading patterns established by such investments will be much more inflexible than the current trade in crude oil. Thus, the potential disruption to OECD economies from any future breaks in trade flows from the OPEC world will be increased. The OECD world was able to mitigate much of the effect of the 1973 Arab oil embargo because crude from different sources is relatively substitutable, thus allowing the oil companies to switch sources. Petrochemical plants, however, are much less flexible, and flows of intermediate products are much more rigid. (These come nearer to the pattern of liquefied natural gas flows, where LNG from a liquefaction plant will be tied to a particular receiving terminal for, say, 20 years.) The new trading pattern would then be such that OECD policymakers will find it relatively hard to plan defensive measures against supply disruptions, as they have done for the crude oil market through the International Energy Agency. On the other hand, this is a problem that can probably be discounted for the 1980s, since flows of chemical and refined oil products from the Middle East are still going to be only a very small percentage of crude oil exports. If there is any exception to this generally complacent judgment, it could be for Western Europe.
Here we come to the nub of the problem likely to be caused by Middle Eastern export-oriented industrialization. The West Europeans are going to be the prime recipients of the products from such ventures, and it is by no means clear that they will be willing to give such products the unrestricted access Middle Eastern policymakers have tended to assume they will get. Indeed, one can go a step further and argue that the United States will be a proportionately heavy gainer in comparison with the West Europeans, and that to some extent the latter may be asked to accept burdens which, though bringing benefits for the OECD world in general, can be seen as particularly rewarding to U.S. corporate and strategic self-interest.
There are three main reasons why the United States will gain relatively heavily from Middle Eastern, particularly Saudi, industrialization. First, the potential partners include a very strong delegation of U.S. companies. The motives of Aramco's ex-parents need little elucidation. They have good relations with Saudi Arabia, which is going to be the key oil-producing state until the day the world runs out of conventional crude oil, and helping the Saudis with their industrialization plans merely increases the chances that they will be looked upon favorably in any future shake-ups in Saudi oil policy.
Second, change was bound to come anyway to the U.S. petro-chemical industry as indigenous supplies of cheap North American gas become less plentiful. Finally, these gains can be achieved with very little direct economic disturbance. The distances involved mean that relatively few of the products generated in the Middle East will in fact find their way back across the Atlantic. The bulk of these products will go to Western Europe and the immediate Middle Eastern region, providing U.S. diplomatic and commercial benefits without arousing the ire of any significant domestic interest group.
The Japanese undoubtedly see their involvement in such projects as an important way of increasing their economic penetration of oil-rich Middle Eastern economies and of reassuring themselves that, in any future oil shortage, they will be sufficiently guarded against discrimination. Thus the Japanese government stepped in with financial assistance when the Mitsui joint venture in Iran looked as though it would not get off the drawing board. Even more dramatic was the speed with which Mitsubishi was pitched back into the Saudi fray after deciding that the ethylene complex it was considering was going to be uneconomic. The Japanese business and government establishment clearly decided that Mitsubishi's withdrawal would do so much damage to Japanese interests in Saudi Arabia that it could not be allowed to occur.
The Japanese do, however, have a marketing dilemma. Although the distances are relatively long, one would expect their corporations to bring products back to Japan and the East Asian economies - but there are countries along the way, such as Singapore, which also intend to become petrochemical powers and which the Japanese, for both commercial and regional reasons, do not want to offend. The result has been that while both Mitsui and Mitsubishi must have been considering Southeast Asian markets for the products from their Middle Eastern ventures, Sumitomo got official Japanese backing to build a competing complex in Singapore. This suggests a slight touch of uncertainty about Japanese policy which the casual observer might miss. Very definitely, all eyes must be on Mitsui, which has ventured ahead of Dow Chemical and the oil giants of the world by irrevocably committing itself to proceeding with its Iranian joint venture. Commercially, this must make it the most exposed corporation of the Middle East.
It is when we turn to the West Europeans, however, that real problems emerge. Over the last ten years, Western Europe has outstripped the United States as the world's largest regional producer of chemicals. All things being equal, it would have expected its industry to extend this lead further as the United States ran out of cheap feedstocks and as the European industry adjusted to newfound feedstocks in the North Sea. (Actually, the falling dollar is maintaining the U.S. industry's competitive position.) However, although the West European chemical sector is extremely large, it (along with the refining sector) sees itself as being in a state of crisis, and this bodes ill for producers like the Saudis when their export industries actually come on stream.
When most of the refining and petrochemical projects we have been discussing were first seriously considered in the aftermath of the 1973-74 oil price rises, conventional wisdom was that around 70 percent of the products would make their way to Western Europe, which was obviously the closest developed market open to them. Moreover, this automatic assumption that Western Europe is the main market has not changed significantly. In the fall of 1977, when the European Communities and the Arab League were discussing the petrochemical and refining issue within the Euro-Arab Dialogue (more on this later), the Arab delegates arrived with an analysis of the total capacity of chemical plants planned within the Arab world, subtracted likely Arab domestic consumption, and then indicated that Western Europe would be expected to absorb a good deal of the remainder.
The reasons why West European reactions are likely to be less than welcoming to such products are as follows. First, Europe remains a fragmented market. There has not been time for the EC Nine to succeed in industrial restructuring, and a large number of plants have been built to serve unrealistically small national markets. Second, the 1972-73 world trade boom led to a surge of investment that has proved hopelessly optimistic; world growth has failed to regain its pre-1973 rates. This investment boom continued on for a couple of extra years until the forecasters started moving their projections of market demand for the 1980s down very sharply indeed. By then it was too late, since several plants were already under construction. Some are still coming on stream and, in general, are badly underutilized. Western Europe's refineries are currently running at around 69 percent of capacity, while in ethylene, industry sources still sound convincing when they argue such plants will be running at under 75 percent of capacity as late as 1981.
Middle Eastern policymakers understandably get quite waspish when faced with this overcapacity argument. Why should they be blocked from world markets because the West Europeans (among others) have been extravagant in past investments? Why shouldn't the Europeans close a few plants down, bring capacity in line with demand and then make room for Middle Eastern plants to take a share of Europe's incremental demand? One sympathizes with their frustrations, but the real world is more complex than they assume.
First, there is a bias against scrapping capital-intensive plants, unless prices fall so low that even direct operating costs cannot be covered. By keeping plants running, a corporation will at least get some revenue back to pay off the initial investment. Second, intra-European nationalism must be considered. The Italians, for instance, have put a lot of governmental effort into building their country into a force within the refining and chemical industries, and they have proved unwilling to rationalize their industries unless all the other EC members take similar action.
Probably the most important complicating factor is that by the time a Saudi plant could come on stream in the mid-1980s, the West Europeans will have been faced with an influx of products from Eastern Europe and, to a lesser extent, from North Africa. This influx will have severely tested the EC's ability to keep the trade protectionists at bay. The Soviet Union's planners have made it plain that they, too, are looking toward Western Europe to help them increase exports from around the current level of three percent of their production to between five and ten percent. At the same time, products are starting to come back into Western Europe, often at distress prices, from "compensation" deals whereby Western corporations have built petrochemical plants in hard-currency-short Eastern Europe, being paid in products once the plant comes on stream. The volume of such compensation products is only just beginning to become significant, but already the industry is putting strong pressure on the authorities in Brussels to set up a compulsory register of chemical buy-back deals with Eastern Europe (similar deals with the Middle East could conceivably be included) and to set a European reference price for chemicals that would act as a form of anti-dumping device against the East Europeans.
It looks as though Brussels is fighting these particular demands, but protectionist feelings are running high within Western Europe, and overcapacity within the region's petrochemical and refining industries means that even these relatively capital-intensive industries are not remaining immune. For instance, the recently attempted formation of a crisis cartel among the leading European producers of synthetic fibers was only narrowly averted; this was to have laid down targets for reducing plant capacity through 1980, as well as set production quotas for the corporate signatories. The latter are still calling for much swifter anti-dumping measures against imports from outside Western Europe, on the grounds that a cartel is of no use if imports are left uncontrolled. The fact that this crisis cartel came so close to final approval has encouraged others in the refining and plastics industries to call for similar action by Brussels.
Such protectionist moves are not yet aimed specifically at oil-producing states, but they must cause worry among would-be industrializers within the Middle East and North Africa. If current conditions of overcapacity last, a real possibility exists that West European industrialists and politicians will give top priority to ensuring marked improvement in their own capacity utilization and will restrict imports from peripheral areas such as Eastern Europe, North Africa and, eventually, the Middle East. The rationale for treating this periphery with relative toughness would be that the countries there are generally "state traders" - i.e., countries in which the central governments so lead and manage their economies that they cannot be said to abide by the principles of relatively unsubsidized free trade supposedly found within the OECD world. Of course, this will be unfair to some of these peripheral countries, and we have personally been chided by a Saudi official who was able to give us a comprehensive rundown of all the subsidies and incentives a chemical company can be granted for investing in a location like Scotland.
The fact remains, however, that the OECD world is increasingly turning its attention to what are fair or permitted levels of subsidization, and there is growing irritation with the East Europeans and certain leading LDCs that enter export markets with industries whose economics are kept impenetrably opaque. If the oil-producing states are going to win relatively trouble-free access to world markets for their petrochemical and refined oil products, then they will have to demonstrate that these industries can indeed be globally competitive with subsidies that are roughly comparable to those available within the OECD world to the same industry. If they cannot so demonstrate, they may have to resort to a weapon which is increasingly discussed - that of insisting that purchasers of crude oil also buy products. It is too soon to tell if this ploy will be needed.
So far, this has been a pessimistic article, but there are grounds for suspecting that some of the problems will not emerge. For one thing, the Euro-Arab Dialogue has spawned one subcommittee which has specifically concentrated on how the two sides might collaborate in the chemical and refining industries. Chances are small that any deal will come out of this debate with, say, the Europeans agreeing that the Arab side should specialize in certain products, but the Arabs have been forced to examine the cumulative impact of all their national plans, particularly in the light of the ever more pessimistic market projections for the 1980s. This has injected a sense of realism into the debate that was lacking in the period around 1974. At the same time, the European side has been forced to take note of the intensity behind the Arabs' desire to find their place in industrial markets. Even if the Europeans doubt that the Arabs will become fully competitive in their first wave of "infant" export industrialization, they know they must come to some sort of terms with the oil producers' ambitions.
Then again, even without the actions of governments, some form of industrial adjustment is taking place around those industries which most attract the oil-producing states. There are signs that old plant is being scrapped, as in the case of the West European refining industry, which has already closed about eight percent of its capacity, as well as clear signs that West European industry in general is reluctant to invest in the bulk petrochemical fields the oil producers are entering, such as ethylene and benzene, but is moving into more specialized areas.
A number of medium-sized oil and chemical companies, however, will still be unable to come to terms with the new world in which oil-producing states will lay claim to oil refining and much of the bulk end of the petrochemical industry. This means that corporate survival will very much rest on diversifying rapidly into more highly skilled areas of business; there are many companies that will not move fast enough. From our European experience, we can already identify a group of these second-rank, smallish companies, which have been some of the most vociferous proponents of cartelization measures. For instance, the demands for EC action to overcome the refining industry's problems have come from CFP, Elf-ERAP, ENI, Petrofina and Veba. This is an interesting group consisting of the "national champions" of Italy, Belgium, Germany and France (joint champions in the latter case), and its composition strikes us as no accident. These companies are very much the products of those bygone days when corporations specializing in marketing refined oil and a few basic chemicals could carve out for themselves a cozy geographical niche through some form of nationalistic pressures. Today, they are left stranded. The oil producers can build refineries and are moving into basic petrochemicals themselves, and the successful corporate response can probably come only from a corporation straddling several national markets. However, these smaller companies can still be dangerous to the industrial aspirations of the oil-producing states, for until these corporations and their parent governments can adjust to the new realities of the world economy, they will incline to calls for protectionist measures against the new industrial challenge from the oil-producing world.
However optimistic we have tried to be, we are still left with the belief that the entry of Middle Eastern and North African oil-producing states into markets for industrial goods will probably be a long and politically messy process. We are not sure that there are any easy solutions that will keep all parties happy, but can put forth some policy recommendations.
To avoid over-reliance on a single OECD market, such as Western Europe, the Middle Eastern oil producers should thoroughly explore the potential of regional markets, particularly in more populous states such as Egypt, Sudan and India. Insofar as such over-reliance is unavoidable, however, they should prepare for resistance to their plans and should not put too much faith in intergovernmental agreements, since the resistance will be led by industrial pressure groups that are not necessarily amenable to national government dictates. The oil producers should anticipate some of the tactics that will be used against them, for instance by being extremely careful in their choice of methods of subsidizing export industries to prevent unnecessarily exposing themselves to charges of dumping. For this round of investments, they should, if possible, probably follow the Saudi strategy of taking large foreign partners which can absorb the resultant products within their own marketing structures to some extent, thus carrying out some of the necessary industrial adjustments within their own global activities. The oil producers should probably see the need to tie product sales to sales of crude oil as a last resort and eventually as a sign of failure, but the success of this ploy will very much depend on the overall state of oil markets in the 1980s.
As far as Western Europe and the EC are concerned, the authorities should accept Middle Eastern industrialization as a healthy development from which Western Europe, as the major trading partner with the Middle East, stands to gain far more than it will lose in the narrow sectors of oil refining and base petrochemicals. The debate on these sectors within the Euro-Arab Dialogue should be kept in low key and not oversold to the Arab side: analyzing markets of the 1980s helps both sides; searching for some mutually agreed pattern of compatible investments is probably a blind alley. General problems of overcapacity should be treated in the context of a positive European industrial policy. A clearly spelled-out European policy toward "infant" export industries in North Africa and the Middle East should be developed, flexible enough to tolerate relatively heavy subsidies for the first wave of projects, but clearly identifying the limits of European tolerance, particularly for heavy subsidies in the second generation of export-oriented industrial investments.
As far as the United States and the OECD world are concerned, it is obviously in the general interest that the Saudi and Iranian industrialization should continue. However, the Saudis do pose a special problem in that they need to break into world markets with what is virtually their first major round of industrial ventures. The risks of Saudi disappointment are quite high, and this necessarily has implications for the world's oil policy in the 1980s, particularly if the Saudis are asked to produce oil at a rate higher than they would prefer themselves.
Similarly, the role of the Saudis in the world's monetary and financial problems cannot be lightly disregarded. If it looks as though their disappointment might stem from the unwillingness of foreign partners to proceed with projects that seem overly risky, then other countries might follow the Japanese example of giving some form of official financial assistance to the pioneering corporations. If the trouble seems more likely to stem from protectionist sentiments in the 1980s, then pressure will need to be placed on the offending countries or regional blocs in order to give Saudi products relatively sympathetic treatment. With luck, the Saudis will not need special treatment; if they do need it to make their first couple of petrochemical complexes viable, then special treatment they should get.
Finally, we would end with a plea for faster world economic growth. Whatever the relationship between world inflation, financial instability and fast growth rates, it is clear that the problem of international industrial adjustment is exacerbated by slow world growth. The EC Commission expressed this argument in connection with the problem of the EC's enlargement. In a working paper, it specifically argues that an average growth rate of 4.5 percent among the EC Nine would remove most of the problems caused by the proposed admission of Spain, Greece and Portugal; growth below two percent would play into the hands of the protectionists. If one extends this argument to include the plans of Middle Eastern oil producers for entering world industrial markets, the logic remains impeccable.
1 We have not assumed any specialized knowledge of the chemical industry by our readers. The projects we are discussing all involve taking Middle Eastern oil and gas and converting them into oil products or base chemicals, such as ethylene, benzene or methanol, which can eventually be turned into products such as plastic pipes, paints or synthetic rubber. Those wanting a detailed list and analysis of the relevant projects should consult Louis Turner, "Heavy Industry," in Middle East Annual Review 1979, Chicago: Rand McNally, Fall 1978. This article lists 110 of the most important refining, petrochemical and metal-processing projects in the Middle East and North Africa.
2 Middle East Economic Survey, Supplement, May 8, 1978, p. 4.
3 We are therefore thrown back on untestable assertions from a number of sources. At one extreme, there are planners in Saudi Arabia who suggest that it will eventually be possible to keep construction costs down to 30-35 percent above those of a similar plant on the U.S. Gulf coast. On the other hand, we have heard executives in one of Saudi Arabia's potential foreign partners blithely concede that the construction bills for their particular venture will come out at least double those they would have to pay for a similar plant in the United States. Perhaps the most usable estimate comes from an executive in another corporation who argues that, if one assumes one could build a Saudi and U.S. project in the same time, then the Saudi project would cost some 35-40 percent more than the U.S. one, due to design changes and the transportation of components; he also argues that a company would expect construction in Saudi Arabia to take at least 25 percent longer than in the United States.
We have worked on these two assumptions, have kept inflation rates constant between the two countries (this is unrealistic, but the differential movement of inflation rates is too difficult to handle here) and have assumed that the investments have been funded by borrowings in the Eurobond market. The ultimate conclusion is that a Saudi petrochemical plant coming on stream would cost its builders some 50 percent more than a similar one in the United States; if the bulk of it is funded at the three percent interest rates the Saudis are offering for a good part of the foreign partners' share, then it should cost about a third more than the U.S. equivalent. We would judge that this 30-50 percent Middle Eastern "construction factor" is about the target at which the foreign partners will aim with the first generation of giant plants in the area. Not all these corporations will succeed in keeping costs down to these levels, but the difficulties of building plants in extremes of heat should not be overestimated. The port delays and other infrastructural bottlenecks have evaporated fast; plant constructors are experimenting with techniques that reduce the need for skilled construction workers on site (one Iranian gas liquefaction project considered a floating plant); and, in contrast to regions like the storm-ridden North Sea or Alaska, it is possible to work throughout the year.
4 We ignore the fact that countries like South Korea have been winning a share of Middle Eastern construction jobs.