Jamaican in Africa

Dow Chemical Says 'See You in Court' to Kuwait

You know, it would be easy to agree with you if I were to only look at the numbers, and I believe that DOW's position has been made stronger now that it has an alternative to Kuwait. Here is the problem, geopolitical considerations sometimes interfere with what would otherwise be good business decisions.
Let us look at three significant recent geoplitical facts:
The Israeli/Palestinian war.
The Russian decision to cut off of gas to Western Europe.
The anticipation that oil prices will rise.

Let us briefly look at these three factors, and notethat the condition on the ground is much more complex, but these provide an explanation into what many who pay attention to economic data might fail to realize.

1. The Israel/Palestinian conflict is part and parcel of what some people in the region see as an ongoing Arab-Israeli disagreement. Islamic parties are using this and other military operations to push Kuwait away from the west. As the government weakens, tribal alliegances and Islamic Parties strengthen. An ex Kuwaiti Oil Minister wrote an editorial (www.arabtimesonline.co...) highlighting the role of tribalism and religious parties in an era when the government has become weak. i Religion, tribalism and an age old conflict are competing with sound fiscal considerations and influencing government decisions in Kuwait.

2. As winter deepens, and energy supplies fall in Europe due to the disagreement between Russia and the Ukraine, European policy makers have been scrambling to find alternative energy suppliers for the anticipated fall in supplies of natural gas. Guess what is the best next available substitute for natural gas... you got it, oil. In the short run, oil cannot be easily substituted for natural gas, because plants will have to be modified, new infrastructure built etc... but it is providing an opportunity that OPEC is desperately seeking to increase the demand for oil even as industrial production and associated demand for energy falls.

3. The anticipation that oil prices will rise. Kuwait is in the enviable position of producing oil at about $20 per barrel, so even when oil fell to less that $40/ barrell Kuwait continued to make almost 100% profit on each barrel of oil it produced. Most forcasters believe that as the international economy recovers, that the demand for oil and other natural resources will increase, and it is likely that oil may command a price of between $60 and $70 per barrel in late 2009, providing a tremendous increase in revenue and financial resources at its government's disposal.
Add to that fact, that Kuwait is fiscally very conservative. Unlike other major oil producers like Iran and Venezuela, the Kuwaiti's typically do not have budget crisis, infact they frequently understand thier budgeted outlays by as much as 30% (www.ameinfo.com/32099....), so when other OPEC nations struggled to meet obligations, Kuwait had few concerns.

Kuwait can afford to pay the cost of breaking this agreement without significantly weakening itself financially in the short term, and it has many cards to play in this matter. I believe the Kuwaitis would be making a mistake in the long term to abandon this deal... but the fact is that they can afford to do it without too much pain in the short term, and too frequently we note that policy makers opt for short term satisfaction rather than exercising good judgement that would be helpful in the long term.
Can I predict the how likely DOW will be in convincing Kuwait to honor its obligation? No, but I would not hold my breath in anticipation that the Kuwaiti government will come to the table and try to revive the deal. My gut tells me that they are going to pay up and walk. This is just a gut feeling.