Research Brief: The Middle East

By Jonathan Galaviz

Chief Economist - February 22, 2011

Impact on global economics over the next month will be significant and real
Middle East tourism sector will suffer declines of at least 20%
Projection: Oil prices will achieve $115 per barrel (Brent) in next two weeks
Critical for the U.S. to be supportive of volatility associated with transition
Personal experiences in the Middle East
Countries to Watch: Libya, Qatar, Saudi Arabia, and the UAE

IMPACT ON GLOBAL ECONOMICS

Our research normally takes a view on globally relevant economic issues and their impact on travel, leisure and tourism. However, in some cases, the analysis needs to explore further into the global political arena. The political dynamics of the Middle East are impacting both global economics and tourism. We see oil prices going up, regional economies in the Middle East going down, and global risk aversion to emerging market investment going up.

It is worth noting that the U.S. dollar generally goes up during situations of increased global risk. Since oil is priced in U.S. dollars, we could see a slight counter-balance to our forecasted view of increases in the price of oil. However, a temporarily stronger U.S. dollar will not be enough to keep oil prices down. This will cause stress on the U.S. economy, but this is the only area of impact we see at this point. We do not foresee any substantive U.S. military engagement in the Middle East beyond that of Iraq and Afghanistan.

We would like to note that political transformation in the Middle East should not be priced in economic costs, even though it's our job to note that. The short-term global economic impact of political upheaval may almost certainly be offset by long-term economic gains over the next 5-10 years when the new middle-class is created in the Middle East. It is hard to see it now, but it could happen.

MIDDLE EAST TOURISM TO DECLINE AT LEAST 20%

Based on our primary research, the hotels of Cairo, Egypt experienced an average 10% occupancy rate for several weeks in February. Middle East countries that get close to experiencing dynamic political activity should calculate for similar occupancy levels. We are currently seeing restricted flight space for civilian aircraft, decreased airline loads, reduced hotel occupancy, and reduced total tourism visitation throughout the Middle East. These are all real-time inbound data points from primary sources in the region.

We would like to note that leisure tourism almost always has a more elastic demand profile than that of business tourism. However, we are seeing decreases in both components of the tourism profile. For example, a 4-star hotel in Cairo that cost $250 a night in December 2010 now only costs $84 per night. The GDP of many countries in the Middle East, in which tourism is a significant component, will experience lower figures.

We are estimating that tourism to the Middle East, with the exception of Israel, will experience a decline of around 20% over the next quarter. Our forecast is based on a tourism visitation statistical blend of several Middle Eastern countries including Egypt, Bahrain, and the UAE . Some of the key tourism distribution channels in the Middle East are the UAE (Emirates Airlines) and Qatar (Qatar Airways), and we believe these countries should be watched carefully.

OUR VIEW ON OIL PRICES: $115/BARREL IN TWO WEEKS OR LESS

In our view, the price of oil will increase to at least $115 a barrel (Brent) in two weeks or less. The regional volatility in the Middle East has already forced some petroleum companies to divert their supply chain in the region, adding frictional costs (particularly in Libya) to the cost structure. As of the writing of this research, oil is trading at approximately $108 a barrel.

We believe that OPEC needs to issue a statement that allows its members to immediately increase the global oil supply in order to minimize overall global disruption. It usually takes approximately 1-week for significant supplies of oil to be released to counter pricing volatility, so the work on this should begin now.

U.S. SUPPORT FOR MIDDLE EAST TRANSITIONS IS CRITICAL

For many decades, the U.S. has talked about its desire to see civilian led transition in the Middle East. Yet, at the same time, it has not hesitated to provide direct and indirect support to the same governments that have posed significant hurdles to civilian led democracy. It is important for the U.S. to be supportive of the historical transition we are now seeing.

Not all of the transitions in the region will be smooth or be favorable to U.S. policy, but on a whole, it is an amazing opportunity for positive change.

We see that the global economic costs of Middle East instability can be minimized by the 'soft-support' of the U.S. The people of the Middle East need to know that the United States supports peaceful transition to the new form of government that citizens in each country desire. In our view, this is an opportunity for the U.S. to act with foundational support to the idea of Middle East transition while at the same time not demanding a certain form of government or value system.

THE MIDDLE EAST: MY EXPERIENCE

I have traveled to the Middle East professionally multiple times over the past 10 years and found various countries in the region to be diverse and unique. My experiences were special as I was forced to spend time in the areas of these countries where people actually work and live, beyond the safe comfort of tourist centers (honestly, I didn't like the idea of going to these areas at first). This provided me a real understanding of the economic and political dynamics of the region. My academic training and reading of books on the Middle East was nothing compared to the experience of having a meal with a middle-class family in Egypt. These kind of meals with normal families in the Middle East assisted me in understanding the real struggles, both political and economic.

I have found the people of the Middle East, in multiple countries, to be kind, generally well informed, and proud of their respective countries. At the same time, these people were also frustrated, introspective, concerned, and in some cases angry. I remember one man describing his anger something to the effect as, "We are mad at ourselves for allowing dictators and unjust royal families to take away from us the very thing you say you would fight for in America: Freedom".

The seismic activity of recent political change in the Middle East in 2011 has so far been dramatic. However, it is not surprising to me. In fact, I am surprised on why it took so long. We must not forget that the small country of Tunisia was the one who ignited a flame of confidence of many people in the Middle East.

ABOUT GALAVIZ & COMPANY

Galaviz & Company is a boutique economic research and strategy consulting firm that serves global Fortune 1000 companies to understand the world from a strategic, political and economic perspective. The firm has its roots in the analysis of the global travel and leisure sector (hotels, tourism, casinos, and airlines). Galaviz & Company prepares feasibility reports and provides strategy consulting for clients worldwide, including private equity funds, investment banks, and real estate firms.

The firm was founded in 2010 and is based in Las Vegas, Nevada, the world's leading global tourism hub. The company also maintains a presence in Washington, DC. The firm's analysis frequently appears on Bloomberg, AFP, and CNBC.