A CDGE, Great Decisions and IT Collaboration

The Syrian Oil Sector

Since Bashar al-Assad succeeded his father in the presidency of the Syrian Arabic Republic, his regime has attempted to reform its centrally planned economy so as to, among other things, reduce dependency on the oil sector.  For instance, it sought to increase foreign investment in the service sector by lowering interest rates[1].  Foreign direct investment did increase substantially between 2001 and 2010, from 110,000,000 USD to 1,469,196,863.5 USD[2], but by 2009 the economy was still heavily dependent on oil production and exports.  According to the most recent data, in 2009 Syria’s oil revenue accounted for 25% of GDP, and 35% of government income[3].

Prior to the chaos which began in 2011, Syria was able to garner important investment from China.  The two largest investment ventures made by China were in the Al Furat Petroleum Company (20.3% share) and the Syria Shell Petroleum Development (35% share)[4].  Today, considering the international investment and export embargo Syria faces, Chinese investment in Syria’s oil sector plays a critical role in determining the course of its economy.

Since the first protests of January 26, 2011, conservative estimates have it that 5,400 Syrians have been killed while 70,000 have been displaced[5].  In response to President Asad’s humanitarian crimes and his continued unwillingness to compromise with the United Nations in terms of policy change, the U.S., the European Union and the Arab League have implemented economic sanctions targeting, in particular, the Syrian oil sector.  Not coincidentally, it is on Syrian oil production and exports that the sanctions have been particularly devastating.  On August 17, 2011, President Obama signed Executive Order 13582, prohibiting the importation of Syrian oil[6]. The E.U. followed suite on September 2, targeting government owned oil companies[7].  In December, the E.U. sanctioned additional state owned oil companies as well as Syria’s largest producer, the joint venture company Al Furat Petroleum Corporation (AFPC)[8].  Foreign investors own 50% of AFPC: 29.7% by Shell, and 20.3% by China’s CNPC.  Shell has ceased its share of production in compliance with E.U. sanctions[9]. Whether CNPC will continue production is largely dependent on ongoing political relations with the U.S., the E.U., and Russia.

Compared with U.S. sanctions, those implemented by the E.U. had far more catastrophic consequences for Syrian oil exports and production; in 2010, 99%[10] of Syrian crude oil exports (109,000b/d) went to members of the European Union[11]. Though the regime wants to keep a positive face on things so the populace doesn’t redeposit all its cash in foreign banks, some ministers tell it how it is.  Later on in December, after the E.U. castrated AFPC and Shell complied with the embargo, Syrian Oil Minister Sufian Alao lamented the effects the sanctions have had on the economy: “We have reduced our production by 30 to 35% until we resume exports.” [12]  He also noted that current oil output had fallen to about 260,000 b/d.  Last month, the Syrian Minister of Petroleum estimated that international oil exportation sanctions have depleted government coffers by $2 billion[13].

In 2009, Syria’s oil revenue accounted for 25% of GDP, and 35% of government income[14].  Given that the tourism industry (another major sector of the Syrian economy along with agriculture) is dead, the contribution of oil revenue to GDP and government revenues is even more critical.  Syria must find buyers to compensate for the 99% gap in oil exports left by the E.U. countries.

Before the protests, the rebellion of the Free Syrian Army, the ensuing slaughter of innocents by the regime and the E.U. sanctions, the oil sector was heavily dependent upon foreign investment, particularly that of China National Petroleum Corporation  (CNCP).  Syria’s ‘Arab Spring’ has seen oil exports drop dramatically because of sanctions.  Critically, China retains its portion of Al Furat Petroleum Corporation and Syria Shell Petroleum Development, and is effectively (while Damascus still searchers for new importers) the Assad regime’s life blood.  If China were convinced by the west to join the embargo, the regime would fall more quickly and with less blood spilt.  While it is the case that China follows noninterventionist policies, either way Syria’s fate hangs on that of its oil sector.

One of the myriad of ways in which the Arab Spring has been affecting the economy of Syria is through the sanctions that have been imposed by outside organizations as a result of the government’s response to protesters. The  violent government crackdowns in the currently restless nation of Syria have in turn led to increasing international pressure  on the Syrian government. Many international organizations have condemned the crackdowns as vicious human rights violations and subsequently have called for the stepping-down of the Assad family, the dictatorial family that has ruled Syria for multiple generations (http://articles.latimes.com/2012/jan/26/world/la-fg-syria-economy-20120127). The European Union and the United States have already instituted sanctions, including the freezing of Syrian assets, and stopping trade with the area. Many viewed these Western groups as former colonial powers meddling in the Middle East and called for a regional solution rather than international condemnation. Recently, however, the Arab League has developed and initiated various sanctions as well, showing that the problem is being taken seriously within the region as well (http://www.bbc.co.uk/news/world-middle-east-17065056). The agency has been working hard in Cairo to try to find a solution that will get the middle and upper-classes to “break publicly with the regime.” This is maneuver is important in a number of ways. As a matter of national pride, Syria has often seen itself as the heartland of “Arabism,” so the fact that the Arab League has taken action against them is a sort of psychological  slap in the face (http://www.nytimes.com/2011/11/28/world/middleeast/arab-league-prepares-to-vote-on-syrian-sanctions.html?pagewanted=all).  Yet another possible insult is the Arab-requested and led resolution being voted on in the United Nations  General Assembly at the time of writing.  The resolution condemns the violence being taken and calls for the resignation of Bashar al-Assad.  At the same time, the delegations to the Arab League are trying to find a solution that hurts the wealthy but makes it possible for the middle and lower classes to still get the crucial items they need, such as lamp oil (for light) and food. Regardless of various exclusions, these sanctions have the potential to be extremely effective, as “Economists estimate that about 50% of Syria’s exports go to the Arab World, and 25% of its imports originate there, much of that from its immediate neighbors” (http://www.nytimes.com/2011/11/28/world/middleeast/arab-league-prepares-to-vote-on-syrian-sanctions.html?pagewanted=all). Despite these efforts, various Syrians, when questioned, provided criticisms, arguing that the wealthy will be fine, and that sanctions will only serve to hurt the average citizen (http://articles.latimes.com/2012/jan/26/world/la-fg-syria-economy-20120127).

The respective roles of Iran and especially Russia, will be important in determining at least in part whether or not these sanctions work. In the United Nations, China and Russia vetoed the resolution put forth by the General Assembly, with Russia concerned over forced regime change and the possible military commitments that may entail. Others share similar worries, and an unnamed government official from the Middle East was quoted in the New York Times as saying that the “war” against Syria would take place economically rather than militarily (http://www.nytimes.com/2011/11/28/world/middleeast/arab-league-prepares-to-vote-on-syrian-sanctions.html?pagewanted=all). However, in terms of the sanctions, Iran and Russia are “posed to provide aid to Syria to compensate for lost government revenues” (http://www.bbc.co.uk/news/world-middle-east-17065056). If these funds are supplied, the regime will be able to hold on for even longer. Whatever economic action taken by international bodies needs to be as unified as possible.

Looking at the sanctions more generally  is interesting because it reflects how different goods and services have sometimes drastically different levels of importance certain commodities have in different regions. In our macroeconomics class with Dr. Moledina we talked about the consumer price index, and how to compare the results. Although there can be either fixed or changing baskets over time, there is also important geographic and cultural differences to take into consideration. For example, if we were to consider what is important to those living in the United States, lamp oil would not be anywhere near the top of the list. Similarly, however, such a thing as gasoline is probably not important to the average  Syrian citizen if they do not have a car. Another way to approach the effects economically is to look at the supply and demand curve, and the subsequent shifts that could possibly take place because of the sanctions.  For example, if the supply of lamp oil suddenly faces a drastic decrease since Egypt will no longer be trading it, the demand would move upward (since the supply had shifted left) and the prices would skyrocket. Although discussing such things is akin to modeling from our removed perspective, these questions are very real and very important to anyone with involvement or assets in the Syrian economy.

Works Cited

MacFarquhar, Neil, and Nada Bakri. “Isolating Syria, Arab League Imposes Broad Sanctions.” The New York Times 27 Nov. 2011: n. pag. The New York Times. Web. 16 Feb. 2012.

“Syria crisis: UN assembly adopts Arab-backed resolution.” BBC News. BBC, n.d. Web. 17 Feb. 2012. <http://www.bbc.co.uk/news/world-middle-east-17065056>.

Zavis, Alexandra, and Alexandra Sandels. “Crisis takes toll on Syria economy.” The Los Angeles Times 26 Jan. 2012: n. pag. The Los Angeles Times. Web. 16 Feb. 2012.