High oil prices a boon to Gulf

6 Arab producer nations are expected to reap over $500 billion in earnings

August 16, 2006|By MCCLATCHY-TRIBUNE

WASHINGTON -- Motorists angry about high gasoline prices are quick to point their fingers at oil companies reporting record profits, but oil-producing nations such as Saudi Arabia are also benefiting just as handsomely.

High oil prices are expected to bring export earnings in excess of $500 billion to the six member nations of the Gulf Cooperation Council, according to a report yesterday from the Institute of International Finance Inc.

The six council countries are: Saudi Arabia, Kuwait, United Arab Emirates, Oman, Bahrain and Qatar. Collectively the Persian Gulf nations account for 40 percent of world oil exports.

How much is $500 billion? Consider that the damage to Lebanon's infrastructure and economy after a monthlong conflict with Israel is broadly estimated at about $10 billion.

That's about 2 percent of the six council nations' projected oil earnings for this year, which are greater than the combined export earnings of the developing economies of India, Brazil, Poland and Turkey.

Howard Handy, director of the Institute of International Finance's Middle East department, called the earnings "really unparalleled." The earnings, he said, are flowing back into the global economy, which makes the six countries effectively exporters of capital as well as oil.

The institute, a trade association for international commercial and investment banks, believes that the six Arab nations, led by Saudi Arabia and Kuwait, will buy more than $450 billion in foreign assets in 2006 and 2007. That's on top of the $167 billion in foreign assets accumulated in 2005.

In the 1970s, Arab oil profits were often squandered on conspicuous luxury goods. But a lot of today's petrodollars flow back into the U.S. stock and commodity exchanges, U.S. Treasury bonds and mortgage-backed securities.

The U.S. Treasury Department reported yesterday that foreign purchases of U.S. stocks, bonds and treasuries exceeded $84.7 billion in June, the latest reporting period. A substantial portion of that, albeit hard to quantify, is believed to be petrodollar investments.

"They've become much more sophisticated than they were in the previous run-up of the price of oil," said Michael J. Economides, an expert on global oil at the University of Houston. "Then, there was a decade of a huge influx of dollars, petrodollars ... they were like little children in a toy store - they actually went out and spent the money."

Unlike the 1970s, the U.S. market is no longer the only game in town for petrodollars. Today, Persian Gulf oil profits are as likely to go to Europe, Asia or the Middle East as to the U.S.

"They have other options now, and they're not going to put all their eggs in one basket," said Rachel Bronson, who studied U.S.-Saudi relations in the recent book Thicker Than Oil: America's Uneasy Partnership with Saudi Arabia.

High gasoline prices have U.S. motorists looking for someone to blame. But the Persian Gulf nations are merely benefiting from surging global demand for oil. Demand in the United States, which consumes a quarter of the world's oil output, continues to grow despite high prices. Demand also is rising in China, the second-largest market.

Persian Gulf nations are reluctant to invest heavily in new production because most major oil forecasts warn that overproduction and falling prices may loom within a decade.

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