SOME OIL MONEY IS UP TO NO GOOD
SOME OIL MONEY IS UP TO NO GOOD
2005-08-24 at 10:52:00 am #12784
Some Oil Money Is Up to No Good
(Aug. 05) – In case
$3-per-gallon gas isn’t depressing enough, consider what your gas money
pays for: A bull market in Saudi stocks. Handouts for Fidel Castro. And
weapons for anti-American terrorists.
Oil-producing states haven’t seen a windfall like this since the twin
price shocks of the 1970s. Persian Gulf countries this year will earn
about $291 billion in oil revenue vs. $61 billion in 1998, when oil
prices tanked, according to the Institute of International Finance
(IIF). For every $1 increase in the price of a barrel of oil,
Venezuela, the No. 4 source of U.S. imports, reaps almost an additional
$1 billion a year.
In several oil-producing countries, soaring oil prices are complicating
U.S. foreign policy or blunting commercial opportunities for American
companies. Irans’ mullahs, locked in a standoff with the U.S. over
Tehran’s nuclear ambitions, are bolstered by an oil-rich economy that
the International Monetary Fund says will grow 6% this year and next.
Thanks to surging oil revenue, Mexico is able to delay the politically
painful step of opening its oil fields to foreign oil companies, says
Roger Tissot, country director for the consultancy PFC Energy.
Of course, not every dollar spent at the pump props up a desert
autocrat or funds global terror. Norway, a major producer of North Sea
crude, uses its oil export earnings to fund its citizens’ retirement
The Persian Gulf oil states are investing about half of their increased
oil revenue in the region, spurring luxury hotel construction in places
such as Dubai and sending shares on the Saudis’ Tadawul All-Shares
index up 79.7% this year.
The other half of the windfall is being funneled into international
markets, according to Howard Handy, the IIF’s director for the Middle
East and Africa. “We estimate $360 billion to $400 billion will be
looking for a home outside the region in 2005 and 2006 combined,” he
That’s a significant sum, but it is being divided among a greater
number of destinations than during previous booms. In the 1970s, most
foreign investment by gulf states ended up in U.S. markets, which
dominated global investing even more than today. Then-secretary of
State Henry Kissinger encouraged Saudi investment so that the most
influential member of OPEC would be discouraged from damaging the U.S.
economy with future oil embargoes, says Rachel Bronson, director of
Middle East studies for the Council on Foreign Relations.
Today, though it’s impossible to track specific figures, the Saudis and
other Arab states are placing more of their investments in non-U.S.
holdings, including euro-dominated securities that didn’t exist at the
time of the first oil price shocks. Riyadh also no longer reflexively
steers most major contracts to U.S. firms. In January 2004, for
example, the Saudis bypassed Chevron and awarded lucrative natural gas
exploration contracts to Russian, Chinese and European companies.
Following the Sept. 11 attacks, the Saudis met U.S. demands by ending
government support for Islamic charities linked to terrorism. But
individuals in the kingdom continue to send cash to groups that support
“We know wealthy Saudis are funding terror. With higher oil prices, they just have more money to do so,” Bronson says.
Soaring oil prices also are causing problems closer to U.S. shores. In
Venezuela, President Hugo Chavez, flush with record oil revenue, is
sending subsidized oil shipments to Cuba’s Fidel Castro and increasing
military spending. Earlier this month, Venezuela announced a purchase
of long-range surveillance radars from China. The U.S. has accused
Chavez of funneling arms to leftist rebels in neighboring Colombia,
which he denies.
At home, Chavez has lavished oil money on his constituents in
Venezuela’s poorest neighborhoods. Through “Mission Mercal,” a network
of government-run groceries, Chavez provides half-priced food to more
than 10 million people.
The social largesse cements the president’s political standing. But
economists such as Claudio Loser, former head of the IMF’s Western
Hemisphere department, say such spending can’t continue indefinitely.
Already, inflation is galloping at 18% annually and is expected to hit
25% next year.
Big oil producers should have learned one lesson from earlier booms:
High prices don’t last forever. Oil prices now are around $65 per
barrel. But with greater production expected from non-OPEC producers
such as Angola, Brazil and Azerbaijan, prices will drop to around $40
per barrel in 2007-08, says Jim Burkhart, director of oil market
analysis for Cambridge Energy Research Associates.
That will spell trouble for some oil nations, including Venezuela. “The
risk is what happens when oil prices decline and governments have to
align their spending with fewer resources,” he says.
Despite today’s easy-money atmosphere, there’s no need to envy the oil
producers. Many face daunting developmental challenges that have gotten
worse since the last oil boom.
Saudi Arabia’s population has exploded from 5.7 million in 1970 to 25
million today. That has driven down per-capita oil export revenue from
more than $22,000 in the early 1980s to less than $5,000 today.
“Even with oil at $65 a barrel,” says Bronson, “they can’t solve all their economic problems.