Petrodollars - Oil producers' investments are now more sophisticated

By Neil Behrmann

November, 06:- AWASH with petrodollars, the members of the Organisation of Petroleum Exporting Countries (Opec) and other oil producers are increasingly calling the shots in world markets. Moreover, compared with the previous oil booms of the 1970s and 1980s when rich oil sheikhs bought bonds, played the casinos and spent their wealth in currency, securities and gold markets, Opec's investments have become exceedingly sophisticated.

These days petrodollars are being channelled into discreet investments in the United States , Europe , Asia and elsewhere. The weight of their money has already had an impact on mergers and takeovers. The battle between Dubai and Singapore over P&O, the UK shipping and ports company, is just one example.

Soaring funds available for investment

A huge amount of petrodollars is also being used to develop regional infrastructure and industries and has been placed in fast-growing and surging Middle Eastern stock markets. Indeed, nations such as Saudi Arabia are not only investing their surpluses in their own countries but also seeking investment from companies in the US, Europe and Asia.

The Bank for International Settlements (BIS) estimates that Opec's cumulative funds available for investment amount to $750 billion. Oil producers still play a huge role in the gyrations of the dollar, euro and yen, as well as stock, bond and precious metals markets.

Partly thanks to this inflow, the dollar has not gone into free fall and, despite interest rate increases, the cost of US credit is still relatively benign and has enabled the economy to maintain a steady growth. But according to the BIS, around 70 per cent of Opec's financial surplus cannot be identified in global banking data.

The BIS finds that 28 per cent of Opec's cumulative funds available for investment have been channelled into foreign stock and bond markets in the current oil boom, compared with 38 per cent in the 1978-1982 oil surge. Foreign bank deposits are down to 47 per cent of funds available for investment compared with 58 per cent a generation ago.

Broad range of traditional and alternative assets

The reduction in conventional deposits and securities illustrates that petrodollars of Opec and non-Opec producers such as Russia are now being invested more broadly, more diversified geographically and across the asset spectrum, according to the BIS. Money is being placed in commercial and residential properties, venture capital, private equity and hedge funds that are not required to release information on the positions of their investors, according to the BIS.

Petrodollar flows into all sorts of assets are likely to continue at the current pace. The US Department of Energy forecasts that Opec's oil revenues will increase by 10 per cent to a record $522 billion this year. In real inflation-adjusted terms, this would be the highest level since 1980. Saudi Arabia , the biggest producer in the 11-nation cartel, will earn $162 billion this year, up from $153 billion last year,

Moreover, oil prices are unlikely to decline much while the West tries to prevent the current Iranian regime from having the means to develop a nuclear bomb. Sanctions would undoubtedly lift global oil and energy prices.

Internal investment soaring to diversify industries

Oil-exporting governments, however, have learned from wasteful spending and white elephant projects of the 1970s and 1980s when they were wont to throw their money at everything that took their fancy. Now, it seems, they appreciate that oil prices and their revenues could dip. Middle Eastern and other oil-producing countries are thus taking steps to build up domestic industrial bases that can develop alongside their oil production. They need to provide jobs for their fast-expanding youthful populace.

Saudi Arabia , for example, is lowering barriers and is opening up industries worth of up to $1.4 trillion to foreign investment. The aim is to reduce dependence on oil exports.

In roadshows in the US and UK , it is encouraging foreign companies to invest in companies that it intends privatising. They will have the opportunity to invest in partnership deals involving the state and private sector. Deals include railways, roads, new petrochemical and power plants, telecommunications and manufacturing. Investments and expansion will take place in the coming 15 years.

Opec's intention seems to be to hedge against eventual decline in oil reserves by holding assets abroad and building up a broad range of domestic industries and businesses. Much will depend on a peaceful end to Iraqi turmoil, a peaceful resolution of a potential Iranian crisis and a roadmap towards stability and democracy throughout the Middle East .

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