Petrodollar flush

6 October 2007

The Gulf states are competing for prestigious Western investments, say Jon Ashworth and Allister Heath

The falcon, untethered for a photo call at Chelsea’s training ground, neatly sums up the Gulf region’s new found confidence and aggression. The bird of prey is renowned among desert falconers for its skill at tracking quarry from afar before swooping with terrifying speed and accuracy. That same deadly self-assuredness is sweeping the Gulf states, born aloft by a combination of rampant oil prices, economic liberalisation and an unprecedented opening up to the outside world.

Dubai, Abu Dhabi (the key players in the United Arab Emirates) and Qatar all want to win the battle to be the new Hong Kong of the Middle East, a beacon of peace, prosperity and achievement to which the whole Arab world can look up to. There was a time when wealthy Middle Easterners were renowned for squandering their wealth; today, in theory at least, the name of the game is to invest it to make even more money. A vast inflow of petrodollars is allowing the region’s giant government investment funds and leading private firms to splash out on Western targets.

Out of the 10 biggest sovereign investment funds in the world, four are from the Gulf, led by the biggest of them all, the Abu Dhabi Investment Authority, with assets of $875bn (£433.6bn, e619bn). By contrast, the new Chinese fund boasts only $200bn, though this will increase as Beijing pumps in more of its trillion-dollar foreign exchange reserves.

Investors from the Middle East have spent $64bn this year already, just over twice last year’s level and around 15 times more than in 2004, figures from Dealogic reveal.

Because of its openness to foreign investments, Britain is one of the main recipients of these petrodollars; such is their influence on the London economy, hedge funds, private equity funds and property markets that Arab money is set to cushion part of the blow from the current and growing credit crunch.

Even though the UK is gradually running out of oil, to Scotland’s great loss, London’s fortunes are increasingly positively correlated to the price of oil. Crude hit a record high of $83.90 a barrel on 20 September on a combination of factors: a weak dollar; falling US inventories; buoyant demand from booming Asian economies led by China and India; storm-related disruption in the Gulf of Mexico; tension between the West and Iran; and nervousness following an Israeli air raid on Syria.

Though oil prices have fallen back a little in recent days as oil companies in the Gulf of Mexico began restoring production, high oil prices are here to stay and could yet reach $100 a barrel within the next two years.