Recycling the Petrodollars

The phrase in the title was on everyone's lips in the 1970s energy crisis. Living in L.A. at the time, I remember lavish homes in Beverly Hills bought by Arab sheikhs, flush with oil money. That doesn't seem to be happening this time. Instead, we see Arab firms such as Dubai Ports World acquiring established western firms like P&O and generally investing in things with inherent value. But as an excellent op-ed from the Wall Street Journal pointed out last week, the current wave of oil profits in the Persian Gulf may be laying the groundwork for the next crisis, one potentially much more serious than the recent "ports crisis."

I haven't spent as much time thinking about the possible consequences of this tidal wave of cash as I should have. The author of "The Seven Pillars of Folly" has, though, and what he observes is alarming. He sees a regional speculative bubble, driven by oil profits and the vicarious liquidity enjoyed by the Gulf countries whose currencies are linked to the US dollar. This seems to have created both equity and real estate booms, both of which Mr. Chancellor regards as having reached precarious points. A collapse of one or both could undermine the few islands of stability in the region and send oil prices even higher, as a secondary effect of the political turmoil following a collapse.

Not all this money is flowing into skyscrapers and speculation, though. The growth of the fertilizer industry in Saudi Arabia has global implications, even if the market capitalization of Sabic, the partially-privatized Saudi state chemicals company, were to crash a la Dot Bomb. The demise of Global Crossing and its peers left behind a pennies-on-the-dollar global fiber optic infrastructure that became the key ingredient in the large-scale offshoring of US service jobs to India. In the same way, these new fertilizer plants will survive whatever fate awaits Sabic and could depress global fertilizer prices for years. That could spell the end of a US fertilizer and petrochemical industry founded on natural gas at $0.50-1.00/million BTUs, which now trades for $6-10/MMBTU.

So as if there weren't enough to worry about in the most volatile region in the world, between the insurgency in Iraq, infrastructure terrorism in Saudi, and the prospect of a nuclear Iran, we must now pay attention to the property market in Dubai and the stock market in Riyadh. Am I the only one who misses the simplicity of the Cold War?