The
Burj Dubai
By
Stanley Reed, with Peter Coy, John Cady, and Diane Brady in
New York, Christopher Palmeri in Los Angeles, and Carol Matlack
in Paris of Business Week Magazine
Beyond
the Dubai Ports deal: Where all those billions are going.
If the Burj Dubai development isn't the biggest project in the
world, it must be close. At night under floodlights thousands
of mostly Asian workers in hard hats swarm over a 500-acre building
site in the heart of Dubai, the Persian Gulf emirate that is
tiny in size but limitless in ambition. Emaar Properties, a
local company, is carving out of the desert a new $20 billion
district with 30,000 homes, a Giorgio Armani-designed hotel,
an ice rink, and a 30-acre man-made lake.
The centerpiece of the project, which employs more than a dozen
American firms, is Burj Dubai, a $1 billion tower. It was designed
by Chicago architects Skidmore Owings & Merrill LLP, and
its construction is being managed by New York-based Turner Construction
Co. "We are moving up one floor a week, and we are now
on the 31st floor," says Mohamed Ali Alabbar, Emaar's chairman.
The exact planned height is shrouded in secrecy to foil competitors,
but Alabbar promises that the luxury residential complex, more
than 2,500 feet high, will be "40% taller than anything
else."
The
world's tallest building? In Dubai? The city-state in the United
Arab Emirates captured headlines in the U.S. recently when government-owned
Dubai Ports World, through its purchase of Britain's Peninsular
& Oriental Steam Navigation Co. for $6.8 billion, agreed
to take over management of several major ports, from New York
to Miami. The deal has sparked an outcry among politicians worried
that an Arab-owned company could be a vehicle for al Qaeda operatives.
The uproar has forced the company to delay its plans in the
U.S.
The
Dubai Ports deal, though, is just one relatively small episode
in the second great Mideast oil boom. The boom is characterized
by hugely ambitious projects that are transforming the shores
of the Persian Gulf into a Xanadu with some of the most fantastic
and expensive structures on earth. The rush of petrodollars
is creating enormous private and public wealth and reshaping
Gulf business and society.
All
this is happening when the other Mideast -- of Iraq, radical
Islam, and Palestinian-Israeli relations -- is wracked by violence
and strife. That turmoil could certainly threaten the Gulf's
prosperity. Just look at what happened in late February when
al Qaeda fighters unsuccessfully attacked a key oil facility
in Saudi Arabia. But for now the authoritarian regimes running
the Gulf are seizing the opportunity to build new economies
and satisfy their restive populations with a new level of affluence.
The
tale of Mideast money is not just a local story, however. This
year, with oil prices stuck in the $55-to-$65-per-barrel range,
perhaps half a trillion dollars will land in OPEC coffers --
more than at any time since the boom of the 1970s and 1980s.
The Mideast oil states alone will gather in $320 billion in
oil and gas export revenues.
Where
is that money going, how is it affecting the global economy,
and what impact will the boom have on U.S. relations with the
region? Those are crucial questions. The last oil boom, from
1973 to 1985, had dire consequences. The oil price spike created
a lethal mix of inflation and slow growth worldwide. Arab states,
unprepared for their newfound wealth, socked too much money
away in U.S. Treasuries and a few international banks. The banks
in turn lent the money to Latin American governments. In the
end, these countries couldn't pay it back -- and instead triggered
a debt crisis that shook the global financial system.
This
time around the impact of money-flows from the Mideast does
not appear quite so toxic. The oil exporters are spending much
more at home on investment and consumption, helping to shore
up global demand for goods, and balancing out the effect of
their huge export earnings.
But
Mideast money is definitely venturing abroad. For starters,
a chunk of the billions is going to deals in the U.S., Europe,
and Asia. Dubai Ports did not just cut a deal for P&O: It
also bought the port operations of Florida's CSX Corp. (CSX
) for $1.2 billion. Last year, Dubai luxury hotel group Jumeirah
bought the swanky Essex House in New York for an estimated $400
million. Dubai International Capital, the private-equity arm
of Dubai Holding, the government's oil money depository, paid
$1.5 billion for Madame Tussauds, the British wax museum, and
an additional $1.2 billion for a 2% stake in DaimlerChrysler
(DCX ). Mubadala Development Co. of Abu Dhabi acquired a 5%
holding in Italian carmaker Ferrari (FIA ). In the biggest Mideast
deal of all, Egyptian cellular operator Orascom Telecom Holding
formed a consortium to buy Wind, a top Italian mobile network,
for $13 billion. "These investors have an incentive to
invest in assets outside the petroleum industry," says
Thomas J. Barrack Jr. His Colony Capital LLC recently partnered
with Saudi Prince Alwaleed bin Talal to buy the Toronto-based
Fairmont Hotels & Resorts Inc. (FHR ) for $3.9 billion.
On
the Hunt
The
numbers involved in these deals are still small
compared with the billions being spent in the region. Bankers
in the Mideast, however, say both governments and family companies
controlled by Gulf billionaires are becoming more adventurous.
Beat Naegeli, the Dubai-based head of Credit Suisse Dubai (CSR
) private banking in the region, says big Arab investors, while
still predominantly invested locally, are increasingly on the
hunt for equity stakes in overseas companies and real estate
deals in New York, London, and Paris. Many of these investors,
he says, are currently expanding their private-equity positions
rather than putting money into hedge funds -- a good way to
diversify. Abu Dhabi and Dubai have multibillion-dollar funds
that are scouting for equity investments abroad. "We will
see more of that," says Brad D. Bourland, chief economist
at Riyadh-based Samba Financial Group, a leading Saudi bank.
"This is the tip of the iceberg."
Then
there's the Mideast money flowing into U.S. Treasury securities
and other passive investments. U.S. government data indicate
that OPEC countries held only $67 billion in Treasuries as of
December. Most of that was held by the Gulf states, but it's
small compared with the giant holdings of China and Japan.
The
official figures, though, probably underestimate the clout of
Arab money in world capital markets. According to PFC Energy,
an energy consultant in Washington, the Mideast oil states hold
a cumulative $1 trillion in foreign assets -- stocks, bonds,
government debt, real estate, and other investments. In fact,
the money isn't easy to trace because unlike the oil boom of
the 1970s, today's petrodollars aren't being parked in a few
big American and European banks. Instead they are sprinkled
around the world through an intricate network of private banks,
funds, and offshore financial centers. "There's a distinct
lack of hard information on where this money's going,"
says Mohsin S. Khan, director of the International Monetary
Fund's Middle East and Central Asian department.
What's
more, the Arab states are now major buyers of goods from Japan,
China, and the rest of Asia, where they sell the bulk of their
oil. So these petrodollars get recycled as Japanese yen or Chinese
yuan -- which the Japanese and Chinese governments convert into
U.S. Treasuries. Indirectly, then, oil money is bankrolling
U.S. deficit spending. Paul Donovan, a global economist for
UBS Investment Bank (UBS ) in London, estimates that petrodollars,
mostly channeled through Asia and Europe, are funding up to
45% of the U.S. current account deficit.
While
these billions circulate through the global money system, you
only have to look around the Persian Gulf to see that huge amounts
of oil wealth are staying in the region. Fueled by the oil boom,
local stock markets have risen anywhere from over 200% to more
than 1,000% in the past four years, despite current sharp corrections
in Egypt and the United Arab Emirates. Imports from the U.S.,
Europe, and Asia are soaring.
Yet
in contrast to the helter-skelter development of the 1970s,
a new and better-planned Middle East economy is rising, shaped
by a well-educated business class and powered by a youthful
population seeking prosperity. "Look at the demographics
of these nations," says Alabbar, 46, who graduated from
Seattle University. "They all see what the outside world
is all about, and they dream to live like that." Some 65%
of Saudis, for example, are 24 years old or younger.
Another
important difference: Governments in the region learned harsh
lessons when they fell into dire financial straits during the
lean period of low oil prices in the early 1990s. They began
shifting economic policies to cut waste and make room for once-tiny
private sectors to create jobs. Those moves created a healthy
environment in which growth could catch fire once oil prices
took off starting in 2000. In 2005 real gross domestic product
grew a healthy 6.5% in Saudi Arabia, by far the most important
economy in the region. "Improved confidence, fear of investing
in the U.S. and Western Europe, and the massive amounts of private
capital brought home have led to an unprecedented boom,"
says Fareed Mohamedi, chief economist at consultants PFC.
The
region's governments have developed more careful spending strategies.
The Saudi government, for instance, has been very conservative
in its budgeting, assuming until this year that oil prices would
return to $25 per barrel. Now, with $150 billion or so stashed
away, Riyadh plans to increase its spending by 20% this year,
to about $90 billion. Capital outlays are set to nearly triple,
to $33 billion.
Planning
Ahead
Much of this money is earmarked for long-term projects. They
include a $50 billion, five-year program to build new roads,
schools, and hospitals in rural areas; a $9 billion modernization
of an oil refinery at Rabigh, with Japan's Sumitomo Corp.; and
$14 billion for new production-capacity expansion at Saudi Aramco,
the national oil company. "The number of megaprojects with
five-year time frames is so big that it ought to sustain a lot
of the private sector through this decade," says Samba's
Bourland. He figures the private sector will record 8% growth
this year, vs. 5% for the overall Saudi economy. In the UAE,
private-sector growth has been hitting double digits.
Governments
have smartened up in other ways. They are tailoring their infrastructure
projects to attract clusters of similar businesses, which gain
from being close together. Dubai has established Internet and
Media Cities -- office parks wired for high-speed data transmission.
Not to be outdone, the Saudis have brought in Emaar to develop
a new $27 billion King Abdullah Economic City on the Red Sea
coast north of Jeddah. The planners of the new metropolis envision
a giant port, and manufacturing businesses including petrochemicals
and pharmaceuticals. Some 30% of the equity in the project may
be offered to investors on the stock exchange.
All
this creates huge opportunities for U.S., European, and Asian
companies. Dubai's Internet City has attracted the cream of
technology companies such as Microsoft (MSFT ), Hewlett-Packard
(HPQ ), and Cisco Systems (CSCO ). "This is a mini Silicon
Valley," says Ghazi Atallah, Cisco's Dubai-based emerging-markets
honcho. The Middle East represents Cisco's fastest-growing region,
with double-digit annual revenue increases thanks to local telecom
deregulation and the increasing sophistication of private businesses.
Mideast companies are also buying a very high proportion of
advanced technology like combined video streaming and data services.
"In some cases [customers in the region] are leapfrogging
Europe and the U.S.," Atallah adds.
Other
international companies such as Fluor Corp. (FLR ) and Bechtel
Group Inc. are likely to benefit from the frantic pace of construction,
especially in the oil fields. Aircraft makers Boeing Co. (BA
) and Airbus are selling squadrons of planes in the region,
which is seeing the rise of fast-growing carriers like Dubai's
Emirates. That airline has an astonishing $37 billion worth
of planes on order, including 45 of Airbus' new A380 -- the
biggest order placed by any airline for the double-decker megaplane.
And between them, Emirates and Qatar Airways have ordered 49
Boeing 777 jetliners. "The Middle East has become one of
the three big reservoirs of aircraft sales in the world,"
along with China and India, says Habib Fekih, president of Airbus
Middle East.
Meanwhile,
Nabil A. Habayeb, Dubai-based President and CEO for the Middle
East and Africa for General Electric Co. (GE ), says the company's
orders for the region leaped by close to 80%, to $8 billion,
from 2004 to 2005. Much of that is in big-ticket items like
power-generation equipment and aircraft engines, as well as
oil-, gas-, and water-treatment facilities. But state-of-the-art
health-care equipment and even theme parks are in demand, too,
says Habayeb: "The priorities are health care, education,
and diversification away from an oil- and gas-based economy."
It's
not just the big U.S. manufacturers that are benefiting. International
investment bankers are being called in to raise capital for
regional corporations interested in taking advantage of the
red-hot markets. Saudi Arabia's Prince Alwaleed raised $397
million on Feb. 23 for his Kingdom Hotel Investments, which
will be listed on the new Dubai International Financial Exchange
and in London. "There is a big backlog of IPOs," says
May Nasrallah, head of Middle East investment banking at Morgan
Stanley (MS ) in London, which managed the Kingdom IPO. Among
IPOs expected, according to bankers, are an offering by Alwaleed's
main vehicle, Kingdom Holdings, and a listing of Showtime Arabia,
a broadcaster partly owned by Viacom Inc. (VIA ).
Bankers
say the deal flow could really pick up if governments start
to sell off their still-considerable holdings. "If governments
see the opportunity to tap into this pent-up demand for financial
investments and transfer ownership of public entities as the
British did [under Margaret Thatcher], I think that would be
very good for the market," says Osama Abbasi, co-head of
the European fixed income group at Credit Suisse First Boston.
Plenty
could still go wrong. Despite all the private-sector growth,
the economies of Saudi Arabia and the rest of the Gulf countries
are nailed to oil. Oil and gas production is more than 50% of
GDP in Qatar and Kuwait and 42% in Saudi Arabia, according to
Credit Suisse. Overheating is also a concern, with investors
borrowing money to chase local stocks and consumer debt growing
to worrying levels in some of the Gulf countries.
The
political problems around the region are far from solved. In
the worst case, Iraq's troubles could spill over into conflicts
between Sunni and Shiite Muslims around the region. How U.S.-Arab
relations play out will also prove hugely influential in containing
potential strife. The U.S. is on the receiving end of a lot
of criticism now, mostly aimed at its conduct of the war in
Iraq. Should the U.S. withdraw, though, the Gulf states might
find themselves once again under pressure from their bigger,
poorer neighbors, Iraq and Iran.
But
if the Gulf regimes need the U.S., the opposite is just as true.
America needs a stable source of oil for itself and the world,
and U.S. companies dearly want to increase an already booming
trade with the Mideast. The indirect but powerful role these
oil states play in financing the U.S. deficit further enmeshes
Washington's interests with the region's, no matter how contentious
relations may get over America's foreign policy.
These
factors increase the challenge Washington faces in encouraging
reform. The authoritarian governments in the Gulf will have
to change to keep pace with their wealthy, better-educated populations.
They have a long way to go on improving opportunities for women,
for instance. While more money in people's pockets buys time,
the rulers are facing demands for greater accountability and
wider political participation. Some business people even think
that oil money could have negative consequences. With financial
pressure off, governments may be more likely to delay privatization
and other reforms.
Yet
it doesn't look like this Gulf boom will fizzle anytime soon,
since oil is in such demand. One possible scenario: As global
interest rates rise with the recovery of Japan and Europe, worldwide
competition for capital will heat up, and the well-heeled investors
of the Mideast will become pivotal players in future deals.
Oil money's role, then, could just get bigger.
________
Additional
stories
Oil
Pricing: Don't Underestimate The Fear Factor
The Middle
East money gusher is fed by many wellsprings, and one of them
is fear. The market is justifiably worried about a massive disruption
of oil supplies, possibly caused by a terrorist attack such
as the unsuccessful one against the world's largest oil-processing
facility at Abqaiq, in eastern Saudi Arabia, on Feb. 24. This
fear is pushing oil prices higher and sending additional billions
into the coffers of oil-producing nations.
The sums involved are astonishing. According to a rough BusinessWeek
estimate, the world paid the Persian Gulf oil states an extra
$120 billion or so last year because of the premium in prices
due to fear of unexpected supply disruptions.
How did
we come up with that number? To get a rough handle on how the
fear factor affects current oil prices, we checked with three
industry experts. James W. Ritterbusch, an oil economist at
Ritterbusch & Associates in Galena, Ill., says it's impossible
to estimate the size of the fear factor, although he agreed
there is one. Sarah Emerson, director of petroleum market analysis
and research at Energy Security Analysis Inc. in Wakefield,
Mass., estimates that fear adds an additional $15 to the price
of each barrel of oil. Tim Evans, senior energy analyst for
IFR Markets in New York, goes even higher, with an estimate
of $25 to $30 a barrel.
We used
Emerson's $15 "subjective guess" because her argument
for it made the most sense. She argued that oil prices would
be somewhat above their historical average anyway because there's
little spare capacity. But, she said, prices wouldn't be this
high without fears of instability: "If you said every country
in this world was stable, and we didn't have to worry about
a disruption, I think it would get back to the $40s," she
said, vs. the current price of around $60 a barrel. The $120
billion comes from multiplying that $15 premium by the annual
oil exports of Algeria, Iran, Iraq, Kuwait, Libya, Qatar, Saudi
Arabia, and the United Arab Emirates.
Some
cynics argue that oil producers welcome the fear of disruption
because it boosts their revenue. While the Saudi royal family
takes pains to assure the world that it's a reliable supplier,
saber rattlers like Iranian President Mahmoud Ahmadinejad and,
outside the Mideast, Venezuelan President Hugo Chávez,
don't seem to mind if their threats against the West scare markets
higher. Fear, says IFR's Evans, is a "gift" to oil
producers.
________
Why
This Oil Boom Is Different
Three
decades ago, OPEC nations didn't know what to do with their
oil money. This time, they're spending it
The
leap in oil prices in the 1970s was a shock to the global economic
system. But the oil boom of the 2000s has done little obvious
harm, for now. Global growth remains healthy. What's the difference?
Probably the biggest difference is what's being done with all
the petrodollars. Three decades ago, most were removed from
global consumption and put into savings. That depressed global
demand. This time, more of the petrodollars are being spent,
keeping worldwide economic growth buoyant.
A bit of
history: When the oil shock began in 1974, the petroleum producers
of the Middle East were extremely underdeveloped and couldn't
use all the money that was flowing into their coffers. So they
stashed it abroad, in Eurodollar deposits at international banks
and in special U.S. Treasury securities. Those funds were eventually
lent out -- some in the form of big bank loans to Latin America
-- but the primary effect of the oil boom was to take spending
money out of the pockets of global consumers.
UNMET NEEDS.
This time, the Middle East oil states have far more advanced
financial systems, bigger populations, and a wide array of unmet
needs and ambitions. So they're spending a big share of the
incoming petrodollars on everything from an indoor ski slope
in Dubai to government jobs in Saudi Arabia (see BW Online,
3/2/06, "Dubai's World-Beating Buildings"). More spending
equals more imports. That means more jobs generated elsewhere
in the world, from New York to Shanghai.
Here's a
back-of-the-envelope indicator of the difference between then
and now, using data from OPEC, the World Bank, and the U.S.
Commerce Dept. In 1974, OPEC nations ran a current account surplus
equal to 1.2% of global gross domestic product. That was enormous.
By running such a big surplus, they were pulling lots of dollars
out of the pockets of oil-consuming nations, but putting very
few dollars back into those pockets by consuming American cars,
French cheese, or Japanese televisions. No wonder the world
economy was hit with stagflation (see BW, 5/9/05, "The
Economy: Why It's Not Déjà Vu").
OPEC is
running much smaller surpluses this time because it's spending
more on imports from Europe, Asia, and the U.S. In 2004 (the
last year for which OPEC has data), OPEC's current account surplus
was only 0.3% of global GDP -- about one-quarter as big as in
1974.
WHAT'S NEXT?
To put things into perspective, OPEC's impact on the global
economy in 1974 was far more drastic than the impact today of
Japan, which also runs big current account surpluses. Japan's
current account surplus, 0.4% of global GDP in 2004, is huge
by today's standards, but still only one-third of OPEC's in
1974. Throw in China, and you get a combined current account
surplus up to only around half a percent of global GDP.
There are
two schools of thought about what happens next. Mohsin Khan,
director of the Middle East and Central Asia Dept. of the International
Monetary Fund, argues that the oil producers will spend more
of their income in the future. The theory is that as they get
used to today's high oil prices, they'll be less concerned about
saving for a rainy day than they were last time (see BW, 2/6/06,
"Oil Prices: The New Reality").
That would
stimulate global demand even more, although at the price of
decreasing the pool of savings. There's historical precedent
for this. According to BusinessWeek's back-of-the-envelope measure,
even though oil prices hit their all-time inflation-adjusted
peak in 1981, OPEC's current account surplus was just 0.4% of
global GDP, a third of the 1974 level.
(A small
complication here: Khan doesn't buy the argument that OPEC spending
is higher now than it was in the early 1970s. He says that the
IMF's numbers show the Middle East members of OPEC are actually
spending less of their income now. You'd think this debate would
be easy to settle, but the quality of the data is less than
ideal. So let's move on.)
SAVINGS
SPREE? But maybe OPEC won't go on a shopping spree after all.
The opposing school of thought, voiced by economist Paul Donovan
of UBS in London, is that OPEC will actually save a bigger share
of its petrodollar income in coming years. He and others argue
that as OPEC nations gradually make headway on their to-do lists,
and create jobs for every potentially restive 20-year-old who
needs one, the urgency of spending will diminish and they'll
start socking away more money.
If
that happens, the timing for OPEC could be propitious. As growth
accelerates in Europe and Japan, the global demand for investment
will rise and more OPEC savings would come in handy. In fact,
infusions of money from the oil sheikhs of Saudi Arabia, Kuwait,
and elsewhere could become highly sought after in the West,
including in the capital-hungry U.S. If that's the case, then
the controversy over Dubai's bid for a port operator could be
just a faint foreshadowing of things to come.
Main
story by Business Week's Stanley Reed,
with Peter Coy,
John Cady, and
Diane Brady in
New York, Christopher Palmeri
in Los Angeles, and Carol
Matlack in Paris. The additional
stories are by Peter Coy BusinessWeek's Economics editor, and
edited by Phil Mintz. Petroleumworld not necessarily share these
views.
Editor's
Note:The above article is Business Week's Magazine Cover Story
for the March 13, 2006, issue, published by Business Week's
on line, on March 5, 2006. Petroleumworld reprint this article
in the interest of our readers. Petroleumworld reprint this
article in the interest of our readers.
(http://www.businessweek.com/magazine/toc/06_11/B3975magazine.htm)
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