Page 233 - Aamir Rehman - Dubai & Co Global Strategies for Doing Business in the Gulf States-McGraw-Hill (2007)

Capable Capital: The GCC as a Source of Capital 215

ENJOYING THE SURPLUS
The source of GCC prosperity is, of course, no mystery. High prices
for fossil fuels, in great demand on worldwide energy markets,
bring immense wealth to the region. The Gulf’s role in global
energy markets should not be underestimated: the region holds
40 percent of the world’s known oil reserves, and 23 percent of its
known gas reserves. The fact that the GCC represents only 22 percent
of actual oil production and only 8 percent of actual gas production is
a sobering thought for any who might consider competing with
them—the Gulf is actually underrepresented in the market consider-
3
ing what impact it could have. At current rates of production, Gulf oil
and gas producers can outlast other nations by a significant period of
time. The Gulf states’ capacity also gives them a huge influence on
global energy prices: increasing production will lower prices, holding
back will drive them up. Since Saudi Arabia alone possesses about a
quarter of the total known reserves, the Saudi oil minister is broadly
understood to be the driving force of OPEC (the Organization of
Petroleum Exporting Countries) irrespective of who chairs its
meetings or acts as secretary-general. Since the days of Zaki
Yamani, who held the post during the crises of the 1970s, the Saudi oil
minister has remained the single most influential figure in world
energy markets.
Two basic facts must be understood to assess the phenomenon
of wealth creation in the GCC countries. First, oil resources in the
region are firmly controlled by governments and (at the federal
level) represent the governments’ prime source of income. 4
Personal income and corporate taxes are not necessary to support
the state as long as it controls the oil and populations remain small.
At the same time, control of energy revenue makes the state the
dominant actor in each country’s economy. A second basic fact is
that energy markets are dollar-denominated exchanges. The
revenue that comes in from oil is in US currency (hence the term
“petrodollars”) and goes straight to government-linked institu-
tions. Largely because of these dynamics, until recently all Gulf
countries pegged their currencies to the dollar (i.e., the local cur-
rency fluctuates with the dollar), and GCC country–based entities
have historically had a propensity to invest in US Treasury bills and
other dollar-denominated assets. While the dollar peg has long