Page 58 - Aamir Rehman Gulf Capital and Islamic Finance The Rise of the New Global Players

CHAPTER 1 Floating on Wealth 43

■ Saudi Arabia—the world’s largest producer—has supplies
lasting 66 more years.
■ Qatar’s oil may run out in 38 years, but its natural gas is
abundant enough to last for an eye-popping 594 years. 34
That’s a longer period than the period between the invention
of the printing press and today.

This reserve advantage means that as oil grows more scarce,
the Gulf states will proportionately have more of it. As long as oil is
precious, the Gulf can expect sustained prosperity. It’s no wonder,
therefore, that countries with booming demands for energy—
namely, China and India—are building ties with the Gulf like never
before.
The reserve advantage also means that Gulf exporters can raise
output to meet global demand with minimal risk of draining their
long-term reserves. Another advantage that key Gulf producers have
stems from their remarkably low cost of production. The geology of
the region makes drilling for oil far cheaper in the Gulf than it is in
certain other regions. This is critical, because if the market price of oil
drops globally, producers with higher cost bases start to cease pro-
duction. For high-cost producers, it does not make economic sense to
produce when the prevailing market price is below their costs. Gulf
producers, however, can still generate profits at low oil prices. Well
past the point when other countries would drop out of the market,
Gulf producers can keep pumping.
Like any other business or organization, national oil companies
in the Gulf have a straightforward revenue equation: revenues
price volume. If the price goes up and volume remains the same,
revenues increase. Revenues can also, however, increase even if prices
go down—if volume increases enough to make up the difference. By
making the region one of the few feasible producers of oil in a low-
price environment, the Gulf’s cost advantage creates the potential for
growth in overall revenues as other producers of oil scale back or exit
the market.

HIT BY THE CRISIS

As discussed earlier, the GCC region has no doubt been affected by
the global financial crisis and economic recession. Investor confi-
dence plummeted in late 2008, destroying billions of dollars of mar-
ket capitalization on public exchanges. The collapse in energy