Oil wealth flows into gulf states, but riches are built on sand

Chicago Tribune (MCT) - While the U.S. reels under the weight of its financial crisis, the sparsely populated sheikdoms of the oil-rich Arabian peninsula are wallowing in more money than they know what to do with.

These desert nations, most of them tiny and long obscure to most Americans, are being transformed. They used to be sleepy backwaters of Bedouins and struggling fishermen. The emirate of Qatar, for example, was once known mostly for its pearl divers.

But now, flush with profits from the soaring prices of oil and natural gas, these countries are emerging as glittering economic powerhouses with the ability to exert influence in the volatile Middle East and beyond.

Collectively, the six nations that make up the Gulf Cooperation Council are estimated to control $1.9 trillion in assets. That puts them second only to China, a seismic transfer of wealth from the pockets of consumers in America, Asia and Europe to this small corner of the world.

"They are an economic threat to the West, because they are taking away so much money from the West in terms of oil revenue," said Adhip Chaudhuri, a professor of economics at Georgetown University's School of Foreign Services in Qatar. "It's a source of resentment that so much income is being transferred."

It's a second lease on life for a region that saw its fortunes soar during the oil boom of the 1970s, only to wither again when energy prices collapsed in the 1990s. Then, the region's ruling families frittered their wealth on new palaces in the desert and luxury apartments in Europe.

This time around, they are making every effort to invest for a post-oil future. They are pouring money into projects aimed at diversifying their economies, preparing for the possibility of a future collapse in the price of oil, or the day when the oil runs out.

The ultimate impact of such wealth concentrated in the hands of the emirates' royal families is unknown. So far, most of them have kept a low profile and kept their investments low key. But Qatar has begun exploiting its profits from natural gas exports to exert influence beyond its borders. This year, it brokered a peace deal between squabbling factions in Lebanon.

"These are strange new societies," said Lebanese commentator Rami Khouri, who heads the Issam Fares Institute for Public Policy at the American University of Beirut. "There's a physical development going on that's quite spectacular, but their political timidity is striking."

That physical development is, indeed, stunning. Forests of plate-glass skyscrapers are rising from the desert in vistas reminiscent of the dramatic emergence from the rice paddies of China's Shenzhen in the 1990s.

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The world's tallest building is due to be completed in Dubai next year. The neighboring emirate of Abu Dhabi is spending billions to entice cultural heavyweights such as the Louvre and the Guggenheim to open museums.

Qatar is investing billions in an ambitious education scheme that includes, among other top U.S. institutions, Northwestern University's first overseas campus. It has lured the renowned architect I.M. Pei out of retirement to build a new Museum of Islamic Art that will showcase items from around the world.

At the same time, sovereign wealth funds controlled by the region's governments have been investing across the planet, with a view to substituting investment income for oil revenues.

Though the recent plunge in global stock markets has wiped billions off the value of those portfolios, and the price of oil is down sharply from its July peak, gulf countries are still racking up surpluses at the rate of $250 billion to $300 billion a year, said Brad Setser of the New York-based Council on Foreign Relations.

The region's oil earnings are projected at around $600 billion this year. Just under a fifth of that comes from the U.S., which relies on gulf oil for a strategically significant 16 percent of its imports.

"There's only so many projects in the world you can spend that kind of money on," Setser said.

The majority of gulf residents, 26 million, live in Saudi Arabia, the biggest of the six GCC nations and an established regional power. But now the tiny emirates surrounding it, notably Qatar, Dubai and Abu Dhabi of the United Arab Emirates, and Kuwait, are emerging also as global economic players. Most residents in those countries are expatriates, chiefly from Europe and Asia. The only political unrest comes from the armies of laborers _ mostly imported from India, Bangladesh, the Philippines and other Asian countries _ who stage occasional protests to demand better working conditions.

Likewise, most of the emirates have not sought to flex their muscles on the world stage. A few high-profile investments have caught the headlines, such as Abu Dhabi's purchase of a share of the Chrysler Building in New York, and the 4.9 percent stake it took in Citigroup late last year.

But for the most part, investments have been low key, and gulf states have not, for example, stepped forward to bail out America's ailing institutions, even though they could afford to do so several times over.

That reflects the inherent caution of gulf investors, who are mindful that their wealth could still evaporate if there were a dramatic fall in the price of oil, Setser said. "Their investments are a buffer ... but they're not out of the woods yet," he said.

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Qatar, the world's fastest growing economy, is the one gulf Arab state that has energetically sought to leverage its stunning wealth into political influence.

An oil and gas-rich desert peninsula whose 1.4 million people enjoy the world's highest per capita incomes, Qatar has in recent years succeeded in casting itself as an important regional mediator. Its crowning achievement was the successful negotiation by Qatar's emir, Sheik Hamad bin Khalifa al-Thani, of the Lebanon peace settlement in May, but it also has actively positioned itself between regional and global powers in ways that sometimes seem contradictory.

Though it opposed the U.S. war against Iraq, it hosts the biggest U.S. military base in the region. Alone among the gulf states, it has had diplomatic and other contacts with Israel _ while it also has a close relationship with Iran and hosts the TV network Al Jazeera.

Qatar's vigorous diplomacy reflects both a desire to put Qatar on the map and pragmatism. "By branding Qatar a peacemaker, it enhances Qatar's security," said Steven Wright, a political scientist at Qatar University.

That's a reminder of the region's biggest vulnerability. Despite the outward appearance of stability, this is still a highly dangerous neighborhood, susceptible to the violent shocks to which the region is prone. The prospect of a war with Iran is the region's biggest fear.

"The gulf remains extremely precarious, and there are many question marks over its sustainability," said Christopher Davidson, author of "Dubai: The Vulnerability of Success."

"You can't forget where it is located and (that) this is still a very unstable part of the world."

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© 2008, Chicago Tribune.