So far, the so-called Sovereign Wealth Funds of countries such as Kuwait and Abu Dhabi, have been picking their way through the wreckage caused to the banking industry by the sub-prime credit crunch in the United States.
Slugcatcher will not bother exploring the intricacies of sub-prime, simply observe that it is a failure of the banking system, something which has happened many times over the past 300 years.
In a nutshell, banks in America and Europe “borrowed short to lend long” – to people who couldn’t repay their debts.
What, you might reasonably ask, has this got to do with the petroleum industry?
Not a lot, yet, is the correct answer. But, unless The Slug is misreading the leaves in his tea-cup it might not be long before the Sovereign Wealth Funds recognise that:
(a) They must find a home for their spare trillions of dollars in loot;
(b) There are opportunities opening in the western world;
(c) They are being welcomed as big new investors in the banking industry; and
(d) It will not take long before they spread their interests more widely.
This scenario is not one solely from the imagination of The Slug. He understands that when a person (or country) has a swag of cash it becomes almost as big a burden as when he has none.
Popping the money in a bank is one possible way of handling the spare cash “problem”, until you realise the interest rates are so low that you might has well buy the bank – which is what Abu Dhabi has done with its plunge into the shares of America’s biggest bank, Citi.
But owning a bank is not what the Arabs really want to do with their spectacular oil wealth.
It is far more logical that they should use their positions as producers of oil to leverage themselves up the value chain by investing directly in downstream processing and retail where the higher profit margins reside.
In one sense this is a perfectly natural example of vertical integration, peeling off fees all the way along as the owner of the resource, the processor of the resource, and the retailer of the resource.
The problem – which our Arab friends will discover if they go that way, and buy themselves a cute little oil refining and distribution business such as Chevron, Total, or BP – is that the world does not often work the way you expect.
It is rare for a company (or country) to have the full suite of management skills to separate the value in the chain. All too often, head office dictates the terms, a top-down set of rules is applied, and the value is lost.
Kuwait, through its US$220 billion Kuwait Investment Authority, appears to understand this. Its boss, Bader Al-Sa’ad, told London’s Financial Times recently that he was being cautious with his investment strategy.
“Sovereign wealth funds are not speculative,” he said. “They are stable and disciplined. They are building long-term portfolios.”
That might be true of Kuwait, with its deep ties to the western world, and highly (western) educated elite.
Will it be the same as Iraq, Venezuela, Iran, and even Russia as those countries contemplate what to do with their new-found oil wealth?
This is when the question of a fool and his money becomes seriously interesting. In Dubai, for example, there is a spectacular example of over-investment in high-rise apartment blocks and office towers.
In The Slug’s humble opinion that small emirate is in the mother of all property bubbles, and heading for the mother of all property busts.
As we move into 2008, watching where the oil money goes will be a major interest to your scribe who reckons it won’t be long before a western oil company becomes a Sovereign Wealth Fund target – and that’s when we will really see whether the fools and their money are easily parted.
