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Persian Gulf to Wall Street

Written By Brian Hicks

Posted September 18, 2007

Something big is brewing along the Persian Gulf, and it’s not what you might expect. Is Iran going to bomb us? Not likely. Will Iraqis beat their swords into plowshares in 2008? Ha! This past weekend, in Philadelphia, a select group of investors got the scoop.

"Hit ’em hard," my publisher, Brian Hicks, told me. In preparation for Angel Research’s first Profit from the Peak investor summit, he sounded like a football coach before the big game. I got my nose busted playing rugby in college, proof I have no problem putting on the pressure. But Brian wanted a brand-new idea for Philly. It’s tough to hold back, but what sweet relief when you get to burst forward with the power of a finely-honed notion.

If you couldn’t be there, you missed out. But you don’t have to be left out. I’ll tell you here what I told my readers I had the pleasure of meeting in the City of Brotherly Love, and luckily we got it all on record, so you can praise us or chastise us later on.

Heck, you can even play us the audio of ourselves and take us to task. I promise we won’t pull a Dick Cheney or Donald Rumsfeld, saying, "Nope, that’s not what I said…"


To order your copy of the full Profit from the Peak proceedings, click here:

What it boils down to is this: the world’s endowment of light, sweet crude is dwindling. Our hot spots for energy exploration over the past century are on the way down, and non-traditional oil sources are ramping up with each dollar that crude surges on the New York Mercantile Exchange.

Check the charts. The Gulf Cooperation Council countries (United Arab Emirates, Qatar, Oman, Bahrain, Saudi Arabia, and Kuwait) are rolling in the greenbacks brought by $80 oil, but they’re also worried.



Worldwide oil supplies are trending downwards, and the heavily tapped regions of the Western Hemisphere and the Persian Gulf are moving right along with the global graph. The only part of the picture that still has an upside is the "other" nations, which is how the US Department of Energy lumps together former Soviet republics like Kazakhstan and African countries like Libya, where decades of diplomatic isolation locked in place Africa’s highest national oil reserve bounty, and the world’s cheapest, sweetest crude (just a dollar a barrel to produce!).

The Gulf Cooperation Council and its citizens aren’t about to let the oil-fueled opulence of the past couple generations slip away. Record oil prices aren’t just financing indoor ski slopes (Google "Ski Dubai" for a real treat) or grown-up amusement parks built on manmade islands.

They’re going hunting for innovation and industry stalwarts alike.

And so far, the track record of Persian Gulf sovereign wealth funds is pretty impressive.

By some estimates, state-run investment agencies hold more capital clout than all hedge funds combined. And, unlike hedge funds, government-run investors have real money, not the asset-backed nightmare paper that has fueled ridiculous acquisition premiums in leveraged buyouts and private equity deals through most of 2007.

Consider Arcapita, the Islamic finance arm of the Bahraini government. Recently, Arcapita bailed out a European private equity buyout of Germany’s largest window and door manufacturer, coming to the rescue with nearly 400 million euros. Whether this money was delivered in a titanium suitcase, I do not know, but the imagery is striking.

Remember Dubai Ports World? You’ll find them these days referring to themselves as DP World, so as not to arouse the ire of Elmer Fudds in congress who bristled at the thought of an Arab company operating American ports early in 2006.

As if Emirati businessmen are just waiting to destroy the company they’ve just bought… Please, at least get a little more logical with your conspiracy theories. DP World completed its deal, and handed over control of its US port operations to an American holding company. Invasion averted–right?

Not quite. The GCC economies may post a combined force equal to the G7 by 2050. Even though the highest-ranking Middle Eastern country is Israel (#13) in terms of US patents its citizens (or subjects) have filed, and Saudi Arabia is a full 32 spots down the list as runner-up, Gulf countries have the petrodollars to buy innovation.

By the way, that DP World deal got done right at the bottom of a recent runup in the Baltic Dry Bulk Index, the world’s leading indicator of shipping costs. Dubai got in on a major bull market with impeccable timing.

Just like China, whose toys and auto parts and clothes and food we’ve bought with relish for so long, the Gulf countries had oil we thought we couldn’t do without, and now they’re sitting on dollar dunes.

China has $1.3 trillion in reserves. GCC countries hold net foreign assets right around a trillion as well. The cross-pollination of Gulf energy with China’s booming energy consumption (outstripping its own whopping GDP growth at over 11% yearly), will create a juggernaut of money flows towards developed economies and developing ones alike.

Dubai’s state investment authority announced last week that it’s looking to spend at least $2 billion in China and India in coming years. Abu Dhabi is set to finance a billion-dollar telecoms network in Nigeria, an old OPEC buddy.

If you’re an investor with an eye on buyout targets, nearly everything’s on the table for this massive trend to target.

Consider Temasek Holdings, Singapore’s sovereign wealth fund, which has been around since the 1960s. Singapore doesn’t have much, if anything, in the way of natural resources. Like Israel, ideas are its bread and butter. But the tiny city-state in Southeast Asia has an appetite for acquisition, and this spring my Orbus Investor subscribers reaped the benefits.

STATS ChipPac, a semiconductor testing firm headquartered in Singapore, was announced as a target for Temasek in March. On the news, the company’s share price skyrocketed. We got out with a quick 44% gain, just because the state-owned fund breathed interest.


Do you see now what I’m talking about? This is a major, sustainable driver of valuation growth, not just a flash-in-the-pan stimulus like the Fed cut we saw on Tuesday.

For the average investor, this means balancing your trepidation as a citizen with a calculation of what is valuable in this world. The countries of the Persian Gulf are banking that Peak Oil is upon us, and they’re putting their money down all around in order to preserve their prosperity.

After all, isn’t that what we all want to do?


Sam Hopkins