Awash with Money
"In one generation we've gone from riding camels to riding Cadillacs. The way we are wasting money, I fear the next generation will be riding camels again."
Those were the words of King Faisal, the former ruler of Saudi Arabia, in the 1970s when oil prices reached $35 a barrel. At the time, Saudi Arabia, which commands 26 percent of the world's proven petroleum reserves, was living fat-and-happy off oil proceeds, paying a legion of princes extravagant allowances, buying up American fighter planes and Park Avenue real estate, while, in the process, building up an extraordinary amount of debt.
Saudi Arabia, as I wrote in one my first articles for Worth, was either going to end up bankrupt at the hands of its own excess, which would send the price of oil soaring, or oil would rise for supply/demand reasons and bail out the Saudis. Either way oil had to rise.
We all know the end of that story. Oil fell to $10 a barrel in the winter of 1998, threatening to make the Arab nations tighten their belt. But last October, oil hit a high of $35 a barrel, much to the ire of Americans who found themselves paying high-heating bills and gasoline prices not seen since the Gulf War.
Rest easy, Faisal. Saudi Arabia hasn't gone under. In fact, people are living better than ever.
The lavish lifestyle afforded those who live in the Gulf nations is hardly surprising. Still, nothing I had read or heard prepared me for the vision of wealth and luxury that greeted us as we entered the Arabian Peninsula. It was storybook riches, the kind I'd read about in fairy tales and legends. What's even more surprising is how quickly this wealth has transformed the once rural towns along the Gulf into thriving modern cities. Nothing on this scale has ever happened in history so quickly.
Our first taste of it was in Saudi Arabia where, not surprisingly, the economy is almost completely dependent on the oil industry. The petroleum sector, in fact, accounts for about 40 percent of the country's gross domestic product and 90 percent of its export earnings. The government has consistently run a budget deficit, but unlike the over expansion of the early- and mid-1990s, the current deficit is more a product of spending on vital and necessary programs such as education and infrastructure development.
I first noticed the presence of wealth as my wife, Paige, and I arrived at the port of Duba in Saudi Arabia. Unlike the ports we had come into in Africa, these were well-maintained. Saudi Arabia is a large country, just over one-fifth the size of the U.S. that dominates three-quarters of the entire Arabian Peninsula, a large arid stretch of land wedged between Northeastern Africa and sub-continental countries like Iran, Pakistan and India. Despite the expanse, the highways are in excellent condition and the roads are packed with luxury cars.
When we reached Jiddah, a city along the coast, we discovered even more evidence of the country's wealth. In 1947, Jiddah was a tiny fishing village, covering only one square kilometer with 30,000 residents.
Today, 1.5 million people live within 80 square kilometers. Jiddah has become a modern cosmopolitan city and Saudi Arabia's principal seaport. Office buildings, shopping centers and apartment complexes are being built all over the city. Swathes of land that were once desert are now lush, green parks.
The main activities for locals are prayer and shopping so, not surprisingly, shopping centers and elaborate mosques abound.
We visited Jiddah's gold souk, or market, a section of town with row after row of stores selling gold in every form imaginable from belts to rings and bracelets to headdresses. All the pieces were 22-carat or 24-carat gold, extremely bright and shiny, not the often dull nine- or 14-carat gold we commonly see in the U.S. In fact, the cheapest gold we found in the souk was 18 carat. Saudis don't even consider 14 carat real gold!
Most surprising, all of the stores are doing solid business, it's not just empty buildings filled with excess gold. We arrived at the end of Ramadan during the gift-giving period, and shoppers were buying up the gold by the pound.
In other Gulf countries, petrol and gas dollars fuel even more excess. We went to the United Arab Emirates, a federation of seven independent Arab states called emirates that sits along the Persian Gulf. It's a tiny country, no bigger than the state of Maine with a population of about 2.4 million people. Still, it's one of the world's top oil-producing nations.
Such a wealth of hydrocarbons has long made this tiny corner of the Arabian Peninsula one of the wealthiest places in the world. In 1985, the GDP per capita in the UAE was $19,120, the highest of any country in the world. Today, GDP per capita sits around $20,000 tax free on par with that of many Western European countries. The government supports its people by subsidizing education and health care. Every citizen is promised a job. There are no taxes. There's even a fund set aside by the government, which guarantees all citizens who marry another citizen $20,000 with which to start life. Then again, $20,000 is pocket change in these El Dorados.
In Dubai, one of the seven emirates, we stopped (but didn't stay) at a hotel called the Burj al Arab where the cheapest room is $1,000 a night. The most expensive was $8,000! The guards in front of the hotel told us we had to pay $100 just to look inside. The hotel's management calls it the only seven-star hotel in the world.
In the United Arab Emirates, we visited the home of the world's most expensive horse race with a purse of $4 million. Gambling is forbidden by Islamic rule but the locals still find a way around the rules. Since everyone has so much money, no one has to put up anything to bet. They only collect their winnings if they win, but pay nothing if they lose.
Dubai has events on the PGA and pro tennis tours as well as speed boat championships. The world's top entertainers stop there on tour. An Internet city in Dubai has attracted major technology companies from all over the world.
As we drove along the roads in the UAE, I couldn't take my eyes off the shrubbery. We've driven through a number of deserts during our trip and, outside of the occasional oasis, we rarely saw anything green. By contrast, the highways in the UAE are lined with lush, green plants and bushes that stretch along the dividers and edge the highway for hundreds of kilometers. The whole desert wasn't green -- just a swathe of land on the divider and sometimes a few meters on either side of the highway -- but it was an unbelievable break from where the yellow sand and stone of the desert stretched as far as the eye could see.
When we finally stopped to look at the plants, we discovered an intricate network of irrigation hoses and nozzles. Either the UAE had a lot of money to spend, enough in fact to water the desert, or some environmental bureaucrat had made a massive mistake. I couldn't even fathom the cost to irrigate all this land, just for the benefit of drivers speeding along the highway.
The shopping centers are filled with top designer stores. Dubai even has a month-long shopping festival in the spring, drawing visitors from around the world. Last year, the promoters gave away a Rolls Royce each day of the festival.
Abu Dhabi, another emirate, and the capital of the UAE, is the most lavish place I have ever visited. We saw row after row of palaces along the streets and acres of irrigated land filled with grassy parks. We visited a gym that had been the home of a prince before he got bored with it and decided to build a new one.
Such excessive wealth also was true in Qatar, a tiny country that sits on a peninsula adjacent to Saudi Arabia. High natural gas prices have helped Qatarpost a trade surplus of almost $4 billion. The government has so much money in its coffers, in fact, that it was able to outbid much larger places for the rights to host the Asian Games, the Asian equivalent of the Olympics. The event will cost $700 million, far more than the country could ever hope to make on the games, but the government is willing to pay that much to buy a place on the map.
Naturally, such luxury can only continue as long as the oil and gas spigot keeps running. We've all heard stories of wells running dry in the North Sea and Prudhoe Bay. But that's not likely to happen in the Gulf. Saudi Arabia basically floats on a giant pool of oil. At present levels of production, Abu Dhabi's oil reserves should last for the next 100 years. Conservatively, Qatar's oil output should remain steady for the next 20 years, if not longer. Best of all, recent discoveries have made Qatar the third largest natural gas producer in the world.
The wealth has some downsides. Since everyone can get a job and no citizen can be fired, many businessmen complain that workers are lazy or make up excuses for why they didn't show up to work. One Saudi employer told me one of his employee's mother had died three times already.
Foreigners, particularly from India, Pakistan and Bangladesh, are moving to these Gulf countries to take advantage of the concentration of wealth and money. In fact, they often outnumber the locals. In the UAE, 66 percent of the population is foreign. Less than a third of Qatar's people are native. The governments try to protect residents by requiring foreign businesses to have local partners and sponsors, but that doesn't mean they can't find ways to do business.
Many of these nations have tried to diversify their economies to be less dependent on oil and gas. Saudi Arabia once successfully irrigated a portion of the desert to grow wheat, but it was costing the government six times the world price of wheat just to produce it.
Now, government officials are trying more realistic methods. For example, in Bahrain, a small island nation in the Gulf, we found an international banking center where the country's tax-exempt status has attracted roughly 80 offshore banking units and investment banks as well as nearly 40 offices of foreign banks. Other countries like Oman and even Saudi Arabia are slowly starting to experiment with tourism. All these countries are privatizing industries that were once state run.
Still, cultural obstacles deter some American business people and tourists. Despite their lavish lifestyle, the people of the Gulf countries are strict Muslims, which translates into restrictions that might steer away many. Alcohol, for instance, is prohibited in most areas. (We could, as Americans buy alcohol in the UAE, but only in our hotels and particular stores.) We knew this going into Saudi Arabia so we dumped any and all liquor we were carrying before we reached the border. Unfortunately, I forgot our doctor in the U.S. had given us a bottle of vodka for our first aid kit. When the border guard found the bottle, I was terrified because the penalty can be anything from 80 lashes to exile to jail. Personally, I was hoping for exile.
Restrictions on women in Saudi Arabia are the most noticeable. Paige had to dress in an abaya, the traditional head-to-toe covering for women everywhere she went. She wasn't allowed to drive. Women often can't even eat in the same room as men. We went into a restaurant our first night in Saudi Arabia and drew many stares when Paige sat down with me. Only later did I realize there was an entire separate section for men and women to eat together and we were in the all-male area.
So, why should Americans even care about these countries? Most people probably haven't heard of Abu Dhabi or Oman.
Consider these financial implications. Unless we discover how to turn garbage into fuel, it's likely the U.S. will be reliant on oil and gas well into the 21st century. Countries like Saudi Arabia and United Arab Emirates are important players in OPEC and their decisions hit us right where it hurts, our wallets at the gas tank and in our home heating bills.
More importantly, a lot of the wealth in these countries has been invested in Western equities. Back in the 1970s, Americans were terrified Arab investors, who had bought up American Treasuries, might suddenly decide to sell and send our economy into a tailspin. The same fear applies today: Abu Dhabi alone reportedly had some $350 billion invested in stock and bond markets. Should these countries decide to pull their investments from our markets, the ramifications could be huge.
I did not invest in any of the countries. In fact, in every country except Oman, it was forbidden for foreigners to invest. Then again, why would I? The price of hydrocarbons is at a top and I can't imagine it going much higher. Still, I think OPEC will probably increase production but I don't think that's going to translate into lower oil prices. Such an event might make places like Abu Dhabi and Qatar the topic of conversation even in the U.S.
Consider the political implications, too. These countries are the primary financiers of the world's Muslim community. We've seen evidence of their dollars at work in many places on our global journey, such as in the building of mosques in Tanzania and in the purchase of airplanes for the Sudanese government. The UAE continues to contribute toward peacekeeping missions in Kosovo. Many of these countries supported the U.S. during the campaign against Iraq. Saudi Arabia supplied us with many of the arms we used against Saddam Hussein.
With such clout comes the obligation to be a leader of more than a billion Muslims, a community that stretches far beyond the boundaries of the Arabian Peninsula. The U.S., powerful as it may be, can't afford to take this lightly or assume the Gulf States will always take America's side. These countries certainly don't in the case of their support of the Palestinians in their struggle against Israel. It's not impossible to imagine, therefore, that whether in a battle over the economics of petrol dollars or the interests of Islam, the U.S. may find itself at odds with well heeled, widely influential nations that, unlike most around the globe, need very little from it.
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E-mail: jim@jimrogers.com