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Islam and Politics ( 19 Jun 2012, NewAgeIslam.Com)

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Gulf Capitalism: Petrodollar Flows from the Gulf


By Farooq Sulehria

June 20, 2012

All the states of the Gulf Cooperation Council (GCC) transformed over the past decade – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE- boast of world’s tallest building, biggest shopping mall, and largest aluminium, plastic, ceramics, and petrochemical complexes. Save coastal China, no other region has seen such a remarkable transformation in such a brief time span.

 What lies behind GCC’s spectacular transformation? The first thing that springs to mind is oil generating phenomenal revenues, particularly from 2000 to 2008: at the peak of this price, the GCC’s GDP climbed to over $1 trillion (roughly 2 percent of the world’s total: $61 trillion). In 2008, the GCC was the 14th-largest economy in the world, and registered a per-capita GDP three times the world average. Yet while oil wealth is clearly key to the economic transformation of the recent decades, a recent book by Adam Hanieh, Capitalism and Class in the Gulf Arab States, describes a different side to the GCC’s development. Hanieh, a Marxist scholar of Arab origin, argues that “much like its desert cousin, the mirage-what visitors actually see in the region’s oil-fuelled boom is not the full picture.”

 In order to fully comprehend these changes, Hanieh argues, it is necessary on the one hand to map the process of capitalist class formation in the Gulf. On the other hand, the internationalisation of Gulf capitalism is the most vital element.

 In Hanieh’s perspective, the Gulf class formation has evolved within the development of a global capitalist system in which oil has assumed primacy owing to certain specific factors. In this process, ironically, Gulf billionaires have not minted money by appropriating oil revenues but they have pocketed spin-offs from oil revenues (i.e., construction contracts, logistics, banking, etc.).

 He grounds his perspective in two key Marxist concepts. Firstly, the concept of “commodity fetishism.” One of the main arguments of this book is that oil is not a “thing” but a commodity embedded in a set of (globally determined) social relations. “It is these social relations that need to be identified and traced if the nature of oil is to be understood,” he claims. In other words, if the global economic system is organised differently whereby oil is replaced by, say, environment-friendly sources of energy, oil will lose its primacy in industrial life.

 Secondly, he mentions the “circuit of capital”: M...C (Mp+Lp)...P...C’...M’.

 Money (M) buys “raw” material (C) [which also includes means of production (Mp) and labour (Lp). In the process of production (P), raw material becomes a commodity of some value (C’) generating profit (M’). However, there are three sub-circuits to this general circuit of capital as well. Some capitalists specialise in the production (P) of raw material through their ownership of manufacturing and other businesses (production circuit). Second, some capitalists specialise in the sale of commodities (C’) through their ownership of retail outlets (commodity circuit). Finally, a section of the capitalist class deals in money through their ownership of banks (finance circuit). Arab billionaires are largely a product of these sub-circuits. By the late 1980s, for example, Kuwait was receiving more income from its financial investments abroad than from its oil exports.

 With oil as commodity and sub-circuits of capital in mind, let us look at the post-World War developments whereby “both the economic and political spheres – the expansion in the scale of industrial production, the development of new industries and sectors, the internationalisation of capital, and emerging US leadership/dominance of the capitalist world – were united by a common factor: the growing systematic centrality of energy and raw materials.” And here too there was a shift as oil and gas displaced coal. Oil had a greater energy density and was easy to transport unlike coal, making it ideal for powering automobiles and airplanes. Also, oil was considered “politically more reliable” as unionised coal miners were not as pliant as Gulf labour.

 Oil and gas also formed the basic feedstock for new industries such as petrochemicals. Moreover, oil had become central to powering modern navies and armies. The US output of gasoline for military use at the end of the war was about 18 times greater. In 1949, oil and gas had accounted for 53 percent of all energy used in the United States. While by 1960, this proportion had risen to 72 percent, and by 1969 the Middle East had surpassed North America and Europe as the world’s major oil provider. Deepening internationalisation also integrated the Gulf into global capitalism. This process was intensified by the 1973 oil shock.

 The price of a barrel of standard Saudi Arabian crude oil rose from $2.59 on January 1, 1973, to $11.65 on January 1, 1974. This sudden groundswell of “petrodollars” assigned a pivotal role to the Gulf in the global economy. Not just because of oil but also because the way petrodollars were utilised in global financial circuit.

 “Petrodollar flows from the Gulf, particularly from Saudi Arabia, played a critical role in strengthening both the financialisation of the system as a whole and the specific role of the United States as the dominant power,” Hanieh says. There are two particular components to this role. First, “much of the Gulf petrodollars flowed into North American and European banks (often operating in Euromarkets) where they were recycled as loans to multinational companies, governments, and other borrowers.” Kuwait provides an excellent example of how these petrodollar flows helped to consolidate the trends of financialisation. As oil prices increased, assets of Kuwaiti commercial banks tripled from 1971 to 1977. The massive amounts of funds accumulated by Kuwaiti banks were redirected into international capital markets through “consortium banks”: joint partnerships between Kuwaiti banks and large foreign banks. From 1973 to 1977, $107 billion of OPEC reserves flowed into Euromarkets, constituting over 10 percent of the market’s total dollar-dominated assets. Over 40 percent of total OPEC reserve assets were held as Eurodollars from 1976 to 1984, a striking indication of the importance of the market for the oil exporting countries.

The second way the Gulf was integrated into global financial markets was more directly linked to the strengthening of US power. The US government made a special effort to ensure that Saudi petrodollars, in particular, were invested in US dollar-dominated bank accounts, equities, and treasury bonds. In 1974 an agreement was reached between the Saudi government and the US Treasury that saw Saudi Arabia deposit billions of dollars in the US Federal Reserve through a secret arrangement to buy US treasuries outside the normal auction for such securities.

The linkage between OPEC reserves and the US dollar was further reinforced by a guarantee from Saudis that the world oil trade would be dominated in US dollars, thus ensuring that the American currency underlay trade in the world’s most important commodity. This GCC-US relationship was mutually reinforcing. The GCC states came to share an interest in the growing strength of the US dollar and US financial power with most of their reserves in dollar-linked markets. Also, the Gulf’s monarchies depend on US military protection. This, perhaps, also explains US concern for democracy in Libya while staying mum in case of the GCC.

Farooq Sulehria is a freelance contributor.