x Abu Dhabi, UAESaturday 20 January 2018

Sovereign wealth is safe in the underground bank

So blessed is this region with oil and gas, it is tempting to think that the Gulf was destined to be the world's energy provider.

So blessed is this region with oil and gas, it is tempting to think that the Gulf was destined to be the world's energy provider. OPEC ministers often indulge in platitudes to this effect, depicting their primary export industries as the fulfilment of a God-given duty or indeed a magnanimous contribution to global prosperity. Such sentiments are rooted in the history of the industry, which grew up in tandem with the colonial experience in the Gulf. But they also carry dangers for policy makers in oil exporting nations.

They feed an assumption that these countries are beholden to the industrialised world and therefore the resources are outside the ambit of independent policy-making. The industry, after all, was established to serve foreign interests. When Sheikh Shakbut signed Abu Dhabi's first oil concession in 1939, the Anglo-Persian Oil Company did not even expect to make use of their exclusive rights to the territory. From the perspective of the company, the concessions were a preventive move to stop German or Turkish interests from moving into the region.

It took two decades for oil to be discovered in commercial quantities, partly because of a simmering conflict between the coastal sheikhs and tribes in the hinterland. But the main reason was that oil companies valued the agreements as much for what they did not deliver as for what they did. For decades, the world's oil barons sped up on slowed development of oil resources to ensure a balance between demand and supply, while setting prices under monopolistic regimes.

For the concession holders, the imperative of development and prosperity for the Emirates ranked below the interests of the corporation and the global oil market. The assumption is that these resources were bestowed onto humanity, not nation states, and OPEC is imposing artificial constraints on their natural flow at the lowest possible cost to the wealthiest nations on earth. When exporting nations assumed the mantle of managing their own resources in the 1970s and 1980s, the tables turned.

But these assumptions still underpin much of the criticism of OPEC oil policy from London and Washington, where leaders greet every attempt to manage global oil supplies with disdain, even when the actions are backed by rigorous market analysis. In response to OPEC's every move, western leaders rarely miss the opportunity to roll out not-so-diplomatic comments about market manipulation, unfortunate timing or the merits of a free market to determine the price.

Abu Dhabi, like other resource-rich nations, has grappled with an economy that was designed around the needs of foreign powers and in three decades has managed to convert its oil resources into a modern, diverse nation. But it is doing more than that. One legacy of the export orientation of this emirate's economic mainstay is that it pumps more oil than it needs. So much, in fact, that it has accumulated an enormous fund of sovereign cash, so big that it must be invested offshore because the local economy cannot absorb it.

Given the huge losses recorded on its sovereign wealth funds - the Council of Foreign Relations estimated the two flagship funds lost US$125 billion (Dh459.12bn) last year - some might ask whether the oil would have been better left in the ground. Of course oil production is not set purely on fiscal terms. Abu Dhabi's status on the global stage is tied to an enviable record as a reliable oil supplier with unrivalled contractual security. And oil is produced along with gas, which is vital to keep the nation's power stations switched on. But seen exclusively through the optic of the national financial need, Abu Dhabi could be said to be producing too much oil.

Given the disastrous performance of financial investments recently, one might question the wisdom of monetising the natural resources at this rate, particularly when demand is weak. Undoubtedly this thinking informed the Government's recent decision to impose deeper supply cuts next month, in anticipation of another reduction by OPEC at a meeting later in March. After all, the country's largest sovereign wealth asset is not in the investment authority, whose funds are now estimated at $328bn, but in the rocks 3,000 metres under ground. At today's prices these reserves are worth about $4 trillion, down from about $12 trillion six months ago. Who knows what they will be worth in another 50 years.