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Jimmy James

One Reason Why High Oil Prices May Not Be Good

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Sorry to bum you guys out. But increase in oil prices also mean an increase in petro dollars - and petro dollars in the hands of wealthy shieks with conspicious consumption in London property markets at that.

Although you need to balance this against a) negative impacts of high oil prices and B) other ways in which petro dollars will be used, think it's important not to factor this out. Petro dollars are very powerful financial tide - just look at the last oil crisis.

Any thoughts on influence?

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Arab Gulf oil wealth to be spent on foreign assets

By Javier Blas in London

FT.com

Published: August 10 2005 22:37 | Last updated: August 10 2005 22:37

Arab Gulf oil producing countries will embark this year and next on a “massive accumulation of foreign assets” as they cash in on record oil prices and soaring worldwide petroleum demand, a new report says.

The region will buy about $360bn (€290bn, £200bn) of foreign assets, from bonds to property in 2005 and 2006 – 50 per cent more than their total purchases of the past five years, according to a study by the Institute for International Finance, the leading association of private banks. “The Gulf Co-operation Council [countries] are in the midst of a period of exceptional economic performance,” says the IIF, which specialises in tracking capital flows in emerging markets.

It estimates that accretions of foreign assets this year and next by the governments and private investors of Saudi Arabia, Kuwait, United Arab Emirates, Bahrain, Oman and Qatar will outgrow China’s accumulation of foreign exchange reserves over the past two years. “High oil prices and production should ensure that the economic boom is sustained,” it adds.

The region is pumping oil at the highest rate in 25 years to keep pace with growing demand from the US and Asia, and oil is trading at close to $65 a barrel, triple the average of the 1990s. Yesterday it reached $64.35 in mid-afternoon trading – a nominal all-time high – following an unexpected fall in gasoline inventory in the US.

“We assume that the bulk [of the foreign assets stock] is held in diversified portfolios of foreign holdings, with US dollar-denominated assets accounting for the largest share,” says the IIF. However, it points out that there “is anecdotal evidence that an increasing proportion of foreign assets [from Gulf oil producing countries] are being invested in other Middle Eastern countries”.

The stock exchanges of Jordan, Egypt and Turkey have all benefited from the Gulf’s flow of petrodollars. The oil producing countries have been active in the mergers and acquisitions market, with purchases of companies amounting to $10bn so far this year.

“The amount of liquidity available to Gulf investors has meant that they have been able to influence global industries in a direct way,” HSBC said in a recent report.

Saudi Arabia, the world’s largest oil producer, is accumulating foreign assets this year at about $4bn a month, according to Samba, the Riyadh-based bank. The kingdom’s oil revenues are forecast to be greater between 2004 and 2006 than for the whole of the 1990s.

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Fair point - but what range of properties will these petro-dollars be buying. I'd wager it wouln't be 1-2 bed shoe box flats. Maybe this injection will affect the top end but it wouldn't have much influence on the BTL / 1st timer drought.

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Fair point - but what range of properties will these petro-dollars be buying. I'd wager it wouln't be 1-2  bed shoe box flats. Maybe this injection will affect the top end but it wouldn't have much influence on the BTL / 1st timer drought.

Correct. The very top end of the London market (e.g. large houses in Kensington and St Johns Wood) is pretty much unaffected by mundane things like interest rates and wage levels, because they are usually bought for cash by rock stars, Russian billionnaires, oil sheikhs etc. There is almost no trickle-down effect on the rest of the market.

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Arab Gulf oil producing countries will embark this year and next on a “massive accumulation of foreign assets” as they cash in on record oil prices and soaring worldwide petroleum demand, a new report says.

The region will buy about $360bn (€290bn, £200bn) of foreign assets, from bonds to property in 2005 and 2006 – 50 per cent more than their total purchases of the past five years, according to a study by the Institute for International Finance, the leading association of private banks.

LOL, what b**locks. Why would they invest abroad when stockmarkets in the GCC are doing so well?

http://www.iif.com/press/pressrelease.quagga?id=115

Also, the anti-Muslim and anti-Arab sentiment in a lot of the Western world has caused much of the oil wealth to be repatriated.

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The other side of the arguement could be that these "shoe boxes" are (albeit marginally) cheaper to heat and are (generally) closer to the city centre - usually the main employment area.

If oil prices continue to rise, its suburbia that will be hardest hit, not the city centres.

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An insurance policy in case they're overthrown?

Yep, dictators and shieks of all shades do tend to invest in western assets on the comfort blanket basis.

And on the trickle down point - i agree that a shiek buying from a russian oligarch is itself not going to have much knock on effect. But it is not a closed system. The patterns of housing wealth spreading from Kensington to Notting Hill to Kensil Rise (sp?), Chelsea to Fulham to Battersea to Clapham looks to have some causal domino pattern.

Anyone got some stats on comparative growth rates ?

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It's not just oil sheiks: there are a significant number of British oil investers who are reaping the rewards of high oil prices. Whether their wealth is enough to affect houseprices is a tricky question.

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