Gas Guzzlers

The Middle East consumes too much oil.

As oil prices skyrocketed in the last few years, many analysts pointed to booming demand in China and India. But they're only part of the picture. It's true that daily Chinese consumption surged from 4.8 million barrels per day in 2000 to 7.9 million barrels in 2008, while Indian demand rose from 2.1 to 3 million. Big fuel subsidies and rapidly expanding middle classes drove the jumps. Meanwhile, combined European and U.S. oil use declined slightly. The International Energy Agency predicts that China will account for more than 40 percent of the global rise in oil demand through 2030, while India will take up another 20 percent.

Fixating on Asia, though, misses two other critical factors. The first is the Middle East. Long seen strictly as a producer, it has in fact become a major consumer of oil. Middle Eastern countries will gobble up nearly 50 percent more oil than India in 2030, despite being home to just a fifth as many people.

The reason? Massive oil subsidies that put China and India to shame. Showering your citizens and companies with $20-a-barrel oil is easy when you can produce the stuff yourself for that much or even less. As a result, it will be far harder to persuade oil producers to part with their subsidies than it will be to convince the Chinese to do the same. That probably means less oil left for the rest of the world -- and higher prices to boot.

The other wild cards are wealthy countries, like the United States. They have few options to cut oil consumption quickly, but far more opportunity over the long haul. A 20 percent cut in oil consumption by the world's wealthy countries in 2030 would completely offset the expected increase in Chinese demand; a similar cut in U.S. gas guzzling would neutralize the expected Indian increase.



A Hole in the Bucket

How petrostates lost big in the Great Recession.

What a difference 18 months can make. As recently as the beginning of 2008, sovereign wealth funds owned by governments flush with massive oil revenues appeared to be the rising titans of global finance, leading some commentators to decry the rise of a "sharecropper economy" in the United States.

Buoyed by high oil prices and the bubbles they fueled, the funds purchased massive equity stakes in several Western investment and commercial banks, such as Abu Dhabi Investment Authority's $7.5 billion purchase of a 4.9 percent stake in Citigroup in November 2007 or Qatar Investment Authority's decision in October 2008 to increase its stake in Credit Suisse to 8.9 percent, becoming the company's biggest shareholder. The 32 funds we studied (13 of them tied to Middle Eastern petrostates) collectively made 12 very large stock purchases, totaling $63.33 billion, between November 2007 and February 2008 -- and 11 of the deals in this period, worth $61.33 billion, involved direct purchases of stakes in distressed Western financial institutions. Surprisingly, these stock purchases were for the most part cheered by European and American governments and investors; the funds were even hailed as saviors for "rescuing" banks from the financial fallout of the subprime mortgage crisis.

But the good times came to an unhappy end by the beginning of this year. The sovereign wealth funds' listed stock investments plummeted in value as the financial crisis wiped several trillion dollars in market capitalization off the world's markets, with banking stocks by far the worst hit. At the same time, fund managers made some disastrously bad choices about the stocks they picked, clustering their purchases within a small handful of moribund Western companies. According to our research, sovereign wealth funds lost a staggering $66.88 billion on their publicly disclosed investments and experienced a total return of negative 53.23 percent from the date the investments were made through March 27, 2009. The $42.67 billion of losses on the 11 ill-timed financial investments of late 2007 and early 2008 accounted for two thirds of this total.

It's not simply the managers' fault. These are, after all, state-owned investment funds. As our data suggest, poor stock picking could have been the result of pressures that forced managers to invest in distressed industries and firms for political reasons. Whatever the case, it's clear that the next time a Western company needs bailing out, the Abu Dhabis and Qatars of the world won't be so quick to show up with a bucket.