Petrodollar Diplomacy

President Bush is making a nine-day trip overseas that will include a visit to the world's newest economic powerhouse. And it's not China, or India, or Russia.

It's the common market begun just days ago by the six Persian Gulf nations that make up the Gulf Cooperation Council - Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.

Combined, the six nations have a gross domestic product of $800 billion and sit on nearly 500 billion barrels of crude oil and 41.55 trillion cubic meters of natural gas reserves. The countries account for about 45 percent of the world's proven oil reserves of 1.1 trillion barrels; they also possess nearly 20 percent of proven global natural-gas reserves.

The surge in crude-oil prices has reaped the six more than $700 billion in revenues - a bonanza that the countries haven't quite figured out what to do with.

For foreign investors - particularly Americans who have long salivated at the prospect of better competing with Europeans and Asians who have traditionally dominated projects in the region - the Persian Gulf common market offers enhanced opportunities for regional projects in both the private and public sectors.

The six Gulf countries, where some 35 million people live, are already spending $2.6 trillion on 3,500 projects related to their infrastructure, education, health care, real estate, entertainment, tourism, and telecommunications.

But over the next five years, they plan to spend an additional $5 trillion.

The city of Abu Dhabi announced plans last week to spend $200 billion on urban development between now and 2013. These plans include a railway system, new residential and recreational areas, said Falah Mohammed Al Ahhabi, director-general of urban planning in Abu Dhabi.

"The real estate and construction sectors will witness unprecedented growth, as the plan visualizes Abu Dhabi becoming one of the largest capital cities in the world," he told reporters.

And there will be additional investment overseas. For example, the Abu Dhabi Investment Authority - which recently poured $750 million into Citigroup making it the bank's largest shareholder - is reported to have more than $700 billion at its disposal for additional investments. And not to be outdone by its traditional Gulf rival, Saudi Arabia will soon be establishing a sovereign wealth fund, said to be capitalized at $900 billion. Dubai, too, is steadily expanding its investments abroad, with high-profile stakes in the Nasdaq and Sony.

The focus of the president's trip, to be sure, is political rather than economic. In addition to discussing the Arab-Israeli issue with the Israelis, Palestinians, and Egyptians, President Bush is expected to want to reassure Bahrain, Kuwait, Saudi Arabia and the U.A.E. - that the United States is fully committed to protecting them against any destabilization efforts by Iran.

But the Gulf nations are more focused on building stronger economic and commercial ties with their non-Arab neighbor. Of Iran's global exports of $100 billion annually, about $2 billion go to the U.A.E. - mostly agricultural products, including pistachios - while Iran imports more than $10 billion worth of electronic and other manufactured goods from the U.A.E., mainly through Dubai.

The Gulf's common market is expected to open doors for more regional commerce.

"The planned monetary union of G.C.C. countries by 2010--an initiative to cap the integration effort initiated in the early 1980s--will reinforce the beneficial efforts of ongoing structural reforms and related macroeconomic polices," a recent I.M.F. report says. "The monetary union is likely to promote policy coordination, reduce transaction costs, and increase price transparency, resulting in a more stable environment for investment. In particular, the introduction of a common currency is likely to enhance growth prospects by contributing to the unification and development of the region's capital markets and improving the efficiency of financial services."

First the euro, now the guro? Or how about the gulfar?

The start of the common market does have its skeptics. Eckart Woertz of the Gulf Research Institute in Dubai, for one, notes that the trade of goods and services in the region had already been liberalized by a customs union in 2003.

The common markets, he says "makes the G.C.C. more attractive as a destination of exports, as the market is larger (once customs union is fully implemented), but one needs to hold the horses a bit: The G.C.C.'s G.D.P. is roughly equivalent to the one of the Netherlands -- hardly a mass market."

Pranay Gupte