PETROCAPITAL, GLOBALIZATION AND MANAGING THE IMPACT OF OIL PRICES ON CAPITAL MARKETS - Notes for Remarks at Haskayne Business School ,
When Dubai Ports World acquired P & O, there was certain symmetry to the deal, the end of one of the most famous, almost romantic symbols of European colonialism and 19th Century globalization. The next round of globalization started with Dubai Ports World divestiture of its U.S. assets in March 2006. It involves recognizing many of the weak foundations of the 1991-200x post Cold War globalization. All capital is not the same; its source matters, both in terms of country of origin and in terms of whether or not it is formed from petro-revenues.
The mainstream theory of globalization in the 1991-200x period argued that all capital is the same. It is disciplined by the efficiencies of investment behaviour, opening up markets to greater productivity. The simplistic anti-globalization argument in the same period was that local capital should not be swamped by large foreign investment whatever its source. At one level this was the no Wal-Mart argument. At a more sophisticated level, it was always about maintaining the control of smaller capital markets to control the pace of growth (as well as local interests). This was the Malaysian argument at the time of the 1997 Asian financial crisis. Now we are in a different era, one defined by South-South investing and new players in the global economy. This raises a new suite of questions.
What difference does it make if the capital is formed not by productive activity, e.g. the commercialization of processed grains and building a multinational like Kellogg’s, the refining of petroleum and building Shell? What if it is just non-productive capital resulting from resource rents and geological roulette? How does the concentration of newly-formed capital in the hands of a few oil producers affect the open operations of international finance and the decision-making of global capital markets? How does petro-capital behave differently than other forms of wealth management? Oil’s disruptive effectives on global capital markets have been well-documented from Daniel Yergin to Peter Tertzakian. With Dubai Ports World, it has become centre-stage in the international political world.
Fluctuating oil prices can be managed by sophisticated hedging strategies in portfolio strategies for institutional investors. However, in a world defined by private equity activities, steadily rising oil prices have a different impact on capital accumulation in the global market and on liquidity for global acquisitions. President Bush’s State of the Union address, the “addicted to oil” speech avoided the central paradox of the new global economy: rising oil prices are required to accelerate the shift to new fuel sources and rising oil prices create strong new dominating players in the global economy while new entrants like China and India are being fully integrated into the global trading system. The management of geologically-generated capital becomes central to the new political system that is emerging, not in some sinister conspiratorial model of the left where the oil companies are hazardous to economic health, but also not in the way of traditional liberal economists who view the source of capital as irrelevant in their politically naive approach to understanding economic activity.
Canadians in general and Albertans in particular could play a leadership role to play in the definition of this new global economy. It is a world where energy investing will play an increasingly significant role. As a result, it is a world where the long term success of the global capital markets will depend increasingly on how we ensure that petro-revenues are converted into sources of productive investment. That is the ingredient which has been missing from the global economy the last few decades, in no small part because we just hoped they would be reinvested in London , Zurich , Paris or Wall Street. The changing world order with the rise of non G8 investors has brought that paradigm to an end.
The new global capital markets are characterized by the reality that oil has become even more of a political instrument than it was during the 1970s OPEC embargo. The conversion of petro-wealth into political leverage by the regimes in Riyadh , Tehran , Moscow and Caracas means that global capital markets have entered a new phase and that this phase coincides with security challenges.
For international strategic considerations, two innovations are paramount:
Calgary is at the centre of Canadian foreign policy in part because Canada is now an energy superpower and energy has become the driving force of global security and global capital market issues. The vocabulary to describe this is just taking shape now.
The Dubai Ports crisis was the first major clash of petrocurrencies and the global capital markets. The consensus about globalization has been based on the notion that capital is capital and that a Danish company should be able to buy an Bangladeshi asset or a Montana company a Saskatchewan company and that this was indisputably a good thing in a world of opening trade. This approach to trade was always naïve and utopian. Many people pointed out this in real time. The debate about trade harmonization and “fair trade” was understandably discredited by some of its more extreme advocates. But the question about how compatible products are made in Central American textile factories with no union rights and unionized North American plants ha not been satisfactorily addressed in the public policy process. Canadians argued about the impact of U.S. investment on cultural industries. Americans would not contemplate a foreign investor buying media assets as Rupert Murdoch’s case demonstrates.
The simply reality was that unregulated global capital was always an abstraction. Now global securities regulators monitor money laundering. Corporate governance should require the compliance of all companies wishing to participate in the global economy, including Lenovo and Dubai Ports . Abstract concerns like compliance with international laws ranging from the Endangered Species agreement to labour practices have demonstrable importance in a regulated globalization. The new real issue is whether we can address the issues of from what source capital is formed and whether state-owned companies should be treated differently as they become global players. By definition, the strategies of a state-owned company are informed by different criteria than publicly-traded companies. Even more significantly, the availability of acquisition capital to a state-owned firm is different from those who have to raise capital in public markets. To ignore this difference is to put globalization at risk. Our conventional framework towards globalization of finance has put these questions on the back burner, focusing instead on how to achieve portfolio performance and how to use foreign investment to enhance productivity in other countries. It should be no surprise that the anti-globalization movement has gained momentum in recent years.
Dubai Ports has ensured that we address the question of how we view petrodollar-formed acquisition capital. We have not addressed the question of state-formed capital in Chinese companies entering the free and regulated market. We have not addressed the question of private investors like Prince al-Waleed Bin Talal of Saudi Arabia using capital to invest strategically in western companies. Is this just another high net worth individual or is the capital different in terms of its source of formation? Dubai Ports as a case has made this issues a central part of the new international debate.
Similarly, the economic power of Moscow , Caracas and Tehran which know how international capital markets operate has created a strategic problem for advocates of liberalized trade and globalization? What if Chavez wanted to buy Disney? Or Putin wanted state-backed actors to achieve a majority position on a small Tbilisi or Talinn stock exchange. The nature of oil-formed capital in global markets has dramatically transformed “security” threats.
What is to be done? In the short-term, we need to address the source-of-capital issue in more direct terms. The issue needs to be focused on state-backed firms which distort the market for acquisition capital. Realistically, this will take a very long time and the result is we will see many more Dubai Ports (or fewer if the petro-capitalists become more inward looking or diverted from the global economy and Chinese state-backed players simply build towns in Angola and Nigeria to be close to the source of their energy). It is inevitable that there will be eruptions of anti-globalization while the new rules are being sorted out. However, in the long-run we are building the framework for a global economy and a global capital market in which disciplined and strategic capital will create the conditions for sustainable prosperity in Angola and Kazakhstan as well as Alberta and Denmark.
In the longer-term, as petro-capital becomes more a feature of the global economy, Canadians can advocate three things:
3.Finally, and most importantly, this integrated global economy needs to ensure that the revenues that come from the next round of petroleum revenues is invested in longterm economic development. By next round, I mean not only the revenues that come as oil moves from $70/barrel to $XX/barrel, but the impact of new players: Angola, Equatorial Guinea, Nigeria, Kazakhstan,Sudan on the global economy. The commitment that all new petro-wealth be put in the hands of accountable and regulated capital actors. In short, we need Angolan pension-funds investing in Angolan personal security, not the simple transfer of wealth based on the anachronistic state-to-state transfers who have made countries without policy infrastructures the new superpowers ( Russia , Iran , and Venezuela ). The axis of oil may be a fact of contemporary life, but the geological heritage of West Africa and central Asia must not become an even further distortion of international investment patterns. The promotion of a Gulf of Guinea Trust , analogous to the Heritage Fund, the CDP in Quebec or the Norway Trust is one of the most important political issues on the global agenda, not simply for the benefit of African economic development, but for the imperatives of global security. The international system cannot be expected to manage additional sources of disruption. This could become a cornerstone of the new Canadian foreign policy, which will also be, of necessity and because of knowledge-base more Calgary-oriented than our foreign policy has been before.