Ports & Petrodollars

I've been amused and intrigued by the recent flap over the sale of P&O;, and with it the operations of several major US ports, to the UAE company Dubai Ports World. For a change, I fully agree with President Bush--well, at least with what he is saying to the media--that this is not a security concern, and that the sale shouldn't be blocked. The US government is still in charge of the security, and to borrow from John Stewart, our ports will enjoy the same incompetent government security no matter who we sell them to. The bi-partisan opposition to this smacks of nothing but racist, reactionary populism. Sure, foreigners can own the ports, just not Arabs--they scare us. If anything, DP World (owned by the UAE government) will be a better partner with US Immigration & Customs Enforcement (ICE) than P&O; was, because while P&O was a publicly traded, for-profit company, the UAE government has strong political interests to protect, and will ensure that DP World bolsters security to prevent major blowback, even at the expense of the bottom line...

But the real question here is why Bush is making such a stand on this issue, when it would be much easier, and more beneficial to his "public agenda," to stand behind his campaign promise and be "a uniter." There are several theories, each of which deserves some thought:

1. A Marketplace for Petrodollars: OPEC sells oil in dollars, and in turn invests those petrodollars in dollar instruments like US government bonds, US equities, US property, etc. This boosts the "growth" of the US economy and bolsters the US dollar, which in turn finances our trade deficit. They--by which I mean "Arabs"--have lots of petrodollars to spend, and to spend large quantities effectively you can't just buy mutual funds or shares of GM. You need to buy large chunks, often whole companies--just ask any i-banker. DP World (which is a petrodollar investment player) wanted to by P&O.; This is a very smart move, because rather than just buying a few billion dollars in stock in P&O but keeping a politically benign minority share, they want to control the company. This creates synergy with their existing ports investments, and leverages the value of that money spent. It also leverages UAE's long-term strategy to become a regional, non-oil economic powerhouse through the wise investment of oil revenues. When the US says "no" to what is otherwise a very wise move (at least by the "generally accepted" wisdom of globalization), then the value of the OPEC's gentleman's agreement to sell oil in dollars declines. At some point it becomes necessary to divest some of your dollars to an alternative--say the euro, or even to sell oil directly in euros. That would be a major blow to the US economic system. This argument, in my opinion, holds some water, but is not entirely convincing.

2. Boeing/Airbus Reciprocity: Emirates Airlines just contracted for $8 billion with Boeing to buy their new 787 dreamliner aircraft. They could have bought the new Airbus instead. Maybe they will if DP World can't buy US ports for $7 billion. Quid pro quo is classic geopolitics for a good reason--it makes sense. I haven't seen any direct evidence of Boeing lobbyists involved in the DP World sale, but I'm always suspicious of coincidences.

3. Strait of Hormuz & Iran: Bush has mentioned that the UAE is a key partner in the "War on Terror," by which, of course, he means the geopolitical chess game to continue oil-based US economic hegemony. The UAE is also critically situated relative to the Strait of Hormuz, the key oil chokepoint at the end of the Persian Gulf through which 25% of all global oil exports pass. The US already has significant bases in the UAE, mainly al-Dhafra Air Base. It is my analysis that, in the face of a concerted Iranian effort to close the strait, a land invasion of the northern edge would be necessary to re-open it. At a minimum, the US would need to occupy the several Iranian controlled islands in the strait: Abu Musa, Greater and Lesser Tunb, just to name a few. Interestingly, these islands were seized from the UAE a few decades ago. While the strait itself is bounded by Iran and an exclave of Oman, the UAE is the better staging ground for any operation by US forces. It's a critical insurance policy to be able to base out of the UAE, and it is a prerequisite to almost any valid plan to invade Iran. With the Marine Corps Intelligence Activity (MCIA) recently contracting with SAIC to "study" ethnic minorities in Iran for possible points of leverage, this is, at a minimum, a serious long term consideration of the Bush administration. Of note, the UAE is also the bypass point of choice for an oil pipeline from the Persian Gulf to the Arabian Sea--which could minimize any Iranian trump card gained by their ability to shut down the strait. To my knowledge, no such pipeline is currently planned, although a natural gas bypass does exist. Overall, this argument seems to hold some water, but it is not yet fully formed.

4. UAE Oil Bourse v. Iranian Oil Bourse: Another concern is the upcoming euro-denominated Iranian Oil Bourse, which is tentatively scheduled to open in March, but lack of public preparations (e.g. licensing traders, publishing contract specifications) makes me wonder if it will actually happen on time? The NYMEX has contracted with UAE to open a sour, heavy crude contract bourse in Dubai, also sometime in the next year. Some have suggested that this is the US effort to counter the Iranian Bourse, but I don't buy this argument. The fundamental strength of the IOB is that it will denominate contracts in euros, providing a valuable option to many countries that don't want to maintain dollar reserves, or who's native currency is the euro. The two bourses don't seem to be direct competitors--there is room for both a bourse that trades light, sweet crude in euros and a bourse that trades heavy, sour crude in dollars. That said, I'm still suspicious of coincidences, so we'll have to wait and see...