This month marks 10 years since the financial crisis turned into a full-blown crash, and 10 years since the purchase of Manchester City Football Club by the royal family of Abu Dhabi. What links the two is the flow of revenues generated by the sale of oil and gas (“petrodollars”) into Britain from the Gulf Arab monarchies – principally Saudi Arabia, the United Arab Emirates, Kuwait and Qatar. The role of Gulf petrodollars remains the untold story of the financial crisis and of the continuing dysfunction of late-period neoliberalism in the UK.
The twin oil crises of the 1970s caused inflationary shocks that helped to destroy the postwar Keynesian settlement. The subsequent flood of oil revenues into the western banking system then facilitated the shift to a new neoliberal paradigm, characterised by financialisation. Gulf petrodollars recycled by western banks into loans to countries in the global south sowed the seeds of the later debt crisis that paved the way for neoliberal structural adjustment programmes enforced by the IMF.
As the balance of the British economy shifted from manufacturing exports to financial services, Gulf wealth played a significant role in financing the resulting current account deficit. Trade imbalances that would normally place downward pressure on sterling were offset by investment from Saudi Arabia in particular. The Gulf producers racked up enormous surpluses in the 2000s due to a new spike in oil prices, and by the eve of the financial crisis, Gulf sovereign wealth had become one of the principal sources of savings worldwide.
As the 2008 crisis approached its crescendo, the Bank of England deputy governor, John Gieve, remarked in a speech that the flow of petrodollars into safe assets had pushed down those assets’ rate of return, encouraging private investors in Wall Street and the City towards riskier products, with devastating consequences. Petrodollars were far from the sole cause of the crash, but they certainly played their part. Then, as the crash unfolded, Barclays Bank avoided a government bailout by securing cash injections from Qatar and from Abu Dhabi’s Sheikh Mansour, the new owner of Manchester City. This might give the impression that Gulf capital had a positive role to play as a source of stability. But the easy availability of petrodollars only encouraged policymakers to avoid the hard work of addressing the underlying imbalances in the British economy.
With its aversion to tax rises and fixation on the fiscal deficit, David Cameron’s government turned to the Gulf monarchs as a source of funds for much-needed infrastructure investment, while its failure or refusal to rebalance the economy saw the current account deficit expand even further, with petrodollar inflows again playing a major role in plugging the gap. The investments of Abu Dhabi and Qatar – from Manchester City to the Shard – are well known, but much smaller than those from Kuwait and Saudi Arabia, who have generally preferred a more low-profile approach (although this is now changing in the Saudi case). Of course, the City has a world-leading capacity to absorb and process these enormous funds. But in the wake of the Arab uprisings, and in the context of the ongoing war in Yemen, these investments also help the regimes to deepen strategic ties and maintain London’s geopolitical support.
The British state, from the prime minister down, continues to work energetically to encourage these trends. The Financial Conduct Authority recently altered its regulations to accommodate a potential listing of the oil giant Saudi Aramco on the London Stock Exchange, despite widespread concern from leading business organisations at this watering down of governance standards. But the delays and problems surrounding that listing do not inspire confidence that Gulf capital is a safe bet for British capitalism. Reliance on high commodity prices is not a sound economic strategy for producers, or for the recipients of producer revenues. This is particularly true after a summer of heatwaves that reminded us forcefully of the need to leave much of the world’s oil in the ground, which in turn would see the supply of hydrocarbon revenues begin to dry up.
It is long past time for British policymakers to start work on kicking the petrodollar habit. A comprehensive industrial strategy would put the economy on a sounder footing, close the trade deficit, and reduce the need for unreliable inflows of foreign capital. If it helped the UK dismantle its ties with some of the world’s most brutal regimes, that would not be a bad thing either.
• David Wearing is the author of AngloArabia: Why Gulf Wealth Matters to Britain
