Breaking The Curse Of Oil.(Business)(Saudi Basic Industries Corp.)

Byline: STEPHEN GLAIN

A Saudi petrochemical giant is using local cheap energy to create new jobs.

ONE COULD BE FORGIVEN FOR ASSUMING THAT RECORD-HIGH ENERGY prices are a cause for celebration in the Persian Gulf. After all, the proven oil reserves that lie beneath the six primary gulf states now total some $65 trillion, more than the value of the world's equity markets. Yet even as sovereign-wealth funds across the region scramble to invest their petroleum windfalls, gulf leaders, who over the past half decade have raised nearly $1 trillion in oil-related revenue, are trying to get their nations out of the energy business. The higher crude prices climb, it seems, the harder the

region is trying to break its habit.

From Riyadh to Dubai, the byword is diversification. After largely failing to smartly invest the oil windfall of the 1970s, the gulf monarchies and emirates are rushing to avoid the same mistake now. They're spending the new windfall to develop new industries from tourism to finance, medicine to education, while also opening to foreign investment, particularly outside the oil patch. The big emphasis is on hydrocarbon-related industries like petrochemicals and fertilizer production, processes that use byproducts and residuals of oil and gas refining. "The oil sector is one third of GDP," says Abdulrahman Al-Tuwaijri, the chairman of Saudi Arabia's Capital Market Authority, a stock-exchange regulator. "But it's capital-intensive, and it does not employ much. It's the non-oil economy that creates jobs--trade, industry, petrochemicals."

That makes Saudi Basic Industries Corp., Saudi Arabia's biggest public company, one of the Middle East's rising corporate stars. Already the world's largest petrochemical company by market value, Sabic, as it is known, has become a vanguard of a diversification drive that seems to be working. Even with oil prices spiking, the kingdom's non-oil exports, mostly chemicals and petroleum-based building materials like plastic, rose from 10 to 12.4 percent of all goods sold abroad between 2006 and 2007.

Local oil makes Sabic chemicals so cheap, investors argue, that eventually any product with substantial plastic content--casings for computers and MP3 players, for example, or bumpers and tires for automobiles--could be produced in the kingdom. Capturing that "downstream manufacturing" and the jobs that go with it is a key step toward building a stable middle class. "What's preventing us from setting up a factory for an electronics maker like Sony to produce covers for Walkmans and TVs?" says Prince Mohammed K.A. Al-Faisal, president of the Riyadh-based Faisallah Group, which manages a portfolio of companies and equity investments. "It's an advantage for them to produce close to cheap raw materials."