Kenneth C. Crowe
Kenneth Crowe

Fellowship Title:

Spending The Petrodollar Billions

Kenneth Crowe
February 9, 1976

Fellowship Year

The views expressed by the author in this newsletter are not necessarily the views of the Foundation.

(THE CONTEXT: Foreign investment in the United States is burgeoning, while public consciousness of this perennial phenomenon has been raised by the prospect of Middle Eastern oil money buying large pieces of American corporations and real estate. The traditional investors in the U.S. have been the Europeans, but in recent years, nouveau investors…the Japanese, the Arabs, the Iranians…have appeared on the American horizon. An understanding of the impact of foreign money and foreign ownership is obscured by a lack of knowledge. The following article deals with one of the new “Merchant Princes” which the surge of petrodollars has created in the United States.)

Two years ago, investment banker Richard Nelson was engaged in the dance of the “Daisy Chain Flakes”, which is his term for those who go through the ritual of trying to sell General Motors or any of the other super-corporations on the Fortune 500 list to the Arabs in exchange for a pile of their petrodollars.

Neither the Arabs nor the Iranians, despite their enormous new wealth, have acquired control of a single major corporation in the United States. But they are spending their money in the U.S. — billions of dollars for products and technical services to raise their standards of living and to develop their own nations’ infrastructures and industrial bases. John Law, managing editor of Chase Manhattan Bank’s Mideast Marketspublication describes what is happening as “a situation which may be unique in the history of world trade — the sudden combination of vast monetary wealth and virtually unlimited development needs…countries with a relatively simple infrastructure were in the market — practically overnight — for ports, roads, telecommunication networks, housing, hospitals, schools and hotels. Anxious to diversify their economies, they also were looking for steel plants, aluminum smelters, petrochemical complexes, and automobile assembly plants.”

Nelson is too good a salesman to waste his time not making money, so he reacted in the direction of the new market. Since the Arabs weren’t going through with the headline-grabbing super deals, Nelson turned to the staid, but lucrative business of selling construction equipment and parts to Middle Easterners.

Sitting in his office in the Sartorius Division of Advest on the 25th floor of a sleek, glassy skyscraper just off Fifth Avenue in New York, Nelson discussed his business adventures on the rim of the Persian Gulf:

“I started out by putting together the big deals. I was going to sell Rhode Island to Kuwait. Everyone was writing (in 1973-74) about how the Arabs were going to buy General Motors along with the World Trade Center.

“It didn’t work out that way. They really wanted to spend their excess dollars on local development. We realized it, and said, ‘Let’s not sell the Brooklyn Bridge to the Arabs. Let’s sell them the equipment to build their own Brooklyn Bridge.”

The Merchant Princes

Nelson, who enjoys speaking in catchy phrases, now has endowed himself and others like him with the title of the “Merchant Princes”, an allusion to those who invest their own funds in the products they export for resale, instead of avoiding a direct financial risk by acting as agents.

From a perspective of two years’ experience and a flourishing trade with customers in Saudi Arabia, Kuwait, Iran, Egypt, Sudan, the Emirates, and Bahrain, Nelson can speak with a touch of cynical amusement about the brokers who are still hustling around the Middle East trying to put together the huge corporate deals: “I watch all these guys in Wall Street smashing their heads against the wall trying to sell Rhode Island. I call them Daisy Chain Flakes, a never-ending circle of brokers, who might as well be dancing around a May pole.”

Nelson has a story to tell about his own grab at a grand opportunity in mid-1973 when the telephone in his Park Avenue apartment rang early on a Sunday morning. The caller was Raymond Mason, chairman of the Charter Company of Jacksonville, Fla., a multifacted conglomerate firm which includes mortgage banking, oil, building and communications divisions. Nelson in past months had opened the way for Charter to be permitted to bid for Saudi Arabia’s unallocated oil.

In that telephone call, Nelson recalls Mason, an unassuming man with an imaginative business mind, saying: “I have a great idea that will just blow your mind. Let’s sell Gulf Oil to Saudi Arabia.”

“The plan was ingenious,” Nelson said. “Absolutely patriotic. It would have done nothing to disturb American assets. It would have ensured an investment of $4-billion. It would have assured politically that no such thing as an embargo could happen” since the Saudis theoretically wouldn’t cut off oil supplies to their own refineries and gas stations in the U.S.

The plan in a nutshell: All of the Gulf Oil Company’s U.S. assets, such as gas stations, refineries, pipelines etc. would be sold for $4-billion to a new company, which we’ll call Saudigulfoil. The Saudi Arabian government would lend the $4-billion to Saudigulfoil. The Saudi goverment and Gulf Oil would each own equal shares in Saudigulfoil, while Mason’s Charter Company would receive a minority interest capable of tipping the balance of power within the new company. Nelson for his efforts was to be paid a $21-million commission if the deal worked out.

Going back to the telephone conversation, Nelson was so enthralled with the proposal that he told Mason: “You really ought to sit down with the King.” His next step was a telephone call to a Saudi contact, whom he calls Sheik Mohammed. “I called Sheik Mohammed, and he said, ‘I’ll take him (Mason) in to see Faisal.”

While Mason’s selection of Gulf Oil as the target company might have been an original touch, the Saudi government had already indicated a hunger for entering the U.S. “downstream”, or marketing end of the oil industry. On Oct. 6, 1972, more than six months before Mason’s telephone call to Nelson, Sheik Ahmed Zaki Yamani, the Saudi Arabian minister of petroleum, had made a speech at Georgetown University during the Middle East Institute’s Conference urging a government-to-government agreement which would open the way to major Saudi investments in the U.S.

Michael Field in his book “A Hundred Million Dollars A Day” described the scene in which Yamani told the Conference: “,,,we in the Kingdom of Saudi Arabia extend our hand to the government of the United States of America and call for a commercial oil agreement between the two countries which would give Saudi Arabian oil a special place in this country. The agreement should exempt our oil from restrictions and duties, and encourage the increasing investment of Saudi capital in the marketing of oil.” Field noted that Yamani was offering the U.S. a package deal: an assured supply of oil in return for the opportunity to invest in America. The Yamani proposal was allowed to die without any action by the United States government.

What Might Have Been

The Saudi Petroleum Minister’s speech came exactly one year before the latest Arab-Israeli war in October, 1973 with its ensuing oil embargo and the subsequent quadrupling of the price of a barrel of oil. Had the Saudi proposal in downstream investment been accepted, the Organization of Petroleum Exporting Countries’ (OPEC) united front might have been shattered, and the price of oil might never have skyrocketed.

Whatever might have been, Nelson’s contact Sheik Mohammed introduced Mason to King Faisal, who apparently liked the proposal. Mason and the Saudi King met four times to discuss the concept. The Jacksonville entrepreneur also approached Gulf. Mason had done business with Gulf in the past — raising money from that giant oil company to help finance the Charter Company’s entry into the oil business in 1971 with the purchase of some of the assets of the Signal Oil & Gas Company, which included a small share of the Iranian Consortium. While the Saudi-Gulf proposal was kept alive by several accounts from mid-1973 to February, 1975, a Gulf Oil spokesman said: “It was nixed by Gulf. There was never any serious interest shown.”

As 1974 had progressed, Nelson began receiving requests from contacts in the Middle East asking him to arrange the purchase of various types of construction equipment. The business started casually, but as Nelson began to realize its full potential, he decided to move Sartorius from the status of an agent in these transactions to being a principal. The decision to assume a direct risk role was built on the concept of the increased credibility a principal enjoys in any business transaction (particularly when you have a company trying to solidify and expand Middle Eastern contacts) — along with higher profits. In January, 1975, Sartorius formed an export company, Sartex International Inc. with Nelson as president.

Nelson admits that in the context of the dollar value of exports directly from equipment manufacturers and the sales by the established Middle Eastern distributors, Sartex’s shipments amount to a small digit. “We’re small potatoes,” he said. “We ship 30, or 40, or 50 machines a year to Saudi Arabia, and we’re selling 75 to 100 machines a year to the whole Middle East.” Nelson said his orders amount to between $1-million and $2-million a month. His emphasis like many small businessmen is on service and the filling of the gap left by the big businesses.

When a construction company in the Middle East needs a bulldozer and discovers that their local distributor can’t get them the machine when they want it because of quota problems, Sartex might get their business.

“I deal directly with the construction companies,” Nelson said, “Caterpillar is a favorite out there. When I get a request, I can go to 115 Caterpillar dealers (in the U. S.) and find the machine they want.”

The personal service that Nelson emphasizes reaches into his own home, often in the middle of the night. He said he usually takes a nap early in the evening, then arises to send and receive telex messages between midnight and 2 a.m., which is 8 a.m. to 10 a.m. in Saudi Arabia. The machine is stored in a sound-proofed closet, but when it dings — as it did at 5:30 a.m. recently — Nelson’s King Charles Spaniel barks and he crawls out of bed to confront the machine.

On this particular occasion, the message being spelled out was from a customer who claimed that several vital hoses were missing from a machine which had just arrived in Saudi Arabia. Nelson said: “I went to live telex and asked for the serial number of the machine. It turned out it wasn’t our machine. But we replaced the parts anyhow. Nothing is more important than my customer over there being satisfied with my service. I’ve sold this guy $5-million worth of equipment.”

They’ll Remember Us

A long time ago,” Nelson said, “the Merchant Prince went down to the dock and counted the bags of rice. We do the same thing today. This is clerks’ work, but we do it right…I personally handle the details, because I want the future orders.”

Nelson said, “I impress our people: ‘Ship those parts, serve them well. They’ll remember us!” Nelson anticipates a future interest in investment in the U.S. by the emerging businessmen he is now dealing with in the Arab countries. “These people are going to know us. They’re going to have more confidence in us because we watched the hose connections a couple of years past. The whole thing is service…We work with-well-to-do merchants and builders. I’m working with the largest builder in Abu Dhabi. He could be a contact for me if I have anything for the ruler…A lot of these people have come to us and said, ‘We’d like to buy a little farm in the United States. Say, do you know a nice piece of property?” Nelson arranged for one of his customers to acquire a $150,000 farm with a two-acre pond, 50-acres of land and a house in the Blue Ridge Mountains region of Virginta. “He’ll come over for the summer, spend some time there and visit suppliers in this country.” He added: “There’s a lot of that type of investment going on.”

Nelson, 36, has a background in international banking as well as having served in the White House as a personal aide to President Johnson from 1963 to 1967. His small corner office is decorated with three pictures of himself and Johnson, including the historic photograph of the President addressing the joint session of Congress just after the assassination of President John F. Kennedy. Nelson is barely discernible in the mass of Johnson’s staff at that gathering. He described his White House duties as a mixture of valet and ambassador. “I did everything from buying his clothes, to disposing of Ellis Island, to speech writing…for press conferences, I brought in the Beagles.”

Economic Patriotism

Nelson sees in the role of the Merchant Prince a form of economic patriotism since the trade with the OPEC countries while earning a profit brings jobs to the U.S. and improves the balance of payments. “What we’re doing,” he said, “is opening new trade belts. There are other sources of goods in the world, but it’s better if they depend on us than the Japanese or the Europeans. It’s better for us.”

Jobs are a factor that the U.S.-Arab Chamberof Commerce emphasizes in promoting trade with the Middle East. A recent report by the chamber’s executive director Mohamed A. Baghal points out that U.S. exports to the Arab nations alone have increased about 800 percent between 1967 ($754,000,000 in exports) and 1974 ($3,418,000,000 in exports). “It is projected that the total for 1975 will easily top the five billion dollar mark,” the chamber’s annual report said, adding “With each one billion dollars in export sales accounting for 90,000 jobs in the United States, purchases by the Arabs will be keeping nearly half a million Americans employed.”

John Haldane, an economist who is marketing manager at the U.S. Commerce Department for Iran, Israel and Egypt, said his office stresses “how important the Near East market is to counteracting our recession in the states. Haldane’s export figures for the Arab oil exporting nations as well as Iran show a growth from $1,318,000,000 of exports in 1973 (oil prices began their unprecedented spiral that year, but the money didn’t flow to the OPEC nations until 1974 because of the mechanics of sales and finance) to exports of $4,235,000,000 in 1974 to exports of $7,387,100,000 in 1975. As big as these numbers are, Haldane said that they didn’t include arms sales. When the price of guns and electronic arms is added, the exports are even more impressive in size:

1973 $3,849,680,000
1974 $10,349,550,000
1975 $11,344,120,000

Assuming that the ratio of 90,000 jobs for every billion dollars of exports is accurate, about one-million American workers can trace their weekly paychecks to Middle East commerce.

U.S. imports — virtually all in oil — from the Arab OPEC nations and Iran have risen just as dramatically as the exports, but the balance of payments was still comfortably in our favor. The imports totaled $1,438,800,000 in 1973; $6,086,900,000 in 1974; and $8,128,100,000 in 1975.

An unknown factor, which reaches into the billions and would inflate the export figures even more, is the price paid by the Middle Eastern nations and their entrepreneurs for the services of U.S. companies and individuals working over there. Haldane said Commerce Department figures are focused on goods rather than services.

Some Conclusions:

Commerce between nations is a link that binds. The multi-billion dollar markets of the Middle East are creating financial and personal relationships (you usually get to know and like the individuals you do business with) which I construe to be a form of liquid foreign investment in the United States. The multi-national businessman would describe it as a growth of the interdependence of the two regions.

Received in New York on February 9, 1976

©1976 Kenneth C. Crowe

Kenneth C. Crowe is an Alicia Patterson Foundation award winner on leave from Newsday. He is studying the investment and movement of foreign funds into the U.S. with emphasis on the OPEC nations’ oil monies. This article may be published with credit to Newsday and Mr. Crowe as a Fellow of the Alicia Patterson Foundation.