Wealthy, Fat, Lazy...and 7-Star Hotels

This is what an massive inflow of petrodollars will do to a local population:

• If the oil price remains at about $100 a barrel, they will reap a cumulative windfall of almost $9 trillion by 2020;
• Almost a fifth of the UAE's native population suffers from diabetes;
• (A) McKinsey (study) reckons a quarter of native employees in Bahrain, Saudi Arabia and the UAE fail to show up for work;
• Burj al-Arab, the world's only seven-star hotel. Guests arrive by helicopter or Rolls-Royce, watch 42-inch plasma TV-screens in their rooms and choose from 13 pillows on which to lay their heads.

Another problem with all of the money coming into the Gulf region is inflation. The Saudis are dealing with an inflation rate of 8.7%, while Oman has an inflation rate 11.1%.

Most local currencies are pegged to the US dollar, which has dropped like a rock lately. This drop in dollars devalues there currency, requiring more local money to purchase goods not priced in dollars. The inflation rate is even hurting foreign workers who send money back to their home countries. Below is a great explanation on how inflation works:

'When an energy exporter converts its petrodollars at the central bank, domestic spending rises. But unless the local economy has a lot of slack, it cannot magically produce more goods and services to meet this fresh demand. Their price instead rises, relative to the price of things that can come in from overseas. According to a study by three IMF economists, a doubling of the oil price results eventually in a 50% rise in the price of non-tradable goods (such as housing), relative to tradables.'

This shows up as inflation. But the price rises should peter out once they have served two useful functions: diverting demand to goods from abroad, and increasing the supply of those goods and services that must be produced at home.'

Source:
'How to spend it', by The Economist