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Eldorados of Modern Times
The quest for eldorados goes on, but are we looking in the right direction?
Pierre Joo (pierre_joo)     Print Article 
Published 2006-11-30 05:17 (KST)   
Many 16th-century conquistadors undertook the quest to find the Golden City, a pre-Hispanic South American territory ruled by a golden king, "El Dorado." It eventually turned out that no such city existed. Dreams of gold gradually vanished, but "eldorado" remained to designate the goals of future quests by men lured by the promise of instant and unlimited wealth.

Even though today's world has no more unexplored virgin land with potential hidden treasures to offer, hopes of eldorados are still alive, as today's global economy offers plenty of opportunities for people to hit the jackpot. This year has confirmed that two industries could be our 21st century eldorados.

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The first one is reflected in the skyrocketing performances of the Peruvian, Venezuelan and Russian stock markets: respectively the world's first, second and fourth best performing markets for this year, according to Business Week. Of course markets were generally bullish worldwide, with the New York Stock Exchange gaining 15 percent since January 2006. But in the meantime, Lima was up 127 percent, Caracas 87 percent, and Moscow 47 percent, all driven by constantly rising prices in resources the three countries are major exporters of: metals, oil and gas.

Some examples could almost let us fancy a world where anything somehow related to energy would turn to gold: Vallourec, a French company producing pipes used for oil and gas transportation, saw its market capitalization rise ten-fold, within a two-year period.

The second eldorado is perfectly summed up in the two recent headlines involving its most prominent actor: Google. In October Google announced it invested $1.65 billion to acquire YouTube, a less than two-year-old company with no clear revenue model, and headed by two co-founders who could be easily mistaken for students. Yet, investors' enthusiasm for Google remained intact: a month later, the company's shares would trade higher than 500 dollars for the first time since the Mountain View company was publicly listed in August 2004 at an initial offering of 85 dollars.

One can legitimately question the actual value creation behind these dramatic price inflations. Will today's investors suffer the same fate as past centuries' conquistadors: grow disillusioned and eventually turn away from what they had coveted?

Value creation from the energy sector seems quite obvious: Behind investors' frenzy for the energy sector is their confidence that the price of raw material, oil and gas will keep rising as long as global demand is sustained by economic growth of China, followed by other emerging powerhouses, while global supply remains vulnerable to geopolitical tensions, especially in the Middle East, or climate uncertainties. A rather sensible assumption.

Consequently, it seems unlikely that money will stop pouring into oil and gas producing countries anytime soon: Saudi Arabian oil exports generate a daily $400 million revenue to the Kingdom; meanwhile, public spending in Venezuela has increased by 36 percent in 2005 thanks to oil revenue; and Russia, which became the world's biggest oil producer in 2006, was able to repay its 22.5 billion dollar debt to the Paris Club of international sovereign creditors ahead of schedule.

Could the 21st century eldorado be digital?
©2006 Pierre Joo
Value creation in the digital industry seems less crystal clear. Of course, this sector has learned from the mistakes of the internet bubble: today, survivors of the Web 1.0 era not only are profitable, but they have paved the way for the Web 2.0 generation of companies offering innovative ways to share information and enjoy entertainment to a steadily increasing number of digital media users. Most reassuringly, announcers have begun allocating a growing portion of their ad budgets to new media.

Yet very few have so far been able to find business models enabling to generate a profitable activity out of the many innovative digital products or services. Venture capitalists or private equity firms who finance most of these companies have more patience than financial markets, but they will run out of it eventually without the prospect of return on their investments.

Of these two sectors, energy and new media, only the latter would then fit the original meaning of eldorado, that is a place of unlimited wealth, but an imaginary one.

Or maybe not. Because in fact, wealth generated from oil and gas exports are imaginary for a majority of people living in those countries. In Saudi Arabia, petrodollars did little to change a society plagued with high unemployment rates for the Saudis, and poor working and living conditions for some 6 million foreign workers. In Venezuela, oil revenues have had little impact on rampant crime, housing shortages and persistent unemployment. As for Russia, its early debt payment may have helped the country recover from the sense of humiliation resulting from the 1998 financial crisis and the loss of its geopolitical influence. Yet petrodollars have not yet been used to address Russia's most urgent challenges: rampant crime and corruption, or run down health care and education systems, to name only a few. Today's Russians enjoy a life expectancy lower than their Soviet parents' during the 1960s.

Oil and gas may have made a select few immensely rich but for a huge majority, there were no eldorado. In fact, petrodollars have even put off the prospect of a better life for many, as easy money provides the illusion of abundance and delays painful reforms generally needed to get wealthier collectively. After all, maybe this is the reason why no one ever found any eldorado: because we셶e been searching in the wrong places. Unlimited wealth does not come out of gold mines or oil reserves generating easy money, which goes as quickly as it comes.

In fact, the only unlimited resources are to be found not in natural resources, but in human resources. It is our unlimited ability for innovation and action to push further back the constraints of nature. Take the example of the mid 19th century California gold rush: gold soon became exhausted, but people's energy and creativity didn't. And today, their grand children live in a place called Silicon Valley, one of the wealthiest place on earth, which has nothing to do with gold.
©2006 OhmyNews
Other articles by reporter Pierre Joo

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