The plummeting price of oil could cause another source of capital to dry up: the Sovereign Wealth Funds (SWFs) of the Persian Gulf. This could be another blow for global credit markets, says Irwin Greenstein. These oil-rich funds fueled with petrodollars invested trillions over the past few years, notably with high-profile infusions of billions in CitiGroup, Carlyle Group, Merrill Lynch and the Nasdaq Stock Market.

Now with oil down more than 50% from near $150 a barrel in July, the Persian Gulf is beginning to suffer from its own credit squeeze.

The bottom line is that world credit markets could suffer, further crippling the economy and the banking industry.

Persian Gulf SWFs control huge amounts of money. The combined funds of the United Arab Emirates (UAE), Saudi Arabia, Kuwait, and Qatar account for more than half the $2.5 trillion total assets of global SWFs.

As of March 2007, the UAE and Saudi Arabia had, respectively, the first and third largest SWFs internationally, and Kuwait ranked sixth, according to Middle East Quarterly. Persian Gulf SWFs have become the favored investment vehicles of Kuwait, Qatar, and the United Arab Emirates. And they’ve been busy…

Last year, SWFs engaged in 173 corporate transactions representing $83 billion - twice that of 2006, according to mergers and acquisitions tracker Zepher.

But now, many Persian Gulf nations are staring at barrels of oil that could sell for $65 each versus near-$150 over the summer.

The Persian Gulf also had a rude awakening that despite its oil riches, it is not completely decoupled from the world’s stock markets. Across the Persian Gulf, stock markets are way down, as investors begin to panic.

Even the boomtown of Dubai, which may have the most high-profile real-estate market anywhere, has softened against tightened credit.

But a slowdown in the Persian Gulf might feel like a crash landing in places like Egypt, Jordan and Syria, where gulf money has helped prop up strained economies.

“I expect investments from the gulf to slow down or stop because they have to deal with their own problems before they invest in other countries,” Nabil Samman, an economist who runs the Damascus-based Center for Research and Documentation, told the New York Times recently.

But is it a slowdown or a crash?

The governments of Kuwait and Saudi Arabia are now in the throes of their national bank bailouts to the tune of tens of billions of dollars. And it’s not due to just low oil prices, but a mass exodus of foreign capital and unfavorable currency trades.

At this rate it’s bound to get worse as we approach 2009. Some experts are predicting oil prices of $50-$60 per barrel for next year.

If that turns out to be the case, world credit markets could wish oil were once again up to $150.00.