Prod. Breaking Points in the Gulf, By the Dollar

May 14, 2009
(Arabian Business News ) - Gulf Arab states could face economic turbulence or prosperity depending on where oil prices go in this year's global recession with prices of around $60 a barrel offering some room for optimism.

Saudi Arabia, the world's biggest oil exporter, and its five neighbours rely heavily on oil and gas revenues.

Below are some of the possible outcomes for the region based on where oil prices go after a Reuters poll showed last month that US crude is likely to average nearly $51 a barrel in 2009 and $65.95 in 2010.

The price of US crude oil collapsed to the mid-$30 a barrel level earlier this year from peaks of nearly $150 a barrel last July. It currently trades around $59.

Gulf Arab states resorted to swift fiscal expansion since 2002 to diversify their economies and as a result, the oil price needed to keep budgets in check has risen substantially.

Oil at $30 a barrel

•    All Gulf countries fail to balance their budgets, forcing them to rethink ambitious expansion plans as they will be loath to eat too much into savings from more than $2 trillion they earned in export revenues in the five years to last June.
•    Governments pledge to pick up the slack in the short term but many, including Kuwait and Oman, warn they would slow spending if prices remain low. Kuwait is especially vulnerable as oil exports account for about 90 percent of state revenue.
•    OPEC producers shelve many energy investment projects and state spending on tourism and real estate is curtailed, spurring a rise in unemployment. States relying on foreign workers, especially the UAE, suffer from a drop in consumer demand.
•    Oil output cuts to try to shore up prices lead to contractions in oil GDP, which has knock-on effect in non-oil sector.
•    Foreign investor confidence in Gulf equity and property markets wanes. Corporate earnings are hit and selling grips Gulf bourses, which are dominated by financial and property shares.
•    The state's ability to generate jobs and maintain nanny- state traditions weakens. Some governments have relied on state benefits and refrained from taxing personal income to secure political loyalty in a region lacking democratic representation.

Oil at $45 a barrel

•    UAE and possibly Kuwait will be able to balance budgets if growth in state spending remains moderate and focused only on essential infrastructure projects. Significant budget deficits force Saudi Arabia, Oman and Bahrain to draw on reserves.
•    Stocks and property prices remain low as foreign investors are wary of entering the region. Banks remain risk-averse as they face rising defaults from commercial and consumer loans.
•    Investments to build up oil output capacity remain very limited.
•    Unemployment risk stays high as state has limited scope to boost spending, keeping the private sector on the sidelines.
•    Non-oil sector investments slow, reducing growth prospects and, along with oil output cuts, raises the risk of a prolonged recession in many Gulf states.