Gulf cashing $1bn a day from record oil prices

OIL WINDFALL: The Gulf is making $1 billion a day from record oil prices. (Getty Images)

Gulf states accumulated $750 billion in current account surpluses over the last five years on the back of a seven-fold rise in oil prices since 2002, Merrill Lynch said on Sunday.

The US investment bank said in a report the six state that make up the Gulf Cooperation Council (GCC) are likely to receive another $360 billion this year in their external surpluses with oil hovering above $140 a barrel - equating to almost $1 billion a day.

Merrill said that every $10 increase in the price of oil adds around $55 billion to export revenues of the GCC, home to around 40 percent of the world’s proven oil reserves and 25 percent of natural gas reserves.

The bank forecast GCC economic growth of 6.4 percent this year and 6.2 percent in 2009, assuming oil prices stay at around $135 a barrel and interest rates remain low.

However, Merrill highlighted high inflation is the biggest challenge facing the Gulf’s economic success story and said it could threaten the long-term sustainability of regional economies.

It said record oil revenues were fuelling economic growth, but that loose monetary policy and increased public spending were creating a situation where inflation risked spoiling the party.

Merrill said inflation, which is above 10 percent in five out of the six Gulf states, could begin to hamper governments’ efforts to diversify their economies away from oil.

It said the region was already facing supply bottlenecks - both in terms of human capital and capacity - and inflation was putting GCC plans to alleviate these bottlenecks, namely through increasing the expatriate population and mega infrastructure projects, in jeopardy.

“Inflation threatens the sustainability of both of these channels, as the cost of living and the cost of production and construction are increasing at accelerated paces,” the report said.

“As GCC governments are still doing little to fight inflation, physical shortages and disruptions are hitting the headlines more.”

Merrill said the huge amount of liquidity in Gulf economies due to monetary expansion and credit growth was likely to push asset prices higher in the short-term and inflate the asset bubble in the medium-term.

However, the bank said the asset bubble still had a long way to go before it was in danger of popping.

All Gulf states, bar Kuwait, peg their currencies to the ailing US dollar, which has been blamed for both pushing up inflation and restricting central banks ability to fight it.

The dollar peg forces central banks to track US monetary policy to maintain the relative attractiveness of their currencies.

The US Federal Reserve has been slashing interest rates since September to stave off recession at a time when Gulf states should be hiking rates to rein in inflation.

The falling value of the dollar also drives up the cost of goods from non-dollar pegged economies - particularly Europe and Asia - adding to inflationary pressure.

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