What went up, has come down - for now

Remember those heady days of summer, when we went about our business happy in the knowledge that we were decoupled, that credit would never go crunchy in the Gulf, and that our villa on the Palm would be worth twice as much this time next year?

Gulf oil producers had more money than they knew what to do with, snapping up trophy assets and prime real estate around the world, and all on the back of a record oil price that showed no sign of receding thanks to the emergence of China and India as eager, all-consuming economic powerhouses.

Needless to say, all that has changed since - and while we mourn our corpsing real estate investments, panic is beginning to set in among those same oil producers, who have witnessed a two-thirds slump in the value of their most saleable asset.

Kuwait stepped up to the plate last week when it was reported that finance minister Mustafa al Shimali would slash the county's budget in 2009 and push forward spending on the private and public sector.

In Oman, the council for financial affairs and energy resources agreed at a meeting to amend its 2009 budget to assume an average oil price of $45 a barrel. And in Qatar, oil minister Abdullah al-Attiyah said that if the oil price stays under $70 many energy projects to boost future capacity will be delayed.

Saudi is already facing the threat of a deficit next year, and the world's largest oil producer has had to scale back on oilfield expansion plans designed to guarantee long-term supply - Aramco last week cancelled plans for a $1bn restart project at the Dammam oilfield, while refineries at Yanbu and Jubail are also under threat.

Of course, Saudi Arabia, Kuwait and Abu Dhabi can ride out a steep fall in the oil price fairly comfortably, provided it's temporary. Others are not so lucky - but there should still be no serious cause for alarm. Those states that gambled on sustained $100-plus oil will be forced to scale back their pace of growth, but at a time when the global economy is racked by spasms, this might not be a bad thing.

As the West deluded itself into thinking that its financial instruments were clever enough to keep the entire system just on the right side of toxicity, so oil producers got a little too comfortable with the commodities supercycle and its petrobillions. Today's relatively low price is a reminder that measured growth is advisable even for nations with valuable natural resources.

Bahrain and Oman in particular are vulnerable, but they are still sitting pretty when compared to the US or UK, for example. They may have to put their dreams on hold a little longer, but they are not at risk of genuine economic depression.

And when the rest of the world's economies have had time to catch their breath and drag themselves back onto their feet, then each of the Gulf oil producers will be there to supply those economies with the fuel they need to move forward once more.

Andrew White is the deputy editor of Arabian Business English.

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READERS' COMMENTS

fantasy
Posted by ossama14, ad, uae on Wednesday 10 December 2008 at 23:20 UAE time

false and misleading propaganda and lack of banking regulation and lending rules beyond real estate bubble. I agree with Paul we are going to face severe recession, the worst is coming.

What went up, has come down
Posted by Zen, Dubai, United Arab Emirates on Wednesday 10 December 2008 at 15:18 UAE time


Good. But when will it come down at our gas stations?????

bravo paul..
Posted by Roche, Dubai, UAE on Tuesday 9 December 2008 at 13:23 UAE time


but shhhh.......!!! we aint suppose to shout it out.. i was wondering if the oil prices stay below 50 usd for an year or so, do you think we can see dubai with none to use its infrastucture.

would it go back to how it was 8 to 10 years back.?

hmmm
Posted by Paul, Dubai, UAE on Monday 8 December 2008 at 15:37 UAE time


Every other article on Arabian Business these days seems to be a comment piece that can be summed up roughly as "the gulf might suffer a little (thanks to foreign problems) but will be better off than the UK and US and will soon bounce back". It's almost like a concerted effort to talk things up.

The west has its problems. What it does NOT have is an economy that relies primarily on 1) oil 2) real estate and 3) tourism. All of which are collapsing. UK property is down 15% in a year. That is one month of falls in Dubai. Or 23 days if you owned a villa in September, according to HSBC.

The bubble in the middle east has been significantly larger than that in the west. One look at house prices will confirm this. The fact that the economies are much more reliant on real estate growth for GDP means a slow down in construction is likely to lead to a severe recession.

I am therefore a little suspicious about all the confident "we are better than the rest" bravado which seems to have little basis in anything other than the same old relentless optimism that helped get us into this mess (i.e. "invest in Dubai real estate, it cannot possibly crash, guaranteed profits" etc.)

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