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Mon 4 Aug 2008 09:25 AM

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Oil price drop will not dent Gulf economic boom

Even at $70 a barrel Gulf exporters still booking windfall returns, analysts say.

Recent weakness in oil prices will not dent economic growth in the Gulf Arab states, experiencing both record expansion and inflation as the energy exporters reap windfall profits, economists say.

Gulf states will still book windfall returns from energy exports despite oil's slide, meaning growth in the peninsula will roar ahead fuelled by an investment boom, experts say.

"A drop from $140 to $123 a barrel has no impact on the domestic economies. All it does is to moderate a little the surplus that the Gulf has to save overseas," said economist Simon Williams at bank HSBC in Dubai.

Inflation in the world's biggest energy exporter, Saudi Arabia, hit a 30-year peak at 10.6 percent in June as costs for food and rents soared, similar to rates elsewhere in the Gulf, new data showed on Sunday.

Oil has sold off since hitting a record above $147 on July 11, trading on Friday at $125.10 a barrel. OPEC chief Chakib Khelil said last week crude may fall as low as $70-$80. But the average oil price to date in 2008 stands at $114.54, up from $72.36 in 2007.

Gulf investors, including sovereign wealth funds, have pumped well over a trillion dollars into overseas investments such as real estate and stocks. Billions went into Western banks badly damaged by the subprime crisis.

"The governments of the GCC have been saving significant amounts of money even at $70 per barrel," said senior economist Hany Genena at investment bank Gulf Finance House.

This has allowed Gulf Cooperation Council members to invest heavily in real estate, infrastructure and to promote development of manufacturing and petrochemicals.

"It's not the level of oil but rather what the governments are going to do with the money that is important," he said.

Gulf economies, where government spending of oil revenues has traditionally been the primary growth engine, have tried to develop private sectors to create self-sustaining expansion that does not hinge entirely on the price of oil.

Economists see the Gulf economies growing at up to 11 percent in 2008, in the case of Qatar, or 5.7 percent in the case of Saudi Arabia, bucking weakness or even recession in the industrialised world.

Inflation has already led to civil unrest in some Gulf states, with hundreds of Asian foreign workers in Kuwait striking and staging demonstrations last week to demand better pay and working conditions. (Reuters)

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Trojan 11 years ago

If my memory serves me right, the Wall Street Journal stated that the US dollar went down by 30% since 2003 against a basket of currencies. So a $70 a barrel today feels like about $49 back in 2003. Add to that the high inflation in the region (and the world) over the past several years, and one has to ask how $70 a barrel could not hurt. They need to teach "analysts" more math!

SR 11 years ago

I can not but help agree with Trojan's math argument. Anyway, I did not take the article seriously because analysis is based on xxBC!!

Bikash Mallick 11 years ago

Mr.Trojan is correct - Math is fact and analysis is faith.