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Tue 20 Sep 2011 09:59 AM

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OPEC’s $1 trillion cash helps quiet Gulf’s poor

$100 oil fuels government spending plans geared at avoiding social unrest

OPEC’s $1 trillion cash helps quiet Gulf’s poor
Saudi Arabias King Abdullah. SAudi has pledged to spend $43bn on its poorer citizens
OPEC’s $1 trillion cash helps quiet Gulf’s poor
OPEC’s $1 trillion cash helps quiet Gulf’s poor

Saudi Arabia will spend $43bn on its poorer citizens and religious institutions. Kuwaitis are getting free food for a year. Civil servants in Algeria received a 34 percent pay rise. Desert cities in the United Arab Emirates may soon enjoy uninterrupted electricity.

Organization of Petroleum Exporting Countries members are poised to earn an unprecedented $1 trillion this year, according to the US Energy Department, as the group’s benchmark oil measure exceeded $100 a barrel for the longest period ever. They are promising to plow record amounts into public and social programs after pro-democracy movements overthrew rulers in Tunisia, Egypt and Libya and spread to Yemen and Syria.

Unlike past booms, when Abu Dhabi bought English soccer club Manchester City and Qatar acquired a stake in luxury carmaker Porsche SE, Gulf nations pledged $150bn in additional spending this year on their citizens. They will need to keep US benchmark West Texas Intermediate crude oil at more than $80 a barrel to afford their promises, according to Bank of America Corp.

“A sharp increase in spending to accommodate social pressures has averted potential disquiet over governance in most countries, though in the longer-term economic reforms will be needed to buoy private-sector growth and job creation,” Jean- Michel Saliba, a London-based economist at Bank of America, said in an email Sept 8. “Without the social spending, Gulf protests would possibly move the nations toward constitutional monarchy.”

OPEC’s basket of crudes, a weighted average of the group’s main export grades, has been trading at above $100 since Feb 21. The basket price was $110.69 a barrel on Sept 16 while WTI on the New York Mercantile Exchange closed that day at $87.96.

Tunisia’s ouster of President Zine El Abidine Ben Ali in January set up the so-called Arab Spring, as protests led to the end of Hosni Mubarak’s 30-year reign in Egypt and threatened the Assad family’s hold on Syria.

Libya’s rebel council met Sept 19 to form a cabinet after seven months of fighting to end Muammar Qaddafi’s 42-year rule. Yemeni President Ali Abdullah Saleh is under pressure to step down after 33 years running the Arab world’s poorest country. Unemployment is at 11 percent in the Middle East and North Africa and as high as 22 percent in Algeria, according to the United Nations Development Program.

Across Yemen’s northern border, in Saudi Arabia, OPEC’s biggest member is funding housing, salary increases and the creation of 60,000 new jobs at the interior ministry, according to royal decrees announced on March 18. At least SR1bn ($267m) has been allocated to the Saudi Ministry of Islamic affairs and The Commission for the Promotion of Virtue and Prevention of Vice after clerics backed a ban on domestic protests.

The religious establishment’s new funds include SR500m to restore mosques and SR300m to support Islamic call and guidance offices, according to the decrees. Money is being spent on installing devices in public squares, markets and schools to deliver audio and video broadcasts with “advice and moral lessons,” the Commission’s President Muhammad al-Eidy said in May.

“They probably feel like they’ve got to do a lot more spending this time and they are focusing on social spending, whereas previous investments were business or private-sector driven,” said Gabriel Sterne, associate director in London at Exotix, an investment bank, and a former economist at the International Monetary Fund and the Bank of England.

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OPEC will need WTI at above $80 a barrel to maintain the increased social spending because the costs of Persian Gulf budget obligations have more than doubled since 2006 to $77, with Saudi Arabia needing an average $82, according to Deutsche Bank AG. OPEC’s basket price at more than $100 puts it on course to earn $1.01 trillion this year, the US government said.

During the oil rally that peaked in 2008 before the onset of the global financial crisis, Abu Dhabi, holder of most of the UAE’s crude reserves, pledged $22 billion to construct Masdar City, powered by renewable energy that would rest on concrete blocks under which electric driverless vehicles would transport residents. Qatar began building an academic hub, attracting American institutions such as Georgetown University in Washington and Texas A&M University in College Station, Texas, with funding from a government-run foundation.

This time, rulers are shoring up domestic support. Demonstrations in Saudi Arabia, the Arab world’s biggest economy, failed to take off in March as citizens were offered extra money for housing. Government employees had their salaries increased 15 percent and got two months extra pay. Kuwaitis received KD1,000 ($3,664) and free food for 13 months, state news agency KUNA said in January.

Earlier this month, Qatar’s crown prince Sheikh Tamim bin Hamad al-Thani ordered QR30bn ($8.2bn) in civil servant salary increases and pension-fund allowances.

“As soon as the government announced handouts, people went out and bought cars,” said John Stadwick, managing director of General Motors Co’s Middle East operations. Sales in Saudi Arabia climbed as much as 48 percent a month since April, compared with a decline in February and March, he said.

Gulf nations are also aiding neighboring Sunni monarchies to prop up dynasties that have ruled parts of the Middle East for centuries. They pledged $20bn for Oman and Bahrain to fend off protests and invited Morocco and Jordan to join the six-member Gulf Cooperation Council which will include economic assistance. In addition, newly democratic Egypt received $20bn from Qatar and $4bn from Saudi Arabia as the Gulf seeks to retain influence in the most populous Arab nation.

Of OPEC’s 12 members, nine increased 2011 budgets and of the remaining three, only Nigeria amended its budget lower, while the UAE doesn’t disclose its public spending. Nigeria, Africa’s biggest oil producer, set up a $1bn wealth fund in May split into an infrastructure fund, a future generations fund and a stabilization fund. Algeria’s cabinet approved a 25 percent budget increase to pay for the salary raise and food subsidies amid protests that have ended 19 years of emergency rule and led to a review of the election law.

OPEC decided against raising oil supplies at its June meeting even as Libya’s conflict curbed exports. Output of about 30 million barrels a day lags behind the 31.3 million barrels the world needs from the region in the third quarter, according to the International Energy Agency. Half of Saudi Arabia’s 8 percent increase in June production to 9.7 million barrels a day was used in its own power plants as domestic demand reached a record, data from the Paris-based IEA showed.

 “Saudi Arabia will cut back after its summer surge,” said Leo Drollas, London-based chief economist at the Centre for Global Energy Studies, the researcher founded by former Saudi Oil Minister Zaki Yamani. “If it doesn’t trim now then prices might lurch downwards on lower demand, and it needs a minimum basket price of $90 for what it wants to do this year.”

The OPEC basket will stay above $100 a barrel for the rest of this year, according to forecasts from five banks and consultants, including Barclays Plc and Sanford C. Bernstein & Co. Its previous record period above this level was from April 7 to Sept. 8, 2008.

Not all the spending initiatives work right away, even though citizens praise the changes.

Abu Dhabi plans to provide more services to poorer citizens by focusing on communities like Ras Al Khaimah after academics and journalists signed an online petition calling for the country’s Federal National Council, an advisory body with no executive authority, to be chosen by universal suffrage and given more power.

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Less than a week after Mubarak’s ouster in Egypt, the city of 250,000 people got a visit from Abu Dhabi Crown Prince Sheikh Mohammed bin Zayed Al Nahyan. Learning they lacked electricity, Sheikh Mohammed, who is next in line to the nation’s presidency, summoned a utility executive who arrived within two hours by helicopter. “Give them power now,” he ordered.

Sheikh Mohammed “sat with the people and listened to our needs,” said Yousuf al-Nuaimi, chairman of the Chamber of Commerce in Ras Al Khaimah, one of seven UAE cities whose per capita income is 45 times less than Abu Dhabi. The Crown Prince promised electricity to the northern sheikhdom, home to one of five pro-democracy activists arrested this year, from a plant in nearby Fujairah and AED1bn ($270m) for road and housing improvements, al-Nuaimi said.

Seven months after the visit, Ras Al Khaimah is still waiting for power but residents don’t blame the crown prince.

“Abu Dhabi is not the problem,” al-Nuaimi said. “The Federal Water and Electricity Authority is the problem. They need to do the connection but they are not. I hope the next step will be for Abu Dhabi to take over FEWA so that we can enjoy the power they promised us.”

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joe 8 years ago

The spending they are doing will put more pressure up on prices and hike inflation maybe to record high.that is what happening now and the outcome of spending will be nill

Ali Saleh 8 years ago

"Unlike past booms, when Abu Dhabi bought English soccer club Manchester City and ". Recently " At least SR1bn ($267m) has been allocated to the Saudi Ministry of Islamic affairs and The Commission for the Promotion of Virtue and Prevention of Vice after clerics backed a ban on domestic protests". This is in a nutshell the modern GCC Politics, what will happen when oil and gas is all used up. Your guess is as good as mine.