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Mideast grapples with oil price slump

CAIRO, Egypt - Vast, oil-fueled budget surpluses may cushion some of the Mideast's major oil-producing countries, now that crude prices have plummeted. But Iran, Iraq and a handful of other countries face daunting challenges to make up the money in coming months because of the price drop and global financial crisis.

The differences are stark: Developers in the United Arab Emirates - whose economy is more diversified - are still announcing multibillion dollar mega building projects. But merchants in Iran went on strike the past few days, and Iraq may find a vaunted oil-money budget surplus is smaller than expected, allowing for less postwar rebuilding.

Other countries like Saudi Arabia may simply need to trim back ambitious projects.

“The Gulf countries have enough reserves to get through rougher periods, and have based their budgets on oil prices lower than what we see today. But poorer countries like Egypt ... don't have those kinds of reserves," said Jon Alterman, Mideast program head for the Washington-based Center for Strategic and International Studies.

As for Iran, the drop in oil revenue is likely to cause that country and its hardline president even more economic headaches, heading into presidential elections next June. But few think, despite the recent strikes, that any political upheaval is at hand.

“Oil at US$70 per barrel doesn't threaten (President Mahmoud) Ahmadinejad's hold on power," said CSIS's Alterman. “Twenty dollar per barrel oil does."

Oil was trading at about US$83 per barrel early Tuesday in New York, well off the record high of US$147 per barrel in July that allowed Mideast OPEC members to see revenues surge.

OPEC's more hawkish Mideast members, like Iran, are heading into a November meeting - to be convened a month before a previously planned meeting is due to be held - with sights set on securing an output cut. Iran has previously said it would like to see prices remain at US$100 per barrel - a level few, if any, believe is currently sustainable.

Equally questionable is whether the cartel will definitely cut production, said Serene Gardiner, oil products analyst for Standard Chartered bank in Dubai.

“They're vigorously going to defend the US$80 mark, but they're not going to call for US$100," Gardiner said. “There's no point in pushing for something you'll never get."

More dovish members - namely Saudi Arabia, the cartel's kingpin and the world's largest exporter - are mindful that a repeat of the surging prices earlier this year could exacerbate demand erosion, particularly in the West, further fueling cuts in consumer spending and deepening the current financial crunch.

Iran's push, however, is understandable.

The Tehran government relies on energy exports for about 80 percent of its income - a level Ahmadinejad wants to sustain because of Iran's international isolation, caused by the dispute with the West over its nuclear program.

The slump in oil prices comes at a particularly unfortunate time for Ahmadinejad, whose economic policies have many Iranians seething even as he looks to muster support ahead of next year's elections.

Scores of the country's merchants went on strike last week in protest over a 3 percent sales tax the government introduced in September. Iran's merchant class played a major role in supporting the radical students who toppled the Western-backed Shah in the 1979 Islamic Revolution.

Bowing to pressure, the government agreed to suspend the tax. The strike, however, continued.

Officially, Iran is downplaying the impact of the oil price fall: the IRNA news agency quoted an official in Ahmadinejad's office as saying the country had based its budget on crude between US$55-US$60 and that recent declines “will not affect our annual budget."

Iraq, meanwhile - struggling to rebuild - could see its hoped-for revenue drop even as it sits atop the world's third largest crude reserves.

A U.S. congressional auditors report found the Iraqi government could end this year with a budget surplus of as much as US$79 billion, causing many Americans to fume since the U.S. has been pumping hundreds of billions into the country.

But that number now seems unlikely. Iraqi Finance Minister Bayan Jabr said recently said that the decline in oil prices “no doubt will have a negative impact on Iraq's economy." Other Iraqi officials say they are studying the impact on their spending plans, but so far, nothing firm has been decided.

Other countries face more mixed pictures.

A recent report by the National Bank of Kuwait warned that if spending remains high in the 2009-2010 budget year, that country's budget “could slip into deficit for the first time in 11 years" but would likely return to surplus the next year.

Saudi Arabia depends on oil revenues for upward of 60 percent of its government budget, said Zulfiqar Bashir, senior economist with the National Commercial Bank in the kingdom.

The kingdom earned US$244 billion in the first three quarters of 2008, compared to US$194 billion in all of 2007, according to the Short-Term Energy Outlook by the Energy Information Administration, the U.S. Energy Department's statistical arm.

Because of the recent drop, Saudi Arabia could face difficulty carrying out planned mega-projects critical to its push to diversify.

But few analysts, including Bashir, are ready to sound the sirens, at least about Saudi Arabia and the UAE - which brought in US$78 billion in the first nine months of 2008, according to the EIA report.

The cautious optimism largely stems from the fact that Mideast OPEC members pegged their budgets to lower oil prices.

Marios Maratheftis, Standard Chartered's head of research for the Middle East, North Africa and Pakistan, estimates the UAE government budget is based on a price assumption of $45 to $50 a barrel. Other estimates suggest that UAE, which draws income from vast foreign investments, could cover costs even at lower prices.

“There is a huge cash cushion that the government enjoys," he said.