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Oil in Troubled Waters

The slide in oil prices has a double imperative for producers in the Gulf states reeling from the financial tsunami. In the space of a few months the price of crude has tumbled from a record $147.27 to just $46 this week with the consequence that Gulf budget surpluses will fall dramatically in 2009.

The break-even prices that will balance 2009 budgets are $36 for the UAE, $38 for Qatar, $48 for Kuwait, $51 for Saudi Arabia, $71 for Oman, and $73 for Bahrain according to the Institute of International Finance. However, if major economies, already in recession continue to contract the demand for oil and therefore the outlook for Gulf producers could deteriorate markedly. The problem is compounded by the fact many Gulf economies have embarked on extraordinary levels of expenditure.

This is no more apparent than in the real estate sector. The connection between the fate of this sector and the outcome for Gulf economies as a whole is profound with Dubai’s concentration in the luxury sector of particular concern. Medium term economic stability may also be affected by a deeper and more protracted recession in the US or Europe resulting in weaker oil demand and further falls in the price of crude below current prices. Such an occurrence could significantly curtail government spending. Yet, there is something of a silver lining; asset price inflation recently so much in evidence is likely to be arrested in the short-term. The rampant growth in credit will slow with a consequential impact on real estate prices. Additionally the size of the region’s investments in foreign assets and the record surpluses it will enjoy in 2008 will ensure the region is considerably less impacted than the rest of the world.

The challenge facing Gulf producers will be to ensure that policy is responsive enough to deal with the rapidly changing economic conditions at a global level. This will place a considerable emphasis on improving the region’s productivity in the non-hydrocarbon sector. Gulf countries still lag behind most emerging economies with output rising by less than 1 per cent a year, as compared with an average of 2.5 per cent in emerging economies.