GCC economies: oil revenues have probably peaked

The Arab media has recently caused some controversy among commentators by suggesting that the GCC economy this year is stagnant. Business is not as lively as last year. But there is good reason for this change which is directly related to falling oil revenues, and marks a slowdown from very high rates of growth.

The average oil price so far this year is down by nine per cent and Opec is pumping less oil. Therefore total actual oil revenues are running below the level of 2006
However, GCC government spending has kept on rising, so the impact of lower oil revenues is more than offset. Hence, the International Monetary Fund estimates five per cent GDP growth for the economic bloc for 2007.

This is a therefore a slowdown, although it may feel like stagnation after some pretty amazing growth in the recent past. In 2005 average oil prices leaped by 35 per cent, and that produced an enormous injection of liquidity into the GCC countries.

It is no coincidence that 2005 was also a year that local stock markets surged in value. But the total amount of cash from oil revenues in 2007 will almost certainly be significantly lower than in 2006, and this is causing some caution among business leaders in the Gulf as it may be the start of a downward trend.

There is reason to be concerned about the outlook. The US housing market has crashed and could well drag the world’s biggest economy into a recession. There is already a slowdown. This is bad for global trade and that will reduce energy demand and send oil prices lower.

Of course, the possibility of an oil price spike due to a crisis in Iran, Venezuela, Nigeria or another oil producer is always possible. But this might not halt the downward trend in average oil prices and indeed could accelerate it by producing a global financial crisis.

So these are more sobering times for business in the Gulf. It may well be that governments have the luxury of thinking long term and can keep on spending from their recent windfall oil revenues. But for private companies that need to deliver a more immediate return to their shareholders things might look rather different.

AME Info