While few analysts agree with headline-grabbing talk of $100-a-barrel oil, fewer still predict that prices will move much south of $40. The implicit message from mid-December's OPEC meeting - when ministers agreed to convene for an extraordinary gathering at the end of January for fear of weaker second and third-quarter demand - was that members are now preparing to defend prices at about that level.

Increased confidence about the future direction of oil prices has been underlined recently by rises in the traditionally conservative forecasts on which governments base their budget projections. Riyadh's outlook for 2006 assumes an average price of about $31 a barrel, up from $25 in the 2005 budget, while Oman goes even further - assuming $32, also rising from $25. And laying the foundations for continued growth further down the line, the region's oil and gas producers are heeding consumer cries and investing heavily to raise production capacity.

The fruits of the oil boom are evident across the Gulf. In December, Saudi Arabia published a preliminary estimate of the 2005 budget surplus, calculating it at SR 214,000 million ($57,707 million), topping Kuwait's KD 3,200 million ($11,000 million) surplus for fiscal year 2004/05. In Qatar, the economy is reckoned to have expanded by 27 per cent in 2005 in nominal terms.

Happily for the region's longer-term macroeconomic stability, the positive story is not all about oil. A combination of bigger budgets, attempts at diversification and a sea of liquidity being invested close to home are driving rapid private sector growth. The region's corporate heavyweights routinely post record profits and stock markets continue to scale new heights. The Shuaa Arab share index rose by more than 90 per cent in 2005, and this was only partly driven by the capital markets of the oil-rich countries. The stock markets of Jordan and Lebanon, for example, rose by about 100 per cent and 70 per cent respectively, while shares in Morocco and Tunisia put in performances that were impressive by global standards. Helped by the mood of optimism created by a new, reformist government, Egypt's Hermes index also climbed by more than 100 per cent over the course of the year.

Overheating

However, the behaviour of certain bourses provides one of the few black-spots on the horizon. With too much money chasing too few stocks, several markets are becoming very overheated - those of the UAE and Saudi Arabia in particular. Given prevailing economic conditions, severe crashes are unlikely, but 2006 is likely to see some correction and is unlikely to produce rises on the same scale as last year. In the GCC, the gradual rise in interest rates in line with US Federal Reserve policy is likely to tame some of investors' wilder excesses. Rising rates will also help control inflation, the other main economic problems faced by the six states.

Private sector growth is being driven by the soaring expenditure of cash-rich governments on infrastructure projects. In Qatar, for example, the Public Works Authority (Ashghal) is carrying out a QR 26,000 million ($7,000 million) infrastructure upgrade programme. At the same time, private sector investment opportunities in infrastructure are growing. Riyadh is moving forward on an ambitious tendering schedule for a series of planned independent water and power projects (IWPPs), the model now finding favour across the Gulf. According to MEED Projects, schemes worth more than $650,000 million are planned or under way in the GCC, Iran and Iraq. Oil price forecasts imply that such activity will accelerate further in 2006.

Under such benign conditions, politicians might be expected to lose some of their enthusiasm for economic reform. However, while not all are pursuing it with a uniform degree of urgency, a raft of changes is afoot which should see a greater role for the private sector and alleviate the region's woeful record in attracting foreign direct investment. Some governments are being goaded by World Trade Organisation commitments, a process that Riyadh has begun following the kingdom's accession in November. Cairo's reformers are proceeding quickly with the divestment of government assets in the banking sector, and even Syria's first private foreign banks have opened their doors. Maghrebi governments have also accelerated their privatisation programmes.

2006 promises to be another year of economic good fortune across the Middle East. And with few economic wolves at the door, governments will be at leisure to push ahead with reform and lay the foundations for solid, long-term growth.