Is the Middle East ready for $100 oil?

13 November 2007

At the start of the year, oil prices were not expected to rise above $60 a barrel. On 16 October, Brent crude hit $84. With tension mounting over Ankara’s plans to pursue Kurdish guerrillas inside Iraq, as well as the seemingly intractable dispute over Tehran’s nuclear programme, oil prices are unlikely to fall significantly any time soon.

More and more analysts now say it is not a question of whether oil will reach $100 a barrel, but when.For the Middle East’s oil producers, the high prices will sustain growing budget surpluses, fuel continued investment in infrastructure and underpin diversification ambitions. They will also allow the development of previously uneconomic hydrocarbons reserves.But if, as expected, the high prices continue into 2008, there could also be some painful consequences for the region.

With most governments’ budgets based on conservative oil price estimates, the sustained high price means many Gulf states will become even more free-spending in an already overheating economy. Regional inflation, in the form of rising materials and labour costs, as well as food, transportation and real estate prices, is already an issue for manyGulf statesand will get worse.

Increased fuel rates will have an inflationary impact overseas too, and may be enough to push the teetering global economy, already weakened by the global credit crunch, over the edge.Then, as has been seen all too often before, Opec members may find themselves helpless as demand for crude oil diminishes in the wake of a global economic slowdown. The global economy has proved remarkably resilient to rising oil prices in recent times, but $100-a-barrel oil may turn out to be too much for it to bear. The high cost of oil and gas will inevitably hit demand for oil in the long term as end-users seek out alternative sources of energy.

In addressing these many concerns, Opec members will face some tough decisions when they hold their next production meeting in Abu Dhabi on 5 December.

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