There were important political events in the Middle East in 2004, but the big story was, and will continue to be, the economy. The cause was a combination of surging oil prices, which meant the OPEC basket of crudes averaged about $35 a barrel, and the highest demand for OPEC oil since 1979. Middle East governments are solvent and the private sector is liquid. Buoyant confidence produced a capital investment boom. MEED estimates that $300,000 million worth of new projects are being implemented in the Gulf region alone.

The outlook for 2005 and beyond is positive. MEED forecasts world oil demand will return to its long-term growth pattern and that non-OPEC supply will surge in 2005 (see Cover Story). OPEC will have to trim production, probably to the 26 million-barrel-a-day (b/d) allocation agreed for August 2004. The bulk of the cutback will come from Saudi Arabia, but this will be a small price to pay to keep the basket price at or above $30 a barrel. If OPEC production discipline is maintained, oil prices will stay at that level or higher for the rest of the decade.

This is enough to finance the bulk of higher government spending needed for infrastructure investment and to meet the needs of the Middle East's expanding population. MEED forecasts that the total population of the GCC, for example, will rise to about 40 million people by 2010 compared with 34 million now.

Economics feeding political change

So for the first time in a generation, Middle East governments will not be under financial pressure. This is great news. The fear is that there will be an easing in the pressure for economic and political reform. I believe this concern is misplaced.

A new generation of leaders taking the reins of government and business throughout the region will recall the bitter economic harvest produced by past errors. They know that getting a decent return from long-term investment requires proper planning before, and careful management after, any project is initiated. Finance ministers are building reserves, installing permanent cost-control systems and identifying fresh sources of revenue, including new taxes. That is why I believe the Middle East boom of 2003 and 2004 has laid the foundations for solid, long-term development.

GCC unity

But there are issues. The first is get-rich-quick speculative behaviour in capital and property markets. Governments should intervene early and vigorously to prevent abuse and contain irrational exuberance in both sectors.

The second is the performance of regional institutions. It was disappointing that the GCC summit at the end of December was missed by Saudi Arabia's Crown Prince Abdullah, apparently in protest at Bahrain's decision to sign a free trade agreement with the US. The differences among Gulf countries are far fewer than the unifying factors. The GCC could become the Middle East's most important regional grouping. More should be done to make it stronger.

The third issue is wreckers from Osama bin Laden to pro-Israel fanatics in US congress aiming to reverse the rising tide of prosperity and spread of good governance in the Arab and Islamic world. So expect mischief-making in 2005. But do not be disheartened by it.

I hope that stability and peace will at last come to Iraq, but fear the disorder caused by wrong-headed US policies will continue. Palestine should be at the top of Washington's agenda, b