Rising spending means a high oil price is more important than ever
With the oil price about $115 a barrel, Middle East oil exporters look like they are sitting pretty, even if there are growing fears that Europe and the US are set to fall into recession.
Risks are increasing for them too, though. Forecasting oil prices is never easy, but the general view now is that the price is about to drop to under $100, maybe even further, according to pessimistic analysts.
Only a few years ago, oil at $100, or even $80, was enough to fulfil all the regional oil exporters’ spending commitments and leave enough to put some aside for the future. Those days are gone. The slowdown in regional economies in 2008-09, coupled with the popular protests against governments in the region, has led to a massive increase in spending in an attempt to restore the status quo.
Qatar, Saudi Arabia, the UAE and Bahrain have all announced huge pay rises for public sector workers. Saudi Arabia has gone further, introducing employment benefit. Massive investments in infrastructure are also planned across the region.
This has led to a dramatic increase in how much the oil price needs to be to make sure budgets balance. For Saudi Arabia, that price has risen by about $30 in just three years. For the UAE, it is up by about $60.
Those countries are now in dangerous territories, exacerbated by the fact oil may fall to below breakeven prices, forcing them into a period of deficit spending. The longer oil remains below $90, the more likely it is that spending will be rolled back, with the axe expected to fall largely on infrastructure spending.
Even without a drop in the oil price, spending has been accelerating so fast that breakeven oil prices are getting higher and higher, exposing the region even more to oil price shocks. In these circumstances, infrastructure spending to diversify economies away from oil and make them more efficient is more important than ever.