Rising oil price will sustain Gulf

28 August 2009

Government budgets are back in the black, and this will enable them to adopt expansionary policies

When oil finally toppled from its peak of $147 a barrel in July last year, many analysts anticipated a crash in prices that would be devastating for the Gulf states.

During oil’s bull run, which started in 2003, the GCC governments were used to seeing the oil price move in one direction only. They saved huge surpluses and made headlines around the world as they reinvested their wealth in global assets. It was almost forgotten that the money was supposed to protect the Gulf states against future declines in oil prices.

The sudden collapse in the oil market, bringing prices down below $40 a barrel at the end of 2008, threatened to start eating into the savings made during the good times.

Coupled with slowing economies and struggling financial sectors, Gulf states worried that their expensive economic stimulus packages might not be sustainable through a protracted downturn. The prices of many assets bought by the their investment funds had also fallen in value because of the global economic meltdown.

However, oil has confounded expectations by rising steadily since March. This has put GCC government budgets back in the black, and will enable them to continue to adopt an expansionary stance over the next few years.

This will be a relief given that, outside the oil sector, the regional economy is still struggling to regain momentum. Real estate prices are collapsing, and activity in the construction market has dropped considerably. Banks remain reluctant to lend because of concerns about defaults.

For growth to resume, governments will probably need to provide another stimulus in 2010. High oil prices mean they can afford to do so for a second year in a row without fear of dipping into their reserves.

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