No stagnation in the GCC economies but oil revenues have probably peaked

The average oil price so far this year is down by nine per cent and Opec is pumping less oil. Therefore total actual oil revenues are running below the level of 2006.

However, GCC government spending has kept on rising, so the impact of lower oil revenues is more than offset. Hence, the International Monetary Fund estimates five per cent GDP growth for the economic bloc for 2007.

This is a therefore a slowdown, although it may feel like stagnation after some pretty amazing growth in the recent past. In 2005 average oil prices leaped by 35 per cent, and that produced an enormous injection of liquidity into the GCC countries.

Falling oil revenue

It is no coincidence that 2005 was also a year that local stock markets surged in value. But the total amount of cash from oil revenues in 2007 will almost certainly be significantly lower than in 2006, and this is causing some caution among business leaders in the Gulf as it may be the start of a downward trend.

There is reason to be concerned about the outlook. The US housing market has crashed and could well drag the world's biggest economy into a recession. There is already a slowdown. This is bad for global trade and that will reduce energy demand and send oil prices lower.

Of course, the possibility of an oil price spike due to a crisis in Iran, Venezuela, Nigeria or another oil producer is always possible. But this might not halt the downward trend in average oil prices and indeed could accelerate it by producing a global financial crisis.

So these are more sobering times for business in the Gulf. It may well be that governments have the luxury of thinking long term and can keep on spending from their recent windfall oil revenues. But for private companies that need to deliver a more immediate return to their shareholders things might look rather different.

Consolidation appropriate

For in a market where average oil prices are on a downtrend logic suggests that consolidation and not expansion is the most prudent business plan. And perhaps the willingness of governments to keep on spending should be taken as a helpful cushion in a market that has lost momentum this year.

Bowling ahead and expanding right at the top of the business cycle is a fairly common phenomenon observed in business life. Large corporations often seem unable to change direction after a boom and people also just make errors of judgment.

It was thus perhaps wrong for the Arab media to refer to stagnation in the context of business this year. But a note of caution and concern that the boom may have peaked is wholly appropriate. For in terms of oil revenues the boom is most probably already over and what else really matters in the GCC?