Standby for a new type of oil boom

Are the Oil states of the Middle East now on the brink of another old fashioned oil boom? Is this a re-run of the mid-1970s, and early 80s? Let's examine the facts.

Previous oil boom periods in the Middle East were characterized by political instability that sent oil prices spiraling. There was the oil embargo that followed the Arab-Israeli war in 1973, and the disruption of supplies after the Iranian Revolution in 1979 and during the Iran-Iraq War.

These episodes were terrible human tragedies resulting in a large scale loss of life. But their impact on oil revenues and the economic development in the GCC states was also very significant. Is history now about to repeat itself?

The contrary argument is to look back to the Gulf War of 1991 and note that the oil price spike at that time was short lived, and had nothing like the same economic impact.

However, perhaps conditions are different today. Even before the recent Israeli military incursion in to Palestine, Opec had effectively reasserted its control of oil supplies. So maybe the world was already heading for a period of higher oil prices in any case. Now we have a dangerously uncertain political situation that is pushing prices still higher.

Moreover, today's higher oil prices come at a time when the pressure for economic reform, globalization and foreign investment has never been higher in the GCC. Saudi Arabia has licensed foreign investment projects worth $11.2bn in the past two years, Dubai allows foreigners to own property, and Bahrain has a one-stop-shop for investors. This list goes on and on.

Around the corner are economic reforms ranging from the capital markets to the liberalization of telecoms and the raising of water and electricity tariffs. And this against the background of World Trade Organization membership, a customs union in 2003 and common currency in 2005.

Perhaps the important point to appreciate is that higher oil revenues will be used to create a diversified, modern economy in the Gulf States and not just to pay for consumption. And it is this application of the economic multiplier effect that gives room for considerable optimism about the economic outlook for the region.