Oil economies: the only way is up

The oil economies of the world are wallowing in windfall revenues from the best year for oil prices since 1981. This year oil revenues in Saudi Arabia will pass $85 billion, according to Saudi American Bank, while in Kuwait, the UAE, and Qatar this will also be a year to remember.

Some commentators believed that the war in Iraq would mark the top of the oil boom, and indeed prices did spike to $40 per barrel. But the predicted oil price crash has just not happened because of the continued security problems in Iraq and the delay to the restoration of Iraqi output.

In the interim period a combination of high production levels and a high oil price have sent oil revenues to a level not seen for almost a generation. And many analysts are now growing weary of trying to call a fall in oil prices. Higher oil price levels may persist well into 2004 and possibly beyond is the general view.

Does this mean that the Middle East is back to the oil boom days? The quick answer is 'yes'. But this is an affirmative that comes with qualifications.

It is rather different this time. For a start the rulers of the Middle East are a far better educated and more market savvy crowd than in the past. They are not about to rush out and pay middlemen to set up fat-margin construction deals.

Instead, we are seeing Government inspired programmes in countries like the UAE and Qatar with expansion going into business infrastructure development and money being ploughed back into the oil and gas sector. On the other hand, Saudi Arabia and Kuwait are seeing more of a traditional non-oil business upturn on the back of higher oil revenues.

However, in both Kuwait and Saudi Arabia the economic reformers are making some solid progress, and the results should become more public over the next year or so. Saudi Arabia will get its new capital markets, and Kuwait may well open up its northern oil fields to foreign investment.

Thus there is good reason to believe that the oil states will secure real long-term benefit from this oil boom with regard to diversification of their economies and capital investment. Certainly the citizens of these countries are enjoying an economic boom at a time when much of the industrialized world is struggling to recover from a recession.