Oil Boils, Middle East Booms

Iraq and regional security concerns may dominate the international agenda, but the local focus is resolutely on the current economic boom. Compare the lacklustre performance of the world's major stock markets with the continuing surge in regional equities. The top three performing stock markets in the world year to date? Saudi Arabia, Egypt and Qatar, all posting close to 40% gains.

Current oil prices are underpinning the boom. Supply concerns and strong global demand have pushed oil prices past twenty year highs. The Gulf is now close to producing oil at full capacity. In our Middle East Quarterly, we explain why we expect oil prices to stay high and volatile. Like so much else in the global economy, China has had an important bearing. It surpassed Japan in 2003 to become the second highest importer of crude oil after the US. Looking ahead, Asian oil demand, particularly from China and India, is likely to continue to surprise on the upside.

Expansionary budgets will also support growth as the scene is set for another spending spree across the region. Twenty-year high prices and record production are likely to push the region's oil revenues (measured in current US dollar terms) even higher than levels recorded in the oil boom of 1981. Inside our Report we estimate that the combined net oil exports of the Gulf Co Operation Council (GCC) are on course to exceed USD 180bn in 2004, a jump of USD 35bn from 2003.

One likely beneficiary of high oil prices, and the risk premium now attached to Gulf crude, is Libya. Geographically closer to the European and American markets, Libya looks poised to reap the benefits of an end to its international diplomatic isolation. To many Libya is a 'sleeping oil giant'. Despite high reserves, oil production has declined due to a lack of maintenance and re-investment. Sustained capacity stood at 3.3 million barrels per day (mbpd) in the 1970s. Today capacity is less than half this level. The Middle East Quarterly examines Libya's undoubted potential and the considerable opportunities, but also potential obstacles, for foreign investors.

But oil is not the only story in the Middle East. Even the region's non oil producers are enjoying an economic recovery. Jordan is likely to post growth of at least 6% this year, its highest level since 1995. Lebanon and Egypt are on track for their best economic performance for more than five years. Embracing further reform will be key for making such growth levels sustainable. In Egypt's case a new government has raised hopes that change may at last be coming. Our Report discusses the outlook for reform in the Levant.

Nonetheless this is not a time for complacency. The region still faces long term challenges, in particular in terms of job creation and economic diversification. But the current boom and windfall oil revenues offer an opportunity to reform from a position of strength. Embracing further reform will be key for making current growth levels sustainable.

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