Middle East oil: back to the 1970s?

Goldman Sachs sent WTI oil prices a fresh all-time high of $57.60 at the end of last week after issuing a report suggesting that oil was heading for a $105 a barrel price spike, and a multi-year trading band of high oil prices.

Its Global Investment Research note also upped predictions for average oil prices in 2005 and 2006 to $50 and $55 respectively against previous forecasts of $41 and $40.

Analysts concluded that the market requires a 'multi-year trading band of oil prices high enough to meaningfully reduce energy consumption and recreate spare capacity only after which will lower energy prices return.'

They said the oil market presently looks very much like the 1970s. Then high oil energy prices plunged the world into deep recession which reduced energy demand while energy capacity was increased.

Meanwhile, the Middle East enjoyed its greatest ever economic boom with massive investment in physical infrastructure. This time observers note that the region is more sophisticated, and the demand is more for the creation of more modern services, trading and capital markets, although real estate is still a huge area for investment, plus of course oil and gas.

The countries that will do best are those that can capitalize on the oil price boom while investing back into their own infrastructure.

The UAE looks best placed with oil capacity set to rise from 2.25 to three million barrels per day next year, and Dubai in particular is undergoing a major construction boom with 16% of the world's crane's now swinging above its skies.

Construction of the 189-storey Burj Dubai, to be the world's tallest building at over 700-metres high, is symbolic of this fantastic boom. For Dubai is surely emerging as the fastest-growing city of the early 21st century.

Goldman Sachs is the world's biggest trader of energy derivatives and its analysis of the energy market, while firmly at the top of traders' estimates, is not to be taken lightly. This investment house often makes the toughest calls and gets them right, that is why its reputation is so high.

So for Middle East businesses planning expansion now is perhaps a time when the only danger is not doing enough. But managing expansion in a boom period is also an art in itself, as getting carried away is only too easy, and nobody should forget that for oil prices what goes up must eventually come down too.

For the Western world a major recession seems in prospect, and that will mean a stock market crash and real estate crisis like that seen in the 1970s; maintaining investments there during such a crisis would seem most unwise.