An Indian summer of great optimism in the GCC

It might seem churlish to even talk of an end to the present boom in the oil producing countries at a time when oil prices look set to scale new peaks in the week ahead.

There is so much for investors to feel confident about: record oil revenues, economic reform, great new infrastructure and real estate projects, and sell-out IPOs.

Indeed, this is a period when what you see in front of your face looks to be good, almost unbelievably good. Of course, it is what you are not seeing that is far more important.

Growth rates in the oil consuming nations have begun to weaken this year. And as The Economist magazine points out this week a global housing investment bubble has become the largest financial bubble in the history of the world.

This respected journal argues that the bursting of the global housing bubble is likely to have a far wider impact on consumption and investment in the oil consumer countries than a stock market crash or any other kind of financial disaster. However, it would also not be too surprising if capital markets eventually decide to anticipate this huge problem with a collapse of their own.

October is the traditional month for stock market crashes, but only a fool would be so bold as to tip October 2005 as the likely date for such a rare and unpredictable event.

All the same, we can see forces building up in the global economy, quite apart from the US twin trade deficits and structural imbalances, which will certainly require accommodation and could well lead to a serious economic recession or outright slump.

In such a scenario the downturn in the oil price that followed the Asian Financial Crisis in 1998 would probably be re-visited. This lead to a domino effect in Gulf stock markets which crashed one after another, though the actual economies of these countries remained comparatively unscathed.

Now because oil prices are presently on an upward track to new record highs, many people will dismiss this comment as irrational pessimism. But with GCC stock markets hitting new highs by the day, the intelligent investor may well be getting nervous and considering cashing out profits, or may have done so a while ago.

It remains a moot point how a reversal of the oil price would hit local economies this time. Stock markets remain small in the Gulf, and their economic impact is not as great as Wall Street in the US, but the general impact on any sectors suffering from over-investment or over-borrowing would be strong.

Nevertheless, with oil supply growth running down in leading producers such as Russia, it is impossible not to be optimistic about the long term business potential of the Gulf countries.

To hold the lowest extraction cost reserves of the world's main energy source is bound to pay-off in the long-run, and recovery from any setback would probably be stronger than expected, as in 1999-2000.