Are we half-way through the third Great Oil Boom?

When the present Great Oil Boom began in 2000 it caught many governments unaware. For after almost two decades of dealing with budget deficits and low oil prices, hardly anyone thought the rising oil price would prove a lasting phenomenon.

Five years down the line and with oil prices up from less than $20-a-barrel to over $65 at the time of writing this article, virtually all the Middle Eastern governments have embarked on major infrastructure investment projects, usually with a private sector twist these days.

As with any boom, the first to spot it fair best. Hence Dubai is well out ahead in terms of projects actually under construction, and has many large schemes at or close to completion.

This is the right policy. In the 1973-4 and 1979-80 Great Oil Boom years a lot of money ended up being invested back in the Western countries. The interest on those investments has helped Oil States through the lean years but probably was not as beneficial as investment in their own economic infrastructure.

For it is no good waiting until the good times stop to start investment: though this the mistake that cautious governments often make, as once a boom is bust nobody is very interested in getting involved in new projects with the pay-back a long way off.

However, looking at the previous boom years, we can note a pattern. High oil price phases sparked off periods of expansion that outlasted the actual oil price boom for several years.

Thus it is reasonable to conclude that if the 2000-05 Great Oil Boom years ended suddenly tomorrow then the investment boom would roll on for a good deal longer, though it would gradually become harder and harder for business to turn a profit.

Could we therefore be half-way through a Great Oil Boom in the Middle East? This is really impossible to say, as the future of the oil price is one of the toughest calls in the financial world.

All that we can say is that the visible impact of very high oil prices are now becoming apparent in the industrialized economies, vis-à-vis slowing growth expectations, queues of cars at the pumps in some areas and talk about shifting to alternative sources. Should this slowdown turn into a recession, this would be enough to push oil prices down.

Then the 2000-05 Great Oil Boom would be over, and the period when virtually every business in the Middle East was doing very well would be also be over. For a downturn in the business cycle would be accompanied by the usual fall-out among those who over-borrowed and over-expanded in the boom, and a return to the survival of the fittest.

On the other hand, history shows that investment continues to roll-out long after oil prices fall back, and many experts believe that oil prices may have moved to a permanently higher level due to supply issues, so life would still go on but maybe not quite as before. Besides we have probably not seen the peak in oil prices just yet.