Not All Gulf Oil-Rich Countries Are Created Equal.
A recent study conducted by the IMF, shows that Saudi Arabia will need the oil price to stay above $49 a barrel to avoid a fiscal deficit. That compared to UAE’s break-even price of just $23 and Qatar’s $24.
Saudi Arabia is the Gulf region’s largest economy. However, a significant portion of its GDP is accounted for by government spending.
The most conspicuous government projects can be found in Dubai, where, in just a few years a city comprised of mostly a single trip of tarmac turned into one of the most glorious display of modern sky scrapers.
Crude oil has retreated from a historical high of $150 a barrel in the past month or so to a more modest $100 range. Suffice to say that Saudi Arabia needn’t worry about a fiscal deficit just yet. In fact, in the most recent OPEC meeting, member countries were vocally divided on what the medium term equilibrium price should be for oil. Surprisingly, Saudi Arabia opined in support of a lower crude price than other member countries.
One would think that OPEC controls the nozzle of the world’s crude supply and has unchallenged power to reduce production to bolster prices. However, the economics of oil is not quite so simple. While recent hikes in crude prices are an often-cited reason for inflation in the US, inflationary effects are much more amplified in the Persian Gulf. Take Saudi Arabia, for example. Its currency is pegged to the greenback for price stability of its main export. However, it stymies the power of the Saudi central bank to employ monetary policies to curtail inflation. While the Fed has been lowering interest rates aggressively to spur growth, Saudi Arabia has suffered from pretty ugly inflation, which erodes wealth and could potentially have severe social political consequences.
The revelation in the IMF study is that the internal as well as external politics of OPEC are really quite complex. And the divergent break-even crude price adds further complication to an already diverse region of the world.
Bo-yun Liu
September 25th, 2008 at 8:55 am
This is a very complex situation. Dubai is attempting to break free of it’s oil dependency, but I believe it is only a matter of time before they will need to introduce much higher taxes than currently exist.
The Dubai government is also investing huge amounts of capital in developments and companies out side of the UAE.
October 9th, 2008 at 3:32 pm
It seems to me a country with such a large percent of its nations resources government owned that countries government would have to be very different than Americas governemnt. It has to dole out money very wisely in a way to avoid superinflation but to keep its populous at a decent level.