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Gulf budgets seen coping with any big oil retreat http://today.reuters.com/news/articlenews.aspx?type=reutersEdge&storyID=2006-09-26T173827Z_01_L26101756_RTRUKOC_0_US-ENERGY-GULF-FINANCES.xml
Tue Sep 26, 2006
By Ghaida Ghantous -- Analysis
DUBAI (Reuters) - Saudi Arabia and other major Gulf oil producers would enjoy healthy finances this year even if prices plummet to $40 a barrel, but a further retreat from record highs may weigh on government spending growth next year.
A four-year, demand-driven rally had pushed oil from $20 to a peak of $78.40 in July -- filling the coffers of Gulf states, with the world's top exporter Saudi Arabia forecast to earn a record $203 billion in oil revenues for 2006.
Over the past two months, oil has tumbled to around $60, the steepest fall in over 15 years, and analysts say prices may drop to the mid-$50s before the fall is stemmed by cold weather or action by the Organization of the Petroleum Exporting Countries.
"There is nothing that is going to happen in the oil market that is going to hurt government finances in 2006," Brad Bourland, chief economist at Riyadh-based Samba Financial Group.
"But as government budget planners see prices off sharply while they are planning for the budget for 2007, I think the decline must affect their thinking and assumptions for next year in terms of spending growth," he added.
Bourland said Saudi Arabia could have a balanced budget for 2006 even with oil prices in the $30s. Thereafter, he said prices would need to recover by only around $10 a barrel per year to allow Riyadh to keep increasing its spending by about 20 percent annually.
Gulf states have plowed their petrodollars into industrial, infrastructure and tourism projects to spur economic growth, create jobs and diversify the economies of the region, which holds nearly half the world's proven oil reserves.
In addition to pumping money into U.S. Treasuries and banks, several Gulf states have announced ambitious plans to expand their crude oil production and refining capacity. Saudi Arabia plans to invest around $70 billion on its energy sector.
"IS THE PARTY OVER?"
Gulf countries adopted prudent spending policies after being hit hard by sagging oil prices in 1997 and 1998, but as they grew increasingly confident that the recent oil boom would last they gave the go-ahead to long-delayed investment projects.
"Four years of extremely strong prices have allowed Gulf Arab governments to build up some very large reserves. They are in a position to tolerate lower prices if need be without having their spending plans significantly disrupted," said Simon Williams, economist at HSBC Middle East.
"Even if prices were to drop below the comfort zone, I would not expect to see substantial cuts in spending although there may be a slowdown in spending growth," he said, adding that $40 a barrel for Brent would be "the end of the comfort zone".
The Institute of International Finance said in August that current account surpluses of the six Gulf Arab states were set to top $230 billion this year. It said oil prices of $68 a barrel for Brent in 2006 and $70 in 2007 should support surpluses of around 30 percent of GDP this year and next. Saudi Oil Minister Ali al-Naimi, who steers the policy of OPEC's largest producer, said last week that prices were reasonable and a Saudi central bank official said on Tuesday that oil prices at $60 a barrel are still "very healthy".
Randa Azar-Khoury, chief economist at National Bank of Kuwait, said prices would have to fall drastically before major Gulf producers start reconsidering investment projects. Looking ahead for Kuwait, she said, a price above $40 for its export crude would still accommodate expansionary government spending.
"With respect to oil revenues and strong government spending, I think we will be asking a fundamental question -- Is the party over? -- because oil prices have dropped so sharply," Bourland said. "But the party is not over. Oil prices will not drop to average $20 per barrel as they did for 20 years in the 1980s and 1990s."
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