Business | Features
Oil revenues and development
Oil has hit an all time high of $64 per barrel and many insiders believe the upside is not yet over.
- Anwar Sher, Special to Gulf News
- Published: 00:00 August 11, 2005
Oil has hit an all time high of $64 per barrel and many insiders believe the upside is not yet over.
This is perhaps also the longest sustained price rise of oil in its history and the trend continues unabated.
Shortage of stocks in the US, higher growth worldwide, political concerns, all mesh into the scenario to create this amazing run in oil prices.
Arab oil-producing countries currently account for 32.2 per cent of world oil exports and they have plans over the next five years to raise their share of the oil export market to 38-40 per cent.
Opec accounts for 28 million barrels per day of production today, which is almost 3 million barrels more than the export quota of 25.5 million barrels per day a year ago.
This increased supply has still not whetted the appetite for oil as world growth continues to demand more energy.
While demand for oil may have slowed a shade in Europe and China, the United States and Japan have picked up the slack and the result has been a robust market.
Yet China's demand for oil is expected to grow at 7.1 per cent annually, off the earlier demand of 15.4 per cent in the previous year and 11 per cent in the year before.
Nevertheless there hasn't been a slackening of the demand side of the equation for countries like China, but merely a slowing down of the pace.
At 84.4 million barrels of oil per day, global demand is robust to say the least, accounting for global energy spend of $5.4 billion per day, of which Opec's share is about $1.76 billion per day.
This is of course counted off at the peak price of oil that we saw last week and indicates the huge impact oil has in world revenues and the amount of cash flow that it creates.
Indeed a great amount of the oil receipts are going back into the development spending of the oil producing countries as they ramp up their economies.
It is estimated, for instance, that the UAE alone would spend more than $95 billion over the next 10 years in building infrastructure and power to meet the needs of its growing economy.
Saudi Arabia is expected to spend more than $130 billion in the same manner.
The lesson to learn is that as the value of oil may well be going up a great amount of the cash coming in as oil revenues will be deployed back into the developmental arena for these countries.
In addition, the financial reserves of these countries do have to be deployed and, given the lack of depth in the emerging economies to absorb such cash flows, it is natural that the money is being reinvested into the developed economies of the OECD.
This does imply that the benefit of the current increase in oil prices while primarily benefiting the oil exporting countries, the global impact of redeployment of these financial assets does have a major impact on the world economy.
Interestingly in the past four odd years, more money than previously has also been going into the emerging economies, thus lifting the mood of development there.
For the poorer countries the high cost of energy remains a problem and this is where the pinch is being felt most.
For the developed world, especially the US, these price increases have been absorbed with relative ease even though it has hurt the man in the street, there has been little fear of resentment of the effect of higher oil prices.
What is even more surprising is that the Republican caucus of George W. Bush and friends had always boasted of their oil background as a major positive for them to understand global oil policy and not have the Americans held hostage to higher energy costs.
It would seem that this time around they have kept quiet and on the contrary passed a Bill allowing the major oil companies exploration in zones that were considered eco-protected.
We must end by considering that the world global annual expenditure on oil, not gas, is about $1,848 billion, of which $595 billion a year comes to the Arab oil producing countries.
These revenues have become the major chunk of the world economic system and the way they are redeployed will change the destiny of generations to come.
The writer is president of UAE-based Sher Consulting
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