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Oil slide could hit infrastructure projects
Oil prices, which are flirting with the psychological barrier of $50 a barrel after recovering from a three-and-a-half-year low of $48.25 on Thursday.
- By Saifur RahmanBusiness Editor
- Published: 23:30 November 21, 2008
Dubai: Oil prices, which are flirting with the psychological barrier of $50 a barrel after recovering from a three-and-a-half-year low of $48.25 on Thursday - or nearly $100 down from the historic high of $147 a barrel in July, remain a double-edged sword for the Gulf countries.
US light crude for January delivery rose 96 cents to $50.38 a barrel at 1200 GMT yesterday, its first increase after five straight sessions of losses. London Brent crude gained $1.40 cents to $49.48 a barrel.
However, the lower oil price could halt a number of infrastructure projects in the Gulf. Dubai's Roads and Transport Authority is investing Dh100 billion in projects including the Dubai Metro. The government agencies will have to diversify their funding sources, analysts say, including increasing fees and charges.
"Oil is coming down. Oil is the bread and butter of Middle Eastern countries. If the incomes from oil become much less, it will affect the economies. It's our main worry," Dr Jasem Al Mannai, head of the Arab Monetary Fund, said at a banking conference in Frankfurt, according to Bloomberg.
"After this euphoria, governments got excited and spent more money. It's very difficult now.''
The steep decline in oil prices means lower windfall gains and lower foreign exchange reserves that could eventually translate into lower spending on infrastructure projects in the coming months. This is tantamount to rubbing salt in the wounds, especially when it comes amid a tight credit situation.
However, a $50 per barrel price band for oil could be good news for consumers if the retail prices of gasoline products are adjusted downwards.
Gasoline prices at the UAE's retail petrol pumps have remained the same since hurricane Katrina pushed oil prices above $70 per barrel in 2006. The price of diesel, pushed up by Dubai's retailers, has been adjusted downwards in phases.
According to the International Monetary Fund (IMF), the breakeven oil price for 2008 fiscal accounts (i.e., the price at which a country would achieve a fiscal balance) for the UAE is $23 a barrel -the lowest in the GCC and much lower than the average of $57. This demonstrates that most oil exporters, including the UAE can easily absorb lower world oil prices.
According to the IMF, the UAE's oil production in 2008-09 is to stabilise at 2.8 million barrels a day. At the rate of $50 per barrel, oil could fetch $140 million revenue per day or $51.1 billion per year in 2008-09.
However, at the peak of $147 per barrel, the UAE could have had solid oil revenues of $411.6 million per day or $150.23 billion.
As per the IMF data, the UAE government's fiscal balance in 2008 is estimated to touch 34.6 per cent of GDP, which in 2009, would decline to 30 per cent.
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