Business | Opinion
The impact of high oil prices on Gulf economies
Oil prices are the headlines in papers around the globe, from the United States to China. That, certainly, is not news. But what is news, is the impact these oil prices are going to have on Gulf economies if prices stay as high as they've been over the past year.
- By Leah Bower, Special to Gulf News
- Published: 23:37 June 30, 2008
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Oil prices are the headlines in papers around the globe, from the United States to China. That, certainly, is not news.
But what is news, or at least what should be news, is the impact these oil prices are going to have on Gulf economies if prices stay as high as they've been over the past year.
It is one of he most basic tenets of economics - prices increase too far and demand falls off.
Sure, there is going to be a limit on how much demand for oil will fall, considering planes need to fly, people need to drive to and from work and goods still need to be transported long distances.
But nonetheless, demand for oil will fall off as prices stay sky-high.
Already oil prices have jumped 48 per cent in the first half of 2008, compared to 57 per cent during all of 2007. And as of Monday, oil rose for the third day in a row, marking a hair short of $143 per barrel.
Sure, it is an economic toss-up. There is a fine line to be walked between supply and demand. Too much supply, prices fall and oil exporting countries make less money. Too little production, prices increase until demand falls and - you got it - so does the amount of money made from black gold.
The Organisation of Petroleum Exporting Countries (Opec) is reaping a windfall as oil prices continuously hit records month after month.
But eventually demand is going to have to fall off, especially as consumers feel the pinch of everything from pump prices to food costs increasing. Once that happens, Opec runs the risk of seeing the profits start to plummet despite the general assumption by investors that there isn't enough supply to meet demand.
It isn't just the potential for decreased oil income that could damage Gulf economies either.
Property sector
As oil prices begin to visibly impact not only the US economy, but red-hot growth areas like China and India, the potential for economic unrest to spread to the Gulf increases.
Investors who are driving Dubai's scorching property market come from the UK, Europe and the US, as well as from around the Gulf.
An economic slowdown half a world away has the potential to begin applying the brakes as investors retrench and look to dump their money into the most secure investments possible.
There is a good chance that there will also simply be less liquidity available, preventing overseas investors from snapping up new properties in Jeddah, Abu Dhabi and Doha.
It could even curtail what is available to invest in regional stock markets, pulling yet more money out of the Gulf. Even if that isn't the case, investors are parking their money in commodities like oil and gold, not regional property markets.
So, what should Opec be doing? Well, ideally it would be pumping a bit more oil to take a little steam off prices and keep demand steady.
But with the United States nagging the group continuously, it is difficult for it to do so without looking like it is bowing to the Americans - a stance unlikely to boost popularity at home. Iran and Venezuela especially drag their heels every time US President George Bush pushes Saudi Arabia to pump more oil.
And, as always, there is the question of just how much Opec really can increase production.
Khurais, a potentially massive undeveloped oil field in Saudi Arabia's eastern desert, is set to come online sometime next year and could potentially boost production in the kingdom by nearly 1.5 million barrels of oil per day.
But it isn't going to happen tomorrow - and we're already staring down the barrel at $200 prices by the end of the year.
The writer is a freelance journalist based in Alaska, USA.
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