Future tense as oil slides even further

The situation seems gloomy, critical and uncertain, not only for Opec members, but for all oil producing countries in general.

The international financial crisis is overshadowing tumbling oil prices. Stopping the rapid decline seems a difficult task as the fall in prices is beyond Opec's hands.

The impact of the crisis on the oil-producing nations, including the oil-rich Gulf region, is expected to begin as early as next year, economists believe.

They warn that any price below $40 (Dh147.12) per barrel would mean entering the "danger zone".

However, economists totally exclude the possibility of going back to the "unbelievable" levels of the late '80s and early '90s prices: nearly $10 per barrel.

Last Friday, the Organisation of Petroleum Exporting Countries (Opec) decided at an emergency meeting in Vienna to slash its official oil output quota by 1.5 million barrels a day (bpd) from November 1 to make the output of the cartel at 27.3 million bpd.

Another meeting was also scheduled in Oran, Algeria, on December 17. Opec produces 40 per cent of the world crude.

Dramatic collapse

The cut was announced in an attempt to support oil prices which "have witnessed a dramatic collapse - unprecedented in speed and magnitude", noted Opec.

Walid Khaddouri, consultant for the respected oil newsletter Middle East Economic Survey (MEES) believes cutting the production ceiling "was just a first step to be followed by many steps to be taken until the markets stabilise".

But Khaddouri considers stopping the price decline a difficult proposition since it is caused by factors "from outside Opec".

"The problem is that there was a sudden surge in oil prices in the past few months. Then, there was a sudden slump", Khaddouri added.

Earlier this year, in July, oil prices beat all previous records by reaching $147 per barrel. One of the reasons given by analysts for the surge was hedge fund speculations in oil prices.

However, prices started to slide later with the international financial crisis, the collapse of some giant financial companies and the decreasing demand for oil. Oil prices lost more than 50 per cent, to be traded in the past few days around $60 per barrel.

Yet, economists believe any price over $50 per barrel might still mean a surplus in the oil-rich Gulf countries' budgets.

A recent report by AFP estimated oil incomes' contributions to GCC countries' budgets at nearly 80 per cent.

Despite the decline in oil prices, prominent Kuwaiti economist Jasem Al Saddoun noted that barrel price was still above the price used to calculate budgets in the region.

"The budgets of the Gulf Cooperation Council (GCC) countries will continue to show a surplus this year," said Al Saddoun.

Subsequent decline

But the decline in demand and the subsequent lower oil prices will start to influence the budgets next year. "Then, oil revenues will be less, and the negative global growth will move to the economies of the region, and the other Eastern countries."

World's top oil producer and exporter, Saudi Arabia, along with the UAE, Kuwait and Qatar, account for more than half of OPEC's official production of 28.8 million bpd. Other GCC countries include Bahrain and Oman.

Economists, for the time being, say it is difficult to speculate what the near future holds.

"Until now," Al Saddoun, who runs "Al Shall" for economic studies and constancy, said, "we don't know what the next phase would look like. But I know for sure that oil prices will never go back to the mid eighties and late nineties levels when it reached $10 per barrel".

Oil prices will continue, Saddoun added, to witness an "ebb and flow", and to swing between $50 and $100 per barrel. The deterring factor in oil prices would be "the ability of the world's economy to recover from the current financial crisis."

Other economists in the Gulf region believe sliding below the line of $40 per barrel would mean "entering the danger zone", as Saudi economist Hussain Al Shubakshi put it.

While economists believe it is still premature to judge the impact of the decline in oil prices on the GCC investments abroad, they add low oil prices and the decline in oil revenues are expected to have a negative impact on financing the "giant" projects in real estates and industrial fields in the Gulf region.

"The markets in the Gulf region are emerging markets," said Al Shubakshi.

And the financial crisis, coupled with the oil prices decline, will "negatively affect the economic and industrial development plans in the Gulf region".