Page last updated at 14:41 GMT, Friday, 7 August 2009 15:41 UK

Middle East feels oil price pinch

By Ben Thompson
Middle East Business Report, BBC World

Oil rig in Bahrain
The lower price of oil is having a big impact on the Middle East

A billion dollars a day - that's how much Saudi Arabia was making when oil prices were high.

Now it's earning just $700m (£432m).

It might seem like a marginal difference, but for the oil exporting nations of the Middle East, those falling revenues are hitting hard.

As demand for oil wanes, in the wake of the global recession, prices have more than halved. And whilst that's good news for consumers, it's not good news for producers.

Spending cuts

"If oil prices fall further, concerns over public spending will surface again," says analyst Mohammed Ali Yasin, chief executive of Shuaa Securities in Abu Dhabi.

"Governments in the region get between 75% and 95% of their income from oil. So any change in price has a big impact."

The BBC is Taking the Pulse of the Global Economy, looking at a range of subjects this summer
Consumer behaviour - how have lifestyles changed over the year
Food prices - which remain a concern particularly in many developing economies
Highly volatile energy prices - which have been a major issue in the past year
The plight of migrant workers - as the global recession takes hold in many economies
Housing markets - which have turned from boom to bust in many countries
Rising unemployment levels - as firms cut back because of falling orders

But for a region that's used to record oil prices and the record revenues they bring, being forced to cut public spending is an unfamiliar concept.

So much so, many have been forced to dip into their cash reserves to fund big infrastructure projects like motorways, airports and public transport systems.

And whilst those reserves will help cushion the current slide in prices, a prolonged downturn could mean those reserves start to run low.

"Saudi Arabia and Kuwait are the most vulnerable to fluctuations in the oil price," says Farouk Soussa, at Standard and Poor's in Dubai.

"They derive almost 90% of their national income from oil exports.

"But at the same time, they are also the two countries with the biggest cash reserves. That could see them through the worst of the storm.

"The real problem will be in countries like Oman and Bahrain. They could suffer the most because they have smaller cash reserves and less oil wealth."

Wider implications

Yet those cash reserves could now become more important than ever.

Just six years ago, Gulf countries could sell oil at $20 a barrel and still balance their budgets.

Everyone now recognises that by diversifying, they're better prepared to deal with oil price volatility
Imad Al Jamal, UAE Contractors Association

But with today's increased public spending, ambitious construction projects and heavy infrastructure development, they now need to sell oil at around $50 a barrel. Even at that level, most will just break even.

"Oil prices and government spending go hand in hand," says Imad Al Jamal, chairman of the UAE Contractors Association.

"That means some projects are being put on hold as the price of oil falls and funds run out."

"Those nearing completion will still be finished, but many new projects are likely to be delayed or scrapped altogether."

And that could have implications for the wider economy too.

'Turbulent year'

"What people need to understand is that in the Middle East economic activity is directly linked to government spending," says Mr Soussa.

"Governments are the biggest employers and biggest spenders. When they're earning more, they're spending more.

Dubai skyline
Dubai has led the moves to diversify away from oil

"There has now been some de-linkage between oil prices and economic growth, as countries try to diversify, but at the end of the day, oil revenues are what drive the economies of the region."

And that means the price of oil is being watched more closely than ever.

In a year that's seen prices soar as high as $150 a barrel and as low as $40, that volatility has hit both consumers and producers.

"It's been a turbulent year," says John Cross, an oil trader at Daman Quattro on the Dubai Mercantile Exchange.

"But now the general feeling is that prices won't rise again until there's some solid evidence of an economic recovery.

"It's no longer an issue of how high prices can go, instead it's about how low they can go."

And it's that concern that has reignited calls for Gulf economies to speed up their diversification.

Economic diversification

Countries across the region are planning for a future after oil, but progress has been slow.

From tourism to financial services, real estate to renewable energy - governments are desperately trying to reduce their reliance on oil revenues, and find alternative sources of income.

"Governments are balancing their budgets for the years ahead," says Mr Ali Yasin.

Oil accounts for more than 90% of Saudi Arabia's exports, and nearly 75% of the government's revenues
The Middle East controls more than 60% of the world's oil reserves and 40% of supplies
Oil exporting nations could face a 53% fall in revenues this year as oil prices remain low

"So if oil prices do continue to fall, they'll either spend less or find other ways of making the money.

"Dubai for example is supplementing its income with tourism, banking and even simple things like road tolls.

"Everyone now recognises that by diversifying, they're better prepared to deal with oil price volatility."

But just as the rest of the world relies on Middle Eastern oil, Middle Eastern governments rely on its income.

Consumers are slowly learning to wean themselves off oil. Now could be the time for producers to do the same.

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