The Second Oil Boom: To Avoid Replicating the First Experience
Samih Massoud Al-Hayat - 18/02/07//
Improving oil prices over the past years reflected positively on the combined oil revenues of Arab oil-exporting States, which, according to estimates, have risen by 39% over the past four years to reach $280 billion in 2005, and $360 billion in 2006.
Rising oil revenues, in turn, led to a record level rise in the current account surplus in the balance of payment from these countries that reached $203 billion, and an overall improvement of these countries' State budgets for the third consecutive year, leading to an overall surplus reaching some $100 billion in 2005.
This comes as the International Monetary Fund (IMF) forecasts a double figure of such surpluses by 2006, despite increases in public spending by Gulf oil countries that have continued at significantly high levels since the beginning of this decade, along with these countries' continued adoption of expansionist policies in reversal of their policies during the second half of the past century.
This suggests that the main challenge facing these countries will be maintaining control over public spending, since substantial and consistent increases in financial revenues lead to pressure on governments for more spending.
It is worth noting that certain Gulf oil States, especially the GCC member States have learned valuable lessons from the first oil boom and are now exerting great efforts to control and improve the management of public spending, and direct oil revenues into three basic spending venues.
First, to pay back domestic and external debts incurred during years of lower oil prices and to build official external reserves, which had reached $70 billion by 2005.
Second, to invest in qualitatively diverse investment venues in Asia, Europe, and the US, with particular emphasis on acquiring assets in the form of real estate property, companies and industrial facilities. The latest example of this can be seen in the acquisition of the UK-based Huntsman Petrochemicals by Saudi Arabia's Sabic that opted for the move, instead of settling for depositing its funds in banks or buying US Treasury bonds, in line with a predominant trend seen during the first oil boom.
Third, to generously spend on financing numerous projects, such as those being frequently announced in different production, services, and infrastructure fields, and which aim to meet the immediate and future economic needs and guarantee that GCC countries would be able to maintain acceptable rates of economic and social development growth, and create new employment opportunities for citizens in the face of a growing unemployment problem.
In this context, estimates suggest that Saudi Arabia is expected to invest nearly $267 billion in 419 developmental projects in five main sectors, namely: construction, petrochemicals, oil and gas, water and energy, and industry by the year 2012.
In the same vein, GCC countries seem poised to set forth an ambitious plan to develop and modernize their education and training sector, due to the significance of its impact on these countries' economical and social foundations.
Therefore, GCC countries are expected to invest what is estimated to reach $28 billion to improve all stages of the educational process and achieve compatibility between graduates' skills and the requirements of the job market.
A report issued by the end of last year by the IMF lauded the economic policies by GCC countries to invest in oil as proceeding in the right direction, pointing out that direct foreign investments in GCC Sates have been consistently increasing, and are expected to reach nearly $700 billion over the next five years in the field of oil and gas, basic infrastructure, and real estate.
Despite the positive aspects of the second oil boom, it must be noted, however, that numerous challenges, having deep historical roots and significant manifestations throughout the past years, and which have not been fully addressed, face Gulf economies.
These challenges include, a limited, non-diversified productivity base, the dominance of the oil sector, the sizable role of government spending, the limited contribution of the private sector in economic activities, the compositional population imbalances, and the numerous economic, social and political challenges posed by the expatriate work force.
The impact of the limited productivity base and dominance of the oil sector on GCC States economy could be confirmed by examining the non-oil based budgets of GCC countries, where surpluses turn into deficits due to the relatively low contributions of the traditional sources of revenues, placing economic growth in its different aspects at the mercy of the fluctuations in oil prices in the international markets.
Another challenge currently facing GCC economies lies in the skyrocketing prices of property and land allocated for residential and commercial activities, as well as the increasing value of rent, which, in Dubai for example, have risen by 100% in the past two years.
This is in addition to the major fallback seen by the GCC financial markets that incurred nearly $422 billion in losses in 2006, according to Al-Hayat (1/1/2007), exceeding oil revenues generated by these countries in the same year.
Therefore, in their current situation, the GCC countries have no other option but to continue implementing economic reform measures adopted years ago, without any rest on the account of the current oil boom, in contrast to these countries' decision to roll back some of these measures during times of high oil prices, and accelerate them during times of lower oil prices.
Generally, these structural reforms have aimed in the past years to redefine and restructure GCC economies to decrease the dominance of the oil sector and diversify revenue sources, maintain these countries' drive to control and rationalize public spending and impose fees on government services based on the actual economic cost of these services, and cut down direct and indirect government subsidization to public projects.
Reforms also aimed at increasing and supporting the role of the private sector in the GCC countries and accelerating the privatization of public economic projects, since the private sector is more capable of making the right investment decisions, managing these projects and maintaining their profitability compared to the public sector.
Therefore, the ability of the private sector to adapt to the realities of the second oil boom is a key objective, and calls for the development of this sector's technical and administrative capabilities, and encourages the merging of private local companies in order to boost their competitiveness and enable them to compete and penetrate the international markets.
* Mr. Masoud is an economic Expert with the Canadian Center for Middle East Studies
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