When will another oil price boom restore GCC economic growth?
Posted on 21 October 2010 with 2 comments from readers
It is surely only a matter of time before the higher oil prices determined by Peak Oil theory return to give the Gulf Oil States another bout of serious economic growth. Indeed, cash flow from oil this year is set to bounce back from $570 billion in 2009 to around $720 billion.
Outside the UAE and Bahrain orders are already picking up. Saudi Arabia is placing multi-billion dollar construction contracts. Qatar has not slowed down much, and Majid Al Futtaim has just started building Doha’s largest shopping mall.
Tourism rebounds
Dubai and Bahrain were hit hardest by the global financial crisis as banking centres that were both also in the throes of a real estate boom. But tourism, trade and aviation have bounced back this year, particularly in Dubai.
The 25 per cent increase in passengers using Dubai airport last month over the same month a year ago is a testament to the continued expansion of aviation and tourism, and a significant green shoot of economic recovery.
Of course, it no coincidence that the oil price has also bounced back since the lows of December 2008 from $33 to over $80 a barrel. The big question then for future growth in the GCC economies is how durable this recovery proves.
You might as well ask how sustainable is the global economic recovery. Look East and the Asia ex-Japan is on a roll, although arguably this is an unsustainable inflationary bubble. Look West and economies are struggling to grow at all, and can surely not carry on borrowing ad infinitum.
It is a pretty weak economic foundation on which to build future economic hopes for the GCC. High oil prices are also hardly helping as a tax on recovery, and let us not forget that they tipped the world over into recession in mid-2008.
World recovery precarious
Surely for another sustainable period of rising oil prices the world has to rebalance its economies first, whether that means cutting public expenditure as in the UK or risking a bond market crash like the US or a more typical emerging market recession in China.
But this is a very tough call. The global economies could choose to keep higher oil prices as a part of an inflationary approach to recovery. This has been the US and Chinese approach so far.
If it is sustainable then the GCC economies will be among the first to recover from the Great Recession while the laggards will be developed nations with high debts. Within the GCC Dubai and Bahrain will lag behind for the same reason.
However, it would be fool hardy to risk everything on the US and China getting their macroeconomic policy right, so betting everything on GCC growth at this stage would be madness. Muddling forward at sub-normal growth rates is a more realistic assessment.
2 Comments posted by readers:
It is only a matter of time. And you won’t have to wait very long. China is almost like adding a whole new developed world to the oil demand. The amount of money that will flow into the Middle East oil exporters during the next 10 years will be mind boggling. A transfer of wealth unlike anything seen in human history.
Ed Note: So staying in Dubai makes sense then. What about investing here now?
Never having been to Dubai, or knowing anything about the political system or local rule of law, I can’t say whether investing in Dubai right now is a good idea or not. The question is, do you want to live in an area that vast amounts of money is bound to flow INTO, or would you want to live in an area that will be constantly drained of more and more capital, as the cost of keeping the economy functioning continually increases as a critical input necessary to keep it working (oil) gets more expensive? Everything else aside, the answer is to live and work where the big money will go, not where it will be coming from.
I personally believe that very few people can appreciate the magnitude of the coming peak oil problem. Having lived through the embargo of the 70’s, I can tell you that an oil shortage can quickly become a life threatening mess. Not because there won’t be enough oil to grow food, or to do other absolutely essential tasks that only liquid fuel can do, but because of what rapidly increasing oil prices will do to the entire economy of the developed world. Once fuel is rationed, the entire economy WILL be forced to shrink. That can’t be good!
Some very rich guy said that the time to buy is when blood is in the street. That is probably true in Dubai, UNLESS real estate developments continue to be built at a pace that greatly exceeds demand, in which case, profit will be minimal or nonexistent. Just because you can borrow money to build stuff, doesn’t mean that stuff is always a good investment. I just wish that I could buy some of the oil in the ground over there.
Other factors sometime determine where people want to live. I remember hearing a story of why a lot of national recruiters for large firms never bothered to go to the University of New Orleans. Too many graduates wanted to stay in New Orleans. They wanted to be by the family. They liked the City of New Orleans. Strangers actually talk to each other here. The bars never close. So to some people, money isn’t everything. And why die rich if you hated the place where you lived your life? Last time I checked, you can’t take it with you.
The UK is in for a long period of austerity and budget cutting. That doesn’t sound like much fun to me. Sure, talented, hard working people can thrive anywhere, but it is a lot easier where the economy is expanding, instead of shrinking. And with peak oil on the horizon, I wouldn’t want to live in a developed country that needs to import a large portion of its’ food. Under worse case peak oil conditions, that could become a BIG problem. It won’t be, in countries with trillions in their banks and oil & gas to export.
I’m just glad Canada has tar sands, a lot of good farmland to grow wheat, and an abundance of fresh water. If only they could change their climate.