RIYADH, 6 April 2003 — Gulf Arab states expect positive economic growth in 2003 with soaring fuel prices and increased output, but fear the war on Iraq will leave negative long-term effects, economists said yesterday.
Saudi Arabia, the United Arab Emirates (UAE), Kuwait and Qatar are currently producing 14.770 million barrels per day (bpd), more than two million barrels above their OPEC quotas of 12.702 bpd decided in January. Their production is about three million barrels higher than their old output quotas of 11.924 million bpd upon which the four countries based their 2003 budgets.
Oman, which is not an OPEC member, is producing about 763,000 barrels a day. The five countries, along with Bahrain, make up the Gulf Cooperation Council (GCC). All Gulf Arab states, which draw three-quarters of their revenues from oil, have calculated their income on the basis of a price for oil slightly less than $20 a barrel.
“Oil prices finished the first three months of the year at an average of $31 a barrel. For the first half of 2003, prices are expected to stay around $25,” Abdulwahab Abu-Dahesh, senior economist of Riyad Bank, said.
“The prices are certainly excellent, much higher than budgeted prices. Oil revenues will be greatly higher than projections,” Abu-Dahesh said. He predicted that average oil prices for the whole of 2003 will be above $22 a barrel, which is four to five dollars higher than budget calculations.
Oil prices have fluctuated since the US-British campaign on Iraq began on March 20, in line with the progress of the war. Prices, which rose sharply before the start of the war, dropped to around $25 a barrel before rising again with expectations of a prolonged combat.
“It is very clear that oil revenues will be much higher than projections. This is coupled with very high liquidity levels, no capital flight and very low interest rates,” Abu-Dahesh added. “It is apparent the war has so far not negatively affected economic activities, except for insurance and shipping. All these are ingredients for a good economic outlook,” he said.
Saudi Arabia is projecting a $10.4 billion budget deficit for 2003, but a number of economic reports have already predicted up to $13 billion in surplus. But other economists insist that economic performance may not be very positive as oil prices may drop sharply to around $18 a barrel after the war and if GCC states were asked to participate in the reconstruction.
“I think that a large portion of extra oil revenues will be allocated in a special account,” in a prelude to participation in the war costs and reconstruction, Omar Bagour of King Abdul Aziz University said. He said that Iraq’s oil production capacity can reach between four and five million barrels a day within five years if some $4-6 billion are invested in the Iraqi oil sector. “This will add enormous pressure on oil prices,” Bagour said.
“It is feared that oil prices may drop sharply after the war. But this depends on OPEC’s ability to cut production. OPEC has to be very flexible here,” Abu-Dahesh said.
Economist Ihsan Bu-Hulaiga estimated last month that Gulf economies stand to suffer around $68 billion in direct losses during the remainder of the current year because of the war on Iraq. But he also expected the GCC states to earn some $47 billion in excess oil revenues because of high prices and output.