Wednesday, December 3, 2008

Panic over low oil prices in greedy gulf states

Arab oil states and others in OPEC, together with speculators, deliberately and artificially inflated the price of oil. The soaring prices helped to sabotage the world economy, already vulnerable because of irresponsible credit policies. The states used the extra revenues to invest in unimaginable and unnecessary projects that helped nobody: Ski resorts in the desert and artificial islands. In Iran, they have been used to fund nuclear weapons development. Now the whole house of cards has come down on the heads of those who created it. Western home owners, gouged for oil, could not pay for their cheap mortgages. Industrialized countries could not afford the oil needed to run their industries. Oil prices headed back toward realistic levels. There is no money to pay for the artifical islands and atomic bombs.
But it seems a bit unrealistic to fear or hope for single digit oil prices. OPEC can always close the faucet after all. Without interference and immoral carteling practices, oil would probably fall to about $30 to $45 a barrel. If the price goes below $20 a barrel, it will be less than the cost of extraction and transport for countries like Russia, and therefore the supply would begin to dry up for legitimate reasons. Nobody will sell oil if they are really losing money.


Oil may fall to single digit, warns economist
Mahmood Rafique | Arab News  

MANAMA: The steep fall in oil prices due to the ongoing economic crisis could result in drastically low oil prices ranging between $15-$20 per barrel or even a single-digit per barrel.

The worst-case scenario will remind us of the situation of the 1990s Asian crisis, a senior economist warned yesterday. Simon Williams, chief economist, Gulf markets at HSBC, in a briefing titled "Shelter from the Storm," held yesterday at the Ritz-Carlton, Bahrain, said oil was the bedrock of the regional economies.

"The Gulf is still digesting the oil price shock as the shift to a new oil price equilibrium has fundamentally changed the Gulf as an economic story. Here everything is directly or indirectly linked to the hydrocarbon industry, and if falling oil prices touched its lowest then everything will be at a grinding halt.

"The GCC as a region has immense hydrocarbon resources heavily dependent on oil income which constitutes half of the gross domestic product of these six nations," Williams added. The economist, who was joined by David Bloom, global head of foreign exchange strategy, HSBC, during a joint presentation on Global Markets Outlook '09, said the ongoing economic turmoil had already hit hard GCC markets which lost about 50-60 percent of its total value in the last 10 months.

"The slowdown with low oil prices seems an end to the remarkable boom of six years with the current account surplus rising to $1.2 trillion. This region has never experienced such a quantum shift in the past which we've seen in the past few years as a trillion-dollar GCC economy having trebled in size in six years.

"The per capita income is in excess of the OECD (Organization for Economic Cooperation and Development) and real growth running well ahead of medium trends. Public finances and the external accounts are extraordinarily strong as no central government deficits have been recorded anywhere in the region over the past six year.

"The cumulative current account surplus of $1.2 trillion over 2002-08 and current risk are currently negligible. But there's a very scary picture ahead with the slowdown of the GCC economies guaranteeing the expected 2-4 percent GDP growth forecast for next year where the US and UK face negative growth which seems indigestible to the most of the economies in the region. In a nutshell, falling oil prices will definitely create volatility and uncertainty in the region.

"Some of the markets lost three-fifths of their value in less than three months while Dubai financial market lost about 80 percent during this volatility period. The year 2010, as it shows by all indicators, is likely to be the worst in the history of the Gulf region."

Williams said that oil and liquidity were the main issues in the Gulf. "Oil prices ranging between $50-to-$70 per barrel have created anxiety among GCC governments but this is going to be worse, like that of $30 per barrel which will definitely put a brake on ongoing development across the region. There is no problem with liquidity but banks are hoarding cash due to existing mistrust and anxiety in the market. This situation is manageable but the bad story is that this region has missed a self-fund opportunity," he maintained.

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