Page 235 - Aamir Rehman - Dubai & Co Global Strategies for Doing Business in the Gulf States-McGraw-Hill (2007)

Capable Capital: The GCC as a Source of Capital 217

surpluses have been achieved: by 1980, Saudi oil revenues grew to
25 times the 1973 figure (from $4.3 billion to $101.8 billion), giving
the government a huge pool of capital to invest in economic
transformation and modernization. 8
Governments’ enormous surpluses are, however, at the mercy of
global energy markets. There have been periods, like much of the
1990s, in which deficits resulted because oil income was not sufficient
to meet governments’ spending. Local planners are, of course, aware
of this phenomenon and therefore try to craft their budgets to cover
basic government services based on conservative estimates of oil
prices. Saudi officials, for example, have historically planned their
budget based on a $25 per barrel oil price—less than half the current
9
market rate. When the price is above the planned level—which varies
from state to state and year to year—excess capital can be invested
in the types of infrastructure projects now common in the GCC coun-
tries. Basic government services like public health care, police depart-
ments, the water supply, and defense need to be planned in such a
way that they can break even if oil revenue is at the planned level.

PREPARING FOR THE MOMENT
OF TRUTH

Gulf governments face a stark challenge in the years ahead as they
prepare for what could be called the “Moment of Truth.” Demand
for government services is growing steadily in all Gulf countries as
populations increase. Recent prosperity has also prompted govern-
ments to launch new programs and services (for example, subsi-
dized investment funds for small businesses started by locals) that
would be difficult to cut in the future now that expectations have
been set. Oil prices, however, are highly volatile and are expected
by many to come down from the $60-per-barrel level to a steady
state between $40 and $50 in the medium-term future. Budgets—
excluding large-scale capital projects—need to grow steadily while
oil revenue does not grow in the same fashion. Figure 8.2 illustrates
the challenge.
While oil prices cannot be predicted with certainty, the US
Energy Information Administration (EIA) and industry analysts
expect prices to fall from the 2005–2007 level of over $60 per barrel
to a level between $40 and $50 per barrel for the foreseeable future.