Boiling oil

The inexorable rise of oil prices to stratospheric highs has brought a collective cheer to producing countries, more so to the producers in the Gulf. That prices could break free from gravity with such vehemence was something unthinkable even a few months back. And the results are there to see. Most of the oil majors in the region, who had budgeted for oil at around $18-$24 for this financial year, have seen massive surpluses – in short a ‘problem of plenty’. And with no likelihood of oil climbing down from its present $54 threshold the problem of plenty is going to stay for some time, particularly with the winter demand in the third quarter likely to push prices further into the $60-plus region.
Sounds too good to be true for the Gulf producers, who only till six years ago were groping in the dark to escape the double whammy of a low oil price of $9 and galloping fiscal deficits brought on by the cradle-to-grave welfare schemes in much of the region. It was with this backdrop that Saudi Crown Prince Abdullah then famously said: “The good old days of high oil prices are over and will never return.” That was one of the reasons that brought in fiscal tightening and disciple to many of the regional producers used to profligate public spending. Also, it brought to light the urgent need for more reforms, transparency and steps to move the economy from the vagaries of oil prices, over which most of the time the producers of the region had not much control. Though Opec tried to bring in a band to control prices over the commodity it was the traders and hedge funds operating out of London and New York who determined the prices. And it is now more true than ever.
But the flip side to this sweet story for the Gulf Cooperation Council countries could be something bitter if one were to go by experience. Volatile prices could impact government revenues and could prove to be big challenge to their fond hopes of putting in place a monetary union in place by 2010. Sharp swings in prices could torpedo efforts at reaching an economic-convergence regime and also efforts to police fiscal discipline. And since the countries are yet to find convergence on the issue of fiscal deficit one can only imagine what a prolonged volatility in oil prices can bring about.

This is an editorial published in Oman Tribune