The Arab economy during the oil boom

by Mohammad Shehabeddin Abdel-Jabbar

World demand for energy will have a positive impact on economic growth rates in the Arab region in 2005, just as the year before, when world demand for oil and OPEC production rose by 3.4 % and 7.1 %, respectively (over 2003, leading to real economic growth of 5 % in the region).
While the International Energy Agency (IEA) expects world demand for oil to rise by 2.2 % in 2005, OPEC production has risen by 3.9 % during the first half of the year compared with the same period in 2004. This means that average economic growth in the region could rise to record rates (almost 5.3 %) in 2005, once again topping that of the OECD countries, although the gap between growth rates of two groups of countries will be greater than the previous year.

It is also estimated that the economic growth rate for the Arab region will be more than double the average expected for the OECD in 2005.
Meanwhile, the indirect repercussions of strong global demand for oil on the Arab region are represented by an enhanced competitive position for exports of petrochemicals and chemical fertilizers, resulting from the price rise in naphtha and natural gas, connected to oil price movements. The price rise has led to increased profitability for Arab petrochemicals and chemical fertilizers, which depend on natural gas or one of its components.

The ongoing international rise in prices due to energy price increases has enhanced the cost advantage in the Arab petrochemical and chemical fertilizer sectors, compared to regions like North America, Europe and Asia.
We should also note the increase in liquidity in the Arab region’s markets due to the huge increase in oil revenues, since Arab investors continue to decline to invest outside the region (in the wake of September 11th); this has seen Arab stock markets see record growth and produced optimism and confidence.

The Arab Monetary Fund’s Arab stock market indicator generally rose from the beginning of 2005 through the third week ofJune by 124 %, while the Gulf Investment Institution’s indicator for the stock market for the Gulf countries (the GCC) rose by about 75 % over the same period. The economic impact of this optimism could last for several years.
The energy price rise has slowed the hydrocarbon-intensive production outside the region, which means a greater scope for expanding existing projects and new projects in the Arab world. However, the record energy price rises have given regional and particularly Gulf players the room to enhance their efforts and speed up the necessary planning to meet the production needs in oil and natural gas.

Available estimates indicate that planned investments in the Arab energy sector (oil, gas, petrochemicals and electricity generation) amount to at least $ 180 bn during 2005-2009, or $ 36 bn annually. This is based on expected regional and international growth rates and the rise in costs of establishing new projects following huge price rises for construction materials, goods and services.
Developing oil and gas production projects (estimated at $ 80 bn) will be self-financed by national and international oil companies. Of the remaining investment needs (estimated at $ 100 bn), to cover subsequent projects in the oil, gas, petrochemicals and electricity generation sectors, no more than $ 30 bn will come from capital contributions, based on a 70:30 ratio of loans to participation.

The huge amount of required commercial financing ($ 70 bn for 2005-2009) signals a promising future for regional bank financing, and opportunities for Arab and international financing institutions to play a role in covering these huge investment needs. We should note that Arab investment institutions, such as the Arab Petroleum Investments Corporation (Apicorp), occupied high rankings (out of 66 Arab and international institutions) regarding project financing for 2004 in the Middle East.
Due to considerations having to do with the Arab region’s status on the world energy map regarding the distribution of reserves, and the resulting comparative advantage enjoyed by Arab petrochemical and chemical fertilizer industries, as well as the strong growth in energy demand growth regionally and internationally, we can expect investment requirements will grow more quickly in the second decade of this century compared to its first decade.