Arab oil wealth hit by inflation, weak dollar

Gulf News ^ | Nov 19, 2003 | Nadim Kawach

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Arab states have enjoyed a sharp increase in their oil income over the past three years and are expected to bask under another financial windfall this year. In nominal terms, 'enjoy' and 'windfall' are the right words but in real money, they are highly exaggerated.

The surge in Arab income caused by strong crude prices during that period is only nominal as real revenues are less than half their level in current prices.

"With the sharp growth in their population and development needs over the past 30 years, you can say Arab states are not in an envious situation," said an Arab oil expert.

Figures by the Organisation of Arab Petroleum Exporting Countries (Oapec) showed crude export earnings of its 11 members shot up from $76.8 billion in 1998 to $109.7 billion in 1999 and hit an 18-year high of $175.4 billion in 2000.

The income was not in real terms as it was calculated on nominal prices of $12.30, $17.50 and $27.60 respectively. At the 1973 dollar price, they ranged only between $4-$8.

Based on 1973 prices, Oapec's real income did not exceed $30 billion in 1998, and around $45 billion and $70 billion in 1999 and 2000 respectively, said Oapec.

The 1973 real price took into consideration the weakening value of the dollar, inflation rates in the world and in member states, and the population growth.

In 2001, nominal revenues of the Kuwaiti-based Oapec were estimated at around $148.8 billion but in real terms they did not exceed $55 billion. Their nominal value of around $131.5 billion last year was estimated at $48 billion in real terms.

Oapec's oil exports are priced in the dollar, to which the currencies of most member states are effectively pegged. The weakening purchasing power of the dollar against other major world currencies has combined with rising inflation rates in most members and growing development needs to hit their real income and create persistent fiscal gaps.

The situation is in contrast with that during the oil boom, when the dollar was strong, inflation was relatively low in most members, and the populations were much smaller.

Such factors have allied with high oil prices in late 1970s and early 1980s to create financial surpluses in several Oapec states and allow them to build massive overseas investments. But the decline in the following years and their rising development needs have created large budget deficits in the absence of other major sources of income.

Gulf states were hit hardest by the decline as oil sales account for the bulk of their income. This has prompted most of them to embark on reforms to diversify their economies, including privatisation and attracting foreign capital.

Although the Arab oil income is projected this year to climb to its highest level since 1981, it will not exceed $80 billion in real terms, according to oil analysts.

"When Opec talks about a price range of $22-28, it is in effect opting for an actual price of below $10 considering the real value of the dollar," said an expert.

Oil prices stood at only $3.05 in 1973 before they rocketed to $17.25 in 1979 and $28.64 in 1980. In 1981, they hit an all-time high of around $32.50 before they started their gradual decline in the following years to dive to only $14.24 in 1986.

Ever since, prices have sharply fluctuated, increasing the financial pain of Arab oil producers.

Their oil income in 1973 was estimated at around $22.4 billion while it leapt to nearly $145.6 billion in 1979 and hit a record 213.7 billion in 1980.

In current prices, the 1979 oil revenues were estimated at nearly $310 billion while the 1980 earnings were as high as $420 billion, according to Oapec.