The high cost of keeping Arab peace

AYESHA DAYA | SEPTEMBER 2011 | SOURCE: Bloomberg

In the past decade, when oil exceeded $100 a barrel, the Gulf’s oil producers went shopping. Abu Dhabi bought English soccer club Manchester City and New York’s iconic Chrysler Building, and Qatar acquired a stake in Porsche and bought British shopping emporium Harrods.

Now priorities have changed. Members of the Organization of Petroleum Exporting Countries, poised to earn an unprecedented $1 trillion from oil this year, are investing in their citizenry. 

The high cost of keeping Arab peace

Gulf nations have pledged $150 billion to fund social programs and put a damper on public dissent, which led to the overthrow of rulers in Tunisia, Egypt, and Libya, and spread to Yemen and Syria.

These commitments give the petrostates plenty of incentives to prop up oil prices. According to BNP Paribas, Saudi Arabia and the Gulf states will need to keep oil at more than $80 a barrel to afford their promises.

Though Saudi Arabia has kept prices stable by pumping plenty of crude, its social agenda at home may dictate a change of direction.

“Saudi Arabia will cut back after its summer surge,” says Leo Drollas, London-based chief economist at the Centre for Global Energy Studies, the energy consultancy founded by former Saudi Oil Minister Sheikh Ahmed Zaki Yamani. “If it doesn’t trim now, prices might lurch downward on lower demand, and it needs a minimum basket price of $90 for what it wants to do this year.”

The bottom line: The Arabs will have to keep oil from slipping below $80 a barrel to afford $150 billion in social programs to quiet dissent.

Related article: Arab Spring will impact oil prices in the long term

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