International Politics

	Vol. 226 No. 12
DR. A. F. ALHAJJI, CONTRIBUTING EDITOR, MIDDLE EAST

No boom here. Oil prices in the OPEC basket have doubled since the beginning of 2004. Nevertheless, analysts’ claims that record prices have led to a second boom in the oil producing countries are still premature at this time. Despite the recent, massive increase in oil prices, the oil producing countries, particularly the major producing countries in the Middle East, are not experiencing a boom similar to that of the 1970s. Listed below is some of the evidence that shows why the current situation has not amounted to a second boom. . .yet.

Real oil prices. Despite their substantial increase since 2003, oil prices during 2004 were 45% less than what they were in 1981. In constant 2000 dollars, oil prices averaged $61.75/bbl in 1981, but they hit only $35/bbl in 2004. The average of real oil prices in 2005 was slightly higher than 2004’s average, but the 2005 figure was still more than 40% lower than the 1981 average. If we include the effect of dollar devaluation when measuring the purchasing power of OPEC oil exports, we find that real oil prices have declined even further. In fact, 2005’s record oil prices would be similar to rates that prevailed in 1983, when oil prices declined by about 30% from their 1981 peak.

Per capita income. Current per capita income in Saudi Arabia, for example, is much lower than the record levels achieved in the early 1980s. It is slightly higher than half what it was in 1981. Furthermore, despite record oil prices, current per capita income in Saudi Arabia is equal to that of 1972, a year before the start of the first boom.

A chief reason for the recent decline in real per capita income is the large increase in populations of OPEC member countries, which have some of the world’s highest birth rates. This situation applies not only to Saudi Arabia, but to all OPEC members. Between 1980 and 2004, real per capita income declined about 50% in the UAE, 35% in Kuwait, 49% in Libya, 29% in Qatar, and 67% in Oman. These figures indicate that recent record oil prices have not led to a “second” boom in oil producing countries.

Real oil revenues. Despite record oil prices, OPEC’s real revenues in 2005 are only one third of its revenues in 1980. OPEC real oil revenues reached $556.2 billion in 1980 (in constant 2004 dollars). They are expected to reach less than $350 billion in 2005.

As Saudi Arabia’s tallest building, Kingdom Centre in Riyadh is a symbol of the country’s economic growth.

The situation is even worse than what these numbers suggest. OPEC production in 2005 is about 6 million bopd higher than the group’s 1980 output. The real oil revenues of Saudi Arabia, the world’s largest oil exporter, are about half of their 1981 levels. Despite record prices, real oil revenues between 1980 and 2005 declined 35% in both Qatar and Libya, and 10% in Kuwait and the UAE. Both Kuwait and the UAE almost doubled their production during the same period. The Saudi real oil revenues have declined more than other countries during this period, because the Saudis maintained their output capacity while other oil producers expanded theirs substantially.

Economic growth. Despite a continuous increase in oil prices over the past three years, and despite record nominal prices, economic growth rates in oil producing countries are still very low compared to rates of the 1970s. For example, Saudi Arabia’s real economic growth since 2003 has not exceeded 6%/year, but it averaged 11% during the first oil boom of the 1970s.

At the start of the first boom, economic growth averaged 15%/year. The trend in other oil producing countries is similar to that of Saudi Arabia. For example, the UAE’s economic growth averaged 14%/year in the 1970s. But it has not exceeded 6% since 2003.

Public debt. One of the main differences between the current situation and the oil boom of the 1970s is that, three decades ago, most of the oil producing countries in the Gulf region were lenders and major aid providers to Third World countries and various global institutions. These oil producing nations also built huge foreign currency reserves. Today, the same countries suffer from huge public debt, and they can barely service that debt. Despite decisions by some Middle Eastern oil producers to use the recent price windfall to reduce public debt, this burden is still large by any standard. It is worth noting, however, that most oil producing countries in the Middle East have started enjoying budget surpluses since 2003, after 19 years of budget deficits and borrowing.

Conclusion. Despite record oil prices, Middle Eastern oil producers have not, and will not, witness a boom similar to that of the 1970s. This result will have a significant impact on the future of world oil markets. These countries will not invest enough capital to expand production capacity to meet growing demand over the next 25 years. The oil producing counties will not be able to meet the predictions of IEA and EIA. If world demand projections by IEA and EIA are correct, then we should expect a world energy crisis – not because of a lack of oil resources, but because of a lack of investment in the major oil producing countries. 

Dr. A. F. Alhajji is an associate professor of economics in the College of Business Administration at Ohio Northern University in Ada, Ohio. At Ohio Northern, he holds the George W. Patton Chair of Economics, specializing in international and energy economics. Previously, he was an award-winning, visiting professor of economics at Colorado School of Mines. He is a regular contributor to this column.