Power sector gains from boom {new Persian Gulf economy}

Gulf News ^ | December 09, 2007 | Babu Das Augustine

[thackney]

Dubai: The oil boom and current petrodollar recycling are creating a strong basis for a new Gulf economy that is fast becoming a key driver of global economic growth and future oil demand, according to Lehman Brothers, a leading global investment bank.

The flow of investment stemming from the high oil prices has increased cash flows of both the public and private sector. These increased cash flows have resulted in a rapid increase in government spending which has fuelled domestic demand for energy in the Gulf, Edward Morse, Leh-man Brothers' chief energy economist said in a recent report.

Analysts from Lehman argue that even if there is a shortfall in oil demand from Organisation for Economic Cooperation and Development (OECD) countries due to an economic slowdown, it (the shortfall) will be offset by the growing demand from within the Opec and particularly from the Gulf countries.

The 'petrodollar boom' has spurred investment in the Organisation of Petro-leum Exporting Countries (Opec), with the aim to diversify output and make economic well-being less petro-centric.

Massive development

This build-up, mostly concentrated in fixed-asset investment, infrastructure development, power generation and petrochemicals, is oil-intensive and takes advantage of abundant and often heavily subsidised local oil resources.

Lehman analysts estimate that Opec oil consumption should grow to 370,000 barrel per day (4.4 per cent) in 2008, leaving the group second only to China in terms of incremental demand growth.

GCC nations will account for 195,000 bpd of this growth (105,000 bpd from Saudi Arabia), which stems from increased power generation requirements and petrochemical manufacturing.

"The economies of the GCC may continue to chug along strongly despite emerging bearish economic trends in the OECD.

"Non-oil export data from Saudi Arabia point to annual average growth of 20 per cent since 2002, but these goods contribute only a 10 per cent share of total exports.

"As such, if housing investment further disappoints in the developed world, it should not damp the Saudi economy or stoke a fall in Saudi demand for oil," the report said.

Even if a slight fall in demand causes Saudi oil exports to fall, the surplus capacity will likely be absorbed domestically. As much of oil demand growth in 2008 is expected from the 'decoupled' emerging economies, oil exports should not slow GDP growth either.