Oil’s not well, but no worries as yet

Oman can use surplus funds accumulated in the State General Reserve Fund (SGRF) to finance development projects

Despite production cuts announced by the Organisation of Petroleum Exporting Coun-tries (OPEC), crude prices have continued to fall, triggering fears that it may affect the economies of the Gulf states, which predominantly depend on oil revenue for funding development projects.

OPEC, which produces 40 per cent of the world's oil supply, the Inter-national Energy Agency and US Energy Department have slashed demand projections in recent months. With crude prices falling almost 63 per cent since July, the huge surpluses recorded by the Gulf countries may turn out to be a thing of the past.

Oman's 2009 budget is based on an assumed average price of US$55 per barrel - well above the prevailing price of Oman Crude at US$45.7 a barrel by the third week of November. However, one cannot forget the fact
that the sultanate has a huge surplus in its kitty from high oil prices in the last couple of years," says an analyst.

The average oil price of Omani Crude so far this year was much higher than the budgeted price of US$45 a barrel for 2008. If the crude price remains at the same level in the coming year as well, there could be a budget deficit.

According to experts, the government is unlikely to cut expenditure as any reduction in government expenditure will have an adverse effect on the private sector as well as the economy. "The government has a major role in activating the economy," he adds. It is also vital in view of the fact that private sector in the Gulf region depends on government spending.

Oman can use surplus funds accumulated in the State General Reserve Fund (SGRF) to finance development projects. With the surplus oil revenue in the recent past, the government's foreign assets have touched RO3.8bn.

The government will take a major role in activating the economy with increased expenditure, which will benefit the corporate sector, especially contracting firms, building material producers and financial institutions. "This will directly help banks, companies involved in infrastructure development and building material producers," says the analyst.

The high-powered oil producers' cartel recently decided to slash production quotas by 1.5mn barrels a day. Before the cut, the 13-member-OPEC said it was taking 520,000 barrels out of daily production.

According to analysts, these reductions in recent months indicate that there is not enough demand to turn prices around and none of these decisions had much impact on the market, which is now driven by fears of an economic recession."

Oil’s not well, but no worries as yet
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