Petro-States increase spending while oil dependence rises

The petro-states of the Middle East and Venezuela, their Caribbean sibling, indulge in higher spending to put out the fire of the Arabian Spring and generate a feeling of bonanza, hoping to get Hugo Chávez reelected. The outcome, in addition to growth supported by greater consumption, is that for public finance to be balanced, oil prices must be at a high.

Recent spending by Middle-East governments is directed mainly at creating jobs, building hospitals, increasing wages, developing housing projects and issuing bonds for public employees. The aggregate expenditures this year are expected to reach USD 488 billion, 35% more than in 2009, according to estimates by the Institute of International Finance.

The process is evident in Saudi Arabia, the world's leading petroleum producer. To appease signs of discontent, King Abdullah bin Abdulaziz announced in March spending of USD 71 billion to raise minimum wage, among others, and this year the kingdom's expenditures will be greater than the 34% recorded in 2008, according to the International Monetary Fund.

Masood Ahmed, IMF director for the Middle East and Central Asia, indicated in a study published in April that increased spending has boosted the minimum price for oil so that the petro-states of the region can maintain the balance of their public finances, but this move creates more dependence on barrel prices.

This year Bahrain needs petroleum to be priced at least at USD 119, Iran at USD 117, United Arab Emirates at USD 84, Saudi Arabia at USD 71, while Qatar and Kuwait can subsist with barrel prices below USD 50.      

War games       

When in March, Ali Naimi, Saudi Arabia's petroleum minister, said that his country wanted barrel prices to stabilize below the peak of USD 128 reached in the first quarter, very few took notice.

But Saudi Arabia, the leading global producer and U.S. ally in the Middle East, began to thrust upon the market up to 10 million barrels per day until crude-oil prices fell close to the 100-dollar level.

Analysts believe that Saudi Arabia, which can operate its finance accordingly with barrel prices below USD 70, aims to aid the economic recovery of the United States and Europe and, at the same time, pressure Iran to raise its prices, thus posing a perceived threat to the latter's nuclear plans.

Last week OPEC confirmed that Iran's production fell by 190 thousand barrels to 2.96 million barrels per day, according to secondary sources, a clear sign that the sanctions applied by the European Union are hitting the government of Mahmud Ahmadinejad hard, and it is also suffering from the impact of slipping oil prices.

Venezuela Arabia

In the midst of a political campaign to decide whether he stays in power, Hugo Chávez has increased spending based on high barrel prices and a significant expansion of debt.

After the first six months of the year, everything seems to indicate that spending by central government, measured in dollars, will be 38% higher than in 2008, and the sale of bonds and treasury bills is bound to reach record levels.

It is a cycle similar to the one experienced in the 70's leading to the ill-fated Black Friday and giving rise to the "decade of loss" during the 80's. In the first government of Carlos Andrés Pérez, a spike in oil prices was construed as an irreversible trend, and public spending grew to levels that were very difficult to reign in despite evidence that barrel prices would lose their spark.            

Rafael Ramírez, president of Pdvsa and minister of Petroleum and Mining, has explained that Venezuela wants oil prices to range from a low of USD 80 to a peak of USD 100, which proves that the country requires a higher-priced barrel than in 2004 when oil prices began to rise.

Douglas Ungredda, coordinator of the Master's Program in International Economics at Venezuela's Central University, believes that prices below USD 100 for the country's oil basket would wreak havoc upon its public finance.            

vsalmeron@eluniversal.com

Translated by Félix Rojas Alva