Rising oil prices are expected to further increase the already record-high inflation across the oil-rich Gulf region, which is reaping a windfall from a quadrupling of oil prices in the last five years.
US crude and Brent have been hovering above $85 per barrel, raising concerns of inflationary pressure - a reality taking its toll on the Gulf's growing consumer base.
Oil rose above $92 a barrel on Friday, inching closer to the psychological $100 mark, which analysts say isn't far away.
As a result of rising prices, the income of oil producers has also risen dramatically. The most prominent example is Saudi Arabia, whose oil income in 2006 amounted to about $194 billion, 2.8 times higher than in 1996 and 5.9 times higher than in 1986 (in real terms). In 2006, Saudi Arabia posted a $95 billion surplus in its current balance of payments account, and Kuwait has a $50 billion surplus. Iran's surplus was $14 billion.
"Although investment in the oil sector stagnated in real terms because of increasing investment costs, GDP growth in oil-exporting countries was sustained by expansion in the non-oil sectors, pushed by rising government spending out of oil revenues, foreign capital inflows, and rapidly growing domestic private credit," an International Monetary Fund (IMF) report released last week said.
Inflationary pressures are likely to persist in the Gulf Co-operation Council (GCC) states as domestic demand expands in response to the positive terms-of-trade and wealth developments, and the equilibrium real exchange rate should appreciate as a result.Weakness of the US dollar added to inflationary pressures in the GCC countries, as most of them peg their currencies to the US dollar.
Strong domestic demand and housing shortages have led to sharp increases in rents and contributed to upward pressure on other prices, the IMF said on the UAE. "As a result, the consumer price index inflation exceeded nine per cent in 2006. Reflecting record high oil prices, the overall fiscal and external current account surpluses remained large in 2006, and have allowed further accumulation of official foreign assets," it said. ( Gulf )