The risk premium on oil prices caused by the political unrest across the Middle East and disrupted Libyan output has provided extra spending power for GCC governments, said a report.

Each dollar increase in oil prices adds around $4.5 billion per year to GCC government revenues. An oil price of $100 per barrel in 2011 would lift budget revenues by more than $100 billion compared to last year, or 28 per cent of budgeted spending in 2011, said the latest GCC brief published by NBK.

From $75 per barrel in September 2010, the price of the Opec crude basket increased to $115 in early March 2011.

Mirroring the trend in overall US dollar depreciation since June 2010, GCC currencies have declined by an average of 7.8 per cent in six months, it added.

This seems to cover the cost this year of all of the extra spending measures recently announced in Saudi Arabia and Oman. Bahrain, on the other hand, is likely to see its budget position deteriorate as a net result of higher revenues and additional spending.

With more than 30 per cent of GCC imports transacted in dollars or dollar-pegged currencies, overall import cost increases may be less severe, the report said.

The increase in oil income provides extra spending power for those governments undertaking measures to boost living standards for nationals, in an attempt to address social and political grievances.

Governments have to consider the long-term financial sustainability of spending measures, not just short-term affordability. But the issue of how much extra spending can take place without governments dipping into their vast sovereign wealth funds may still be a real one.

More than half of the total GCC revenue is attributable to the region’s largest oil exporter, Saudi Arabia, which exports more than 7 million barrels per day (mbpd) of crude oil and products, while Bahrain – which has net exports of less than 0.2 mbpd – sees just $50 million in additional revenues.

The Saudi Arabian government has announced by far the most extensive – and expensive - series of supplementary spending measures in the GCC.

Those range from a 15 per cent pay increases for public sector workers to a commitment to build 0.5 million new homes. Estimates of the total amount of extra spending are above $130 billion, half of which could be spent this year.

This would account for more than the increase in revenues generated by $100 oil this year compared to the $77 of 2010. But the government would still be left with a substantially better fiscal position than that implied by its budget oil price assumption.

The major new spending measures in Bahrain might add around $2 billion to budget spending in 2011, close to double the additional revenues generated by higher oil prices this year, the report said.

Short of higher revenue from other sources, the Bahraini government is likely to see its financial position deteriorate as a net result of the spending and oil revenue increases, it added.

The report estimated that the main measures announced by the Omani government should cost in the $1-2 billion range, which would absorb half of the extra revenues generated by higher oil prices this year than last. – TradeArabia News Service