The High Cost of Keeping Arab Peace

In the past decade, when oil exceeded $100 a barrel, the Gulf’s oil producers went shopping. Abu Dhabi bought English soccer club Manchester City and New York’s iconic Chrysler Building, and Qatar acquired a stake in Porsche and bought British shopping emporium Harrods. Now priorities have changed. Members of the Organization of Petroleum Exporting Countries, poised to earn an unprecedented $1 trillion from oil this year, are investing in their citizenry. Gulf nations have pledged $150 billion to fund social programs and put a damper on public dissent, which led to the overthrow of rulers in Tunisia, Egypt, and Libya, and spread to Yemen and Syria.

These commitments give the petrostates plenty of incentives to prop up oil prices. According to BNP Paribas, Saudi Arabia and the Gulf states will need to keep oil at more than $80 a barrel to afford their promises.

Saudi Arabia is spending $43 billion on its poorer citizens and religious institutions. That includes the creation of 60,000 jobs at its Interior Ministry and generous support for the Ministry of Islamic Affairs and the Commission for the Promotion of Virtue and the Prevention of Vice, which was promised after clerics backed a ban on protests.

Kuwaitis received 1,000 dinars ($3,664) and free food for 13 months. Civil servants in Algeria received a 34 percent pay rise. In September, Qatar’s Crown Prince Sheikh Tamim bin Hamad Al-Thani ordered 30 billion riyals ($8.2 billion) in civil servant salary increases and pension-fund allowances. Gulf nations have pledged $20 billion for Oman and Bahrain to fend off protests, while Egypt has received $20 billion from Qatar and $4 billion from Saudi Arabia. “A sharp increase in spending to accommodate social pressures has averted potential disquiet over governance in most countries,” wrote Jean-Michel Saliba, a Bank of America economist in London.

Brisk consumption has often followed this largesse. “As soon as the government announced handouts, people went out and bought cars,” says John Stadwick, managing director of General Motors’ Middle East operations. Car sales in Saudi Arabia have climbed as much as 48 percent a month since April, he says.

The Gulf states need oil at $77 a barrel to meet their spending plans this year, while the Saudis need $82 a barrel to afford their ambitious social agenda, says Yaroslav Lissovolik, chief economist at Deutsche Bank. Of OPEC’s 12 members,9 have increased their 2011 budgets.

Though Saudi Arabia has kept prices stable by pumping plenty of crude, its social agenda at home may dictate a change of direction. “Saudi Arabia will cut back after its summer surge,” says Leo Drollas, London-based chief economist at the Centre for Global Energy Studies, the energy consultancy founded by former Saudi Oil Minister Sheikh Ahmed Zaki Yamani. “If it doesn’t trim now, prices might lurch downward on lower demand, and it needs a minimum basket price of $90 for what it wants to do this year.”

Not all the initiatives work right away. Abu Dhabi, the richest of the United Arab Emirates, is focusing on poorer emirates such as Ras Al Khaimah. Less than a week after Hosni Mubarak’s ouster in Egypt, Ras Al Khaimah got a visit from Abu Dhabi Crown Prince Sheikh Mohammed bin Zayed Al Nahyan. When he learned Ras Al Khaimah lacked electricity, Sheikh Mohammed summoned a utility executive, who came within two hours by helicopter. “Give them power now,” he ordered.

Ras Al Khaimah is still waiting for power. Residents don’t blame the crown prince. “Abu Dhabi is not the problem,” says Yousuf al-Nuaimi, chairman of the Chamber of Commerce in Ras Al Khaimah. “The Federal Water and Electricity Authority is the problem. I hope the next step will be for Abu Dhabi to take over FEWA so that we can enjoy the power they promised us.”


    The bottom line: The Arabs will have to keep oil from slipping below $80 a barrel to afford $150 billion in social programs to quiet dissent.

    Before it's here, it's on the Bloomberg Terminal.