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Opec income hits record as oil prices soar
The Financial Times
By Javier Blas in London, Krishna Guha in Washington and Andrew England in Abu Dhabi
August 10 2008 23:30

Opec nations earned as much in the first half of this year as they did in the whole of 2007 – thanks both to record oil prices and record production – triggering a big increase in its spending.

Members of the Saudi ­Arabia-led oil exporters' cartel took home $645bn (£335bn, €430bn) between January and June, just below the record $671bn they earned last year, according to the US department of energy.

At the current pace, Opec nations would earn about $1,245bn this year, a record.

The recent 20 per cent drop in oil prices below $120 a barrel is unlikely to damp the earnings significantly, as higher output will offset the impact.

Industry estimates suggest that Opec production in July hit a record 32.6m b/d. The current oil price, at $116.53 a barrel, is still higher than the first half of the year's average: $111.1 a barrel.

The flood of petrodollars has boosted Opec's overseas spending, with imports rising up to 40 per cent from last year's level.

Binky Chadha, of Deutsche Bank in New York, said that Asian emerging markets were now the primary beneficiaries of oil exporters' rising trade expenditure, followed by the euro area.

The US, meanwhile, was losing some of its market share.

"Although oil prices have been increasing, they [Asian emerging markets] have seen an increasing offset in terms of rising exports to the oil exporters," he said.

China's share of oil exporters' spending has risen to 11 per cent, from 4 per cent in 1999, mostly at the expense of the US, where the share of spending has fallen to 7.5 per cent from 12 per cent.

Opec officials believe that the cartel's overseas spending plus sovereign wealth fund investments in troubled western banks has helped to support global economic growth

The oil boom is being felt in the Gulf perhaps more than anywhere else and is the driver behind a swathe of multi-­billion dollar mega-projects throughout the region.

It is also making the region's sovereign wealth funds and state investment vehicles more active, particularly as the Gulf's boom coincides with the financial turmoil in western markets.

HSBC forecasts that between 2006 and 2010 the Gulf will earn more in oil revenue than in the past 20 years combined and that the six states of the Gulf Co-operation Council should earn more in 2008 than the entire 1980s.

But Gulf governments are spending only about 40 per cent to 45 per cent of their public revenues this year, a figure that is lower than it has ever been.

That is in spite of the fact that public spending in absolute terms is at its highest, says Simon Williams, chief economists for Gulf markets at HSBC.

"What people can miss is the magnitude of change this oil price is bringing. It's probably a $1.2 trillion economy this year for the GCC; five years ago it was more like $350bn."

He says there are limits to how much oil revenue Gulf countries can absorb, adding that the region is already operating at its maximum absorptive capacity. As a consequence, he says, while the level of domestic spending is rising significantly, overseas savings are rising sharply as well.

Some government officials in the region have already started talking about slowing down government spending as a means of damping inflation, which has reached double-digit figures in many of the Gulf states and is causing increasing ­concern.

Copyright The Financial Times Limited 2008

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