Over the last several decades, the Middle East had little choice but to attempt to diversify its economy, particularly in the finance arena. The development of the finance sector in the likes of Kuwait and Dubai, or real estate and resort projects, are valiant attempts to avoid the perils of "extraction economies." Gulf States had hoped to avoid the complete integration of their economies with the fate of the many tiers of petroleum pricing attached to their chief export. After twenty years, the result has been mixed. At best.
Much of the Gulf has budgeted for much lower oil prices. Gulf states, on average, need prices above $47 a barrel to keep from running budget deficits. But some states are more vulnerable than others: Bahrain's so-called break-even price is $75 a barrel, compared with Saudi Arabia's $49 and Kuwait's $33, according to the International Monetary Fund.
The speed of crude's tumble -- to about $64 a barrel -- has unnerved officials despite the apparent cushion. At an emergency meeting on Friday, the Organization of Petroleum Exporting Countries hastily decided to cut output by 1.5 million barrels a day, the biggest single cut in almost eight years. After that move failed to curb crude's fall on Friday, some oil officials suggested over the weekend that another cut was in order.
We speculated last week that OPEC would push as hard as it could. The smell of panic was in the air. The effect on actual prices (over the long-term, where it actually matters) is just about as unpredictable a problem as international economic relations has to offer. The consequences to certain states, however, would be pretty clear.
Weeks of sliding equity prices have wiped out billions of dollars of wealth for the region's influential clique of local retail investors. Saudi Arabia's main stock-market index is down by more than 50% year to date. The fall has wiped some $205 billion of value off the region's biggest exchange by market capitalization since June.
It's hard to feel sorry for them, however, when you read this:
On Sunday, Kuwaiti traders, clad in white flowing robes and waving placards, staged their second stock-exchange walkout in as many trading days. (Kuwait's market is closed on Fridays and Saturdays.) Protesting before a government building in downtown Kuwait City, they demanded more state intervention in the markets to prop up share prices. The chief executive of the National Bank of Kuwait, Ibrahim Dabdoub, called on authorities Sunday to close the exchange altogether.
Financial Storm Hits Gulf [The Wall Street Journal]