Hydrocarbons Subside

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As oil prices continue to fall amid concerns about the global economic crisis, Abu Dhabi is adjusting its expectations as the drop in revenue is expected to impact its economy and potentially its development plans.



Crude oil prices retreated to a 17-month low on October 27 due to weaker demand and rising inventories in the US and as part of broader sell-offs on global markets amid increasing concerns the US and European economies are heading into recession. West Texas Intermediate (WTI) crude fell $1.23 cents to $62.92 a barrel and London Brent crude closed at $59.02. Between July 2008 and today, Arabian Light Crude has almost halved in value.



Falling oil prices have piled pressure on the Organisation of Petroleum Export Countries (OPEC), which took action in an emergency meeting on October 24. In an effort to support prices, the oil cartel, which controls 40% of the world's oil exports, has agreed to reduce supplies and cut its production official limit - currently standing at 28.8m bpd - by 1.5m barrels a day. The cut, due to take effect on November 1, amounts to about 5% of OPEC's output and nearly 2% of global consumption.



According to OPEC, lower production levels are required to bring stability to the oil market and stop prices from sliding further. However, the move failed to brake the price decline as oil decreased by another $4 by the end of the day, reflecting investors' concerns that the onset of a global recession will continue to sap demand for oil.



"Markets voted down the cut," Nazem Fawwaz Al Kudsi, chief executive of Abu Dhabi Investment Company, told OBG.



Although traders were not instantaneously impressed by the cut, inaction on OPEC's behalf could have resulted in a worse situation, according to some.



"The cut was necessary. Given the price's continued fall after the news, one can imagine how low it could have gone if action had not been taken," Saif Al Ghafli, general manager, Abu Dhabi Gas Liquefaction Company (ADGAS), told OBG.



Naturally, producers and oil-exporting countries such as Abu Dhabi are watching the abrupt fall of oil prices in recent weeks with careful attention to see how it could affect them. Abu Dhabi is the world's sixth largest exporter of oil. It holds some 94% of the UAE's total oil reserves, accounting for 92.2bn barrels of oil. According to the Abu Dhabi Chamber of Commerce & Industry, the oil sector has grown at an average of 11.7% per year in the past seven years. Its contribution to Gross Domestic Product (GDP) grew to $61.8bn or 55.7% in 2007, from $18bn, or 44% of GDP in 2001.



Just as record oil prices this summer endowed Abu Dhabi with a historic wealth transfer, lower oil prices will lead to lower revenues for the emirate. But although the UAE capital has seen its main export asset price return to historical levels, it remains in a relatively good position.



"The Abu Dhabi boom began when oil prices were still relatively low. And the really high prices, ranging around $140 per barrel, were based on speculation. The government knows prices go up and down and based their development plan on lower prices. Thanks to this strategy Abu Dhabi is very stable," Abudulla Al Hamed, chief executive of Capital Group, told OBG.



Indeed, officials used an estimated price of $45-50 a barrel in the 2008 budget. This means that, with a current account surplus amounting to 25% of GDP, Abu Dhabi has ample room for manoeuvre and sufficient liquidity reserves to balance its national budget.



Another reason why Abu Dhabi is perhaps better placed than other producers such as Iran or Russia is its efficient hydrocarbon extraction. "Abu Dhabi is one of the most competitive in the region," said Al Kudsi. As a lower-cost place to drill, Abu Dhabi can afford to let prices fall for a while without hurting its budget.



And now that crude prices are dropping and global demand is weakening, "construction costs will go down and contractors can execute their plans with lower overheads," said Al Hamed. Falling prices are also expected to cool down the local economy, which has been steaming ahead at breakneck speed in recent years. "The falling prices may also mean we could see a decreased inflation rate," he went on to say.



Although there are inadvertent benefits borne out of falling crude prices, Abu Dhabi needs to see the value of oil stabilised. Otherwise, some fear that ongoing declining prices could lead in the short-term to a suspension of some of the uneconomical projects that are currently planned. "The spreadsheets of many projects could well be scrutinised over the coming months," Al Kudsi told OBG. "But in terms of the overall beauty contest, Abu Dhabi is in much better shape than others," he added.

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