Oil producers to carry on spending, but warily

By Simon Webb - Analysis

DUBAI (Reuters) - A deep drop in oil prices has sapped the confidence of producer nations as even top exporter Saudi Arabia faces the prospect of a financial deficit next year.

But they are still expected to carry on spending for as long as possible and the core Gulf producers can draw on healthy cash reserves accumulated during the price boom.

International benchmark U.S. crude has lost around two-thirds of its value since hitting an all-time high of $147.27 in July and many are predicting the price will stay low because global economic weakness has choked off fuel demand.

"Depending on where prices stabilize you will see a deterioration in current accounts, moderation in spending growth and restructuring of projects," said Monica Malik, economist at EFG-Hermes in Dubai.

"But Gulf states are in a much better position than other oil exporting countries as they were so much more cautious on expanding spending when the price was on the way up."

OPEC members face a double hit as their finances have been eroded by a fall in volume as well as in value.

To match depleted demand and to try to stave off any further price collapse, the Organization of the Petroleum Exporting Countries meets this weekend in Cairo for an informal debate on how much more oil it needs to remove from the world market.

Citigroup economist Mustaq Khan said that if oil averaged $50 next year, Saudi Arabia's external deficit could reach more than a quarter of its gross domestic product (GDP) and even oil at $75 would leave it with only a small surplus.

"This is not a disaster," Khan said. "They have enough liquid assets to be able to fund their deficits."

In a sense, falling into the red is only a return to the norm. Saudi Arabia ran consecutive deficits from 1983 to 1999.

After the boom, it is much better placed for bust and needs to spend to create jobs for a youthful and growing population.

The kingdom's finance minister said this week there were no plans yet to retrench.

"I project public spending in 2009 to be higher than in 2008," said Finance Minister Ibrahim al-Assaf Assaf. "There will definitely not be any impact from the oil price decline in the government's development plan."

What has changed, however, is the appetite for risk.

The value of assets held by sovereign wealth funds has been pummeled by huge falls on world financial markets, notably in U.S. equities, adding to the appeal of more alternative investments.