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Sat, Apr 15, 2000
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Can Oil Exporters Ride the Price Boom?
By John Paul Rathbone  Reuters
LONDON — The past year's near tripling in oil prices has some analysts worried about its effect on western economies. Yet, perhaps surprisingly, few oil nations in the developing world have cheered the price surge either. In contrast with the situation in the three oil shocks of the past 20 years, many openly share U.S. President Bill Clinton view that the price spike "is a deeply troubling thing."

Mexico in particular fears that high oil prices may hobble the U.S. economy, its largest trading partner, and thus slow growth in the rest of the world.

"The main focus is on the West rather than the producers because of the threat of oil prices on inflation and interest rates," West LB head of emerging markets Isaac Tabor said.

But he added: "History also shows that while high oil prices provide a window of opportunity for producers, they rarely use it."

Managing The Boom/Bust Cycle

Clearly not all is gloom for exporters with oil prices at $30 a barrel, although Saudi Arabia, Venezuela and Mexico said this week they saw the need to boost supplies and ease prices.

The price surge has helped refit the macroeconomies of exporting countries such as Russia, Indonesia, Venezuela and Nigeria that were doubly hit in 1998 by the global financial crisis and an oil glut that depressed prices.

The sovereign risk of these countries has also dropped, which has prompted some stellar stock and bond rallies, reopened international capital markets and eased borrowing costs.

Yet oil's volatile price — it has rocketed from lifetime lows to nine year highs in just over a year — is a reminder of the bumpy ride many oil economies face.

"Economists often talk about a rich natural resource as through it were a curse," said Tony Killick of Britain's Overseas Development Institute.

"But if you have political and economic systems that allow you to manage it well, those resources — be it oil or diamonds — can be a very valuable thing."

Dutch Disease And Oil Funds

Exporters suffer from what economists call Dutch disease: an overvalued exchange rate that can suffocate the non-oil economy and leave the country even more vulnerable to price swings.

Oil booms can also distort broader thinking about the economy. "That can lead to some strange decisions, such as growing Saudi Arabian wheat," Charles Blitzer, chief economist, emerging markets, at Donaldson, Lufkin and Jenrette said.

Then there are the difficulties of managing what can become an abundance of oil revenues when prices boom.

Norway, one of the world's top three exporters after Saudi Arabia, parks its surplus cash in an investment fund that has become a model for others.

Nigeria had one, but it has been disbanded. Venezuela's fund is still not fully up and running, even though it is the world's number three oil exporter.

And while several Gulf States, such as Kuwait, ran relatively successful investment funds during the 1970s Arab oil embargo, even those petrodollars — recycled by international banks — pushed down the cost of international loans and so indirectly caused the 1980s Latin American debt crisis.

"The main problem with oil wealth is political. Ask anyone in Texas and they won't tell you it's a curse," said Bernard Mommer, research fellow at the Oxford Institute for Energy Studies and a former official at state owned oil company PDVSA.

"But it's probably no coincidence that not one OPEC country has economically done that well over the past 20 years."

Back of the envelope calculations show the economies of the Organisation of Petroleum Exporting Countries, combined with Mexico, Russia and Norway, add up to less than eight percent of world gross domestic product (GDP).

Despite oil-born dreams of grandeur nurtured in the heady 1970s, that is still just a third the size of the U.S. economy.

Will It Be Different This Time?

Still, analysts say this year's oil price boom may help grease reforms in troublespots such as Ecuador, which wants to dollarise its economy to escape financial ruin, and Iran, where political moderates won elections last month.

Nor has the need for prudence after the spending binges of the 1970s and 1990 Gulf War been lost on exporters. Economists do not see any signs of overspending this time round, yet.

That is partly because oil economies were in such bad shape two years ago. Saudi Arabia's current account deficit reached 10 percent of GDP in 1998 so there's little spare cash around.

Other countries, such as Mexico, have also diversified their economies so that oil is now only a fraction of exports.

Yet economists remain sceptical.

"Oil is not an unmixed blessing," Blitzer said.

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