Gulf States Prepare to Weather Economic Storm After Drop in Oil Prices

Saudi Arabia, the world's leading oil producer and exporter, is expected to cut back on both current spending and adjust ambitious long-term development plans in the light of the slump in prices.

But cautious fiscal policies will place the kingdom in a relatively strong position, with the current budget based on a price of around $45-50 a barrel. Expansion next year will require around $55-62.

The worry must be that in a country with no elections, parliament, political parties - or taxes - the combination of slowing development projects and a widening gap between a fabulously wealthy elite and ordinary people struggling to make ends meet could be destabilizing.

Publicly the message from the top has been that there is no need to panic: "Citizens should be sure that the country is moving calmly and all the coming days will be happiness and prosperity," King Abdullah told his people last month even as falling prices of crude oil and the global financial crisis were becoming inextricably linked and starting to wreak havoc in the Gulf economies.

By mid-November, the stock exchanges of Dubai, Saudi Arabia and Kuwait had declined by 62.5%, 50.4% and 29.5% respectively. A Kuwaiti court took the unprecedented step of closing the country's stock exchange for a few days to stop the hemorrhaging. Kuwait, which sits on 9% of world oil reserves, is expected to see its first budget deficit in over a decade in 2009-10 if crude prices continue to fall. That will mean cautious spending in the short term and a longer-term incentive to diversify revenues away from oil.

In Kuwait, Qatar and the United Arab Emirates, government-run investment funds have also suffered from heavy exposure to US and European stocks. But the UAE's Abu Dhabi Investment Authority has assets of $500bn to $1tn.

Dubai, the glitziest part of the UAE - but little oil of its own - which has seen a breakneck oil-fuelled boom in property, is starting to see a slowdown. But some welcome that as a way of reducing the number of foreign expatriates and re-establishing a disappearing sense of national identity.

Abd al-Rahman Al-Rashed, director-general of the Saudi satellite TV al-Arabiya and columnist for the London daily al-Sharq al-Awsat argues that crude oil prices as low as $20 a barrel would be a blessing in disguise - a message about the need for self-reliance, and an opportunity for reform.

And reform, according to Al-Rashid, must focus on the education system: "We do not need $100 a barrel to reform our education. Teaching students more chemistry, physics and mathematics will not require a single additional dollar, but will produce more than our existing educational system ? Weak instruction produces [an] emaciated society."