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Monday, September 22, 2008

Lehman Brothers collapse felt in Gulf: Oil price drop seen

ABU DHABI — Gulf Arab producers, amid the global credit crisis, expect a sharp drop in the price of crude oil.

Gulf analysts said the U.S. banking crisis, sparked by the collapse of Lehman Brothers, could cause the price of oil to plunge by another $40 over the next two months. The analysts said the banking crisis would reduce economic growth throughout the world and spark a drop in global oil demand.

"The U.S. banking crisis will further slow global economic growth, dampening demand for oil," Said Al Sheik, chief economist of Saudi Arabia's National Commercial Bank, said. "This will cause oil prices and revenues to drop sharply."

The analysts said Gulf Cooperation Council states have a direct stake in stabilizing the economic situation. They said GCC states have invested $1.5 trillion from their oil revenue windfall since 2002, much of it in Europe and the United States.

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Analysts said GCC investors were not linked to Lehman Brothers. They said this would avoid an immediate crisis in the Gulf Arab banking system, particularly in the UAE.

"The Central Bank stated that UAE banks had virtually no exposure to Lehman Brothers, that there was no systemic risk in the UAE as a result of the fallout in international money markets," the UAE Central Bank said.

Kuwait plans to launch a $130 billion financial development plan meant to lure foreign investment. The GCC sheikdom has sought to diversify its oil-based economy and become a Gulf financial center.

Still, analysts said the global credit crisis could worsen over the next few months. Standard & Poor's Ratings Service warned of "another large wave of write-downs in the second half of the current year."

So far, GCC states have already been urged to sever their peg to the U.S. dollar. The International Monetary Fund said such a move would facilitate efforts to fight double-digit inflation in Bahrain, Kuwait, Qatar, Oman, Saudi Arabia and the United Arab Emirates.

"If inflationary pressures were to persist for an extended period, consideration may need to be given to alternative exchange rate arrangements that allow monetary policy to be utilized in fighting inflation," IMF manager director Dominique Strauss-Kahn said.



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