Five years into an oil price boom, social tensions and growing populations mean Opec states need to invest more heavily, but public sector spending is eroding the windfall and storing problems for the future.

While high oil prices have fuelled robust economic growth across much of the oil exporting world, analysts say most countries have failed to meet earlier pledges to diversify and modernise their economies, and thus may be tempted to buy time by keeping oil prices near $30 for as long as possible.

Petrodollars from earlier oil booms were frittered away on creating cradle-to-grave welfare systems in most Gulf states, with generous subsidies and imported labour, leaving the economies little slack to cope with periods of low prices.

Spooked by the last oil price collapse, growing unemployment and discontent, countries are trying to spend the extra cash on retiring debt and buying assets to ease the way for the future.

"One gets the impression they are trying to be fairly cautious with the spending this time, possibly because they feel the windfall will be short-lived," said Sharif Ghalib, analyst at Energy Intelligence Research in Washington.

Oil revenues in the largest Opec producer Saudi Arabia rose last year to an estimated $85 billion, versus the average $58 billion earned annually between $1998-2002. It recorded budget surpluses in 2002 and 2003 for the first time since 1982.

Brad Bourland, economist at Samba Financial Group in Riyadh said Saudi had used unanticipated revenues last year to pay down debt and build up its foreign assets.

"If you compare with the 1970s there is a slightly different feel to it this time," he said.

Opec meets this week to debate an oil output cut, though crude prices recently hit 13-year highs of over $38 a barrel. That was almost double what some Opec states budgeted for 2004.

In 2003, US crude prices averaged $31 a barrel, the highest in two decades.

But economists say the reform efforts are too little too late. Red tape and the slow pace of privatisation have choked foreign investment and job creation, while the public sector continues to eat up much of the oil revenue in most Opec states.

Just half a million Saudis of an 18 million population, work in the private sector. Gulf states have made little headway on crucial but unpopular measures like income tax and hiking utility rates, leaving budgets dependant on oil.

IMF data showed that foreign direct investment in the Middle East last year was lower even than Africa's at $9.3 billion.

"The promises to introduce reforms, cut public spending and subsidies, have all been forgotten because of high oil prices," said Jassem al-Sadoun of Kuwait's al-Shall consultancy. "The half-hearted measures we are seeing are too little, too late."

As a result, analysts say the pain threshold - the oil price at which the population starts to suffer - has changed for most Opec members. And growing insurgency is a fall-out.

"If a few years ago, the threshold for Saudi Arabia was $15 oil, today I would see it at $20-22 because the population is growing at four percent a year," Mr Ghalib said.

Unemployment rates average 15 per cent in the Arab world. And unrest, reflected in last year's Riyadh terror bombings, is keeping defence spending high - in some states like Kuwait and Saudi Arabia it is estimated as high as 10 per cent of GDP.

London's Centre for Global Energy Studies (CGES) said in a recent report Saudi Arabia wanted an average $30 oil price for 2004.

"A price of $27.4/barrel will generate the requisite revenues and leave the Saudi authorities with a balanced budget," CGES said. "But should it wish to retire $2.5 billion of debt as well, it would require a minimum price of $30.03."

Saudi Arabia has used some of the extra revenues to cut debt to 80 per cent of Gross Domestic Growth (GDP) from 120 per cent in 1999, though this is still above the 40 per cent debt/GDP ratio recommended for a country dependant on a sole export commodity.

Last year it retired $5 billion in debt. Its currency reserves are at record highs and state assets overseas are estimated to have risen by $11 billion in 2003. The 2004 budget also boosted allocations to technical and vocational training.

"This reflects the focus now being placed on improving education and workplace skills development," a Samba note said.

Kuwaiti currency reserves have almost doubled since 1999 and overseas investments have risen. But with 93 per cent of Kuwaitis still employed by the state, and oil providing three quarters of budget revenues, its problems are similar to those of its peers.

"As long as oil is high, they are okay but the growing unemployment is a time bomb for the entire region," Sadoun said.

For other Opec members such as Nigeria and Venezuela too, the $30 oil could not have come at a better time.

Nigeria has cut its budget deficit and boosted allocations for debt servicing. In Venezuela, high oil prices have helped avoid a crunch in short-term debt repayments though refinancing.

But its debt/GDP ratio has risen to 46 per cent now versus 31 per cent in 2001 as it is placing new longer-term debt to roll over maturing bonds. And instead of going into the oil stabilisation fund, the extra revenues have been spent on public sector salaries, as political turmoil has hit tax collection.

The fund's assets have dwindled to under $1 billion from $6.6 billion four years ago.

"While the Gulf states have been accumulating assets, Venezuela has been running them down," said Fitch analyst Morgan Harting. "The high oil price is supporting the government's viability - a fall from these levels would make it very difficult, if not impossible, to meet obligations.