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Will lower oil prices hurt the Gulf?
The GCC states boomed amid surging hydrocarbon revenues, writes Christopher
Watts. But now, the fall in oil prices poses fresh challenges for the region.
By now, the story of the recent oil boom may be familiar. The price of oil started
climbing back in 2002, reaching a high of USD 147 per barrel last July, up from a
historical average of around USD 15—20 in the two decades before. It was the
ballooning economies of India and China that drove much demand; at the same time, prior under-investment meant
downstream production bottlenecks restricted supply; and financial speculators contributed to the surge in oil prices,
too.
For the GCC states, the result has been a tripling of combined GDP to almost USD 1.2 trillion by 2008, according to
estimates from the International Monetary Fund (IMF) in Washington. Along the way, Qatar is fast becoming the
world’s richest state, with GDP per capita the IMF estimates at a whopping USD 87,000 for 2008. The region has
generated cash surpluses in the last five years of over USD 1.0 trillion. Local governments have used some of this to
diversify their economies away from oil; the remainder has been squirreled away in sovereign wealth funds.
Where the story goes from here, though, is less clear. Crude oil prices have tumbled by around two-thirds in under
six months, to some USD 50 per barrel. Behind this dramatic fall are widespread expectations of a deep and
prolonged economic slowdown in the US, Europe and elsewhere, hitting demand for oil. In a bid to stabilise prices,
the Organisation of the Petroleum Exporting Countries (OPEC) announced in October it would cut oil production by
1.5 million barrels per day; more cuts may be on the way. Merrill Lynch expects oil to fall as low as USD 25 per barrel
this coming year.
Until recently, the Gulf’s economic policy makers had been grappling with rising inflation, fuelled by the weakening
dollar, accelerating raw materials prices, and rents that were skyrocketing as migrants flocked to the region. Soon
enough, some turned their attention to addressing financial market liquidity that was tightening in the Gulf as the
financial sector crisis spread. Suddenly, now, policy makers are bracing themselves in anticipation of the effects of
shrinking hydrocarbon revenues as volumes and prices come under pressure.
The effects on the Gulf’s economies are likely to be significant. Lower income from oil and gas, compounded by
restricted availability of funding, is likely to affect large-scale projects that are planned in the region—estimated by
MEED Projects at a total USD 2.4 trillion. While high-priority infrastructure projects already underway are likely to
proceed, new investments may come under closer scrutiny. Consider Saudi Aramco, the world’s largest oil company,
which said in November that it would review its capital expenditure plans, worth some USD 20 billion annually. At
greatest risk of all, perhaps, are ambitious developments in the real estate and tourism sectors.
Shrinking hydrocarbon revenues are set to weigh on growth in the Gulf’s real economy, too. Where non-oil GDP in
the non-energy sector doubled between 2002 and 2007, the Institute of International Finance (IIF) in Washington
says non-oil growth could sink to around 5.4% in 2009, if oil prices average USD 75 per barrel during the year, or to
about 4.5% if oil stays around USD 50. That’s in stark contrast to a figure of around 8.0% in 2006—2007, when
average oil prices were around USD 70 per barrel (but were tending to move up, rather than down).
Tellingly, Nakheel, the Dubai real estate developer that is putting up the world’s tallest building in Dubai, announced
in late November it would lay off 500 of its 1,800 staff. That means fewer prospective diners for pricey Japanese
restaurant Nobu, which launched in Dubai in September, and fewer prospective shoppers for the Dubai Mall, the
world’s largest, which opened its doors in November. More to the point, announcements like these are a sign that
growth may be about to slow dramatically in financial services, and in legal, auditing, public relations, and other
business services.
For the Gulf’s economic policy makers, a slowdown in the region’s non-oil growth is largely uncharted territory. Since
regional governments stepped up moves to diversify their economies away from hydrocarbons earlier this decade,
high oil prices have supported these efforts. Now, though, as governments face a slump in the region’s oil and non-
oil economies both, the key challenge, according to Dr Jarmo Kotilaine, Chief Economist at NCB Capital in Bahrain, “is
to make sure they are willing to support economic activity.” As well as providing monetary and fiscal stimuli, he says,
“this means effectively communicating that the economies of the region are healthy.”
As they move to buttress confidence in the region’s economies, it helps, of course, that Gulf governments mostly
pursued conservative policies as oil prices climbed. They predicated their budgets on oil prices ranging from USD 35
to USD 50 per barrel. On this basis they have accumulated foreign assets of around USD 1.5 trillion, according to the
IIF, equivalent to 134% of the region’s GDP. That’s a contrast to the last oil boom in the 1970s, when governments
of the Gulf region spent freely as oil prices rose, only to be left saddled with debt when they fell.
What’s plain is that the long term economic outlook for the Gulf region remains secure. The International Energy
Agency in Paris expects global energy demand to grow 45% by 2030. According to estimates from the McKinsey
Global Institute, the GCC states will generate oil export revenues of USD 4.7 trillion in the years to 2020, with oil at
around the USD 50 per barrel—two-and-a-half times the total of the past 14 years. The Gulf region is home to
around 40% of the world’s proven oil reserves; if push comes to shove, most GCC states will be able to get by on oil
and gas for another 100 years or more.
