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Page added on December 19, 2014
Gulf braces for tough times over oil price plunge
Gulf countries are bracing for tough times as vital oil revenues fall and after they missed a golden opportunity to diversify their economies in a decade of unprecedented windfalls, analysts say.
The six nations of the Gulf Cooperation Council (GCC) – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates – could soon start reeling from falling oil prices, which have dropped by half from their 2014 highs to around US$60 (S$78) a barrel.
Pumping about 17.5 million barrels per day, GCC countries are forecast to lose at least half their oil revenues, or around US$350 billion a year, at current price levels.
Oil revenues make up around 90 per cent of income for most GCC states and with prices now below budget forecasts, their governments are looking at certain deficits next year.
Spending cuts are sure to follow – and possibly even the region’s first taxes – raising fears of public discontent and eventually an economic slowdown.
The oil price drop has also sent Gulf stock prices plummeting, wiping out billions of dollars of market value across the region and hurting major private firms like developer Emaar Properties and builder Arabtec Holding.
The heart of the problem, leading Kuwaiti economist Jassem al-Saadun said, is that Gulf states failed to seize on surging energy revenues to build up their economies outside the oil sector.
“Gulf states have missed an important opportunity to reform and build a real diversified economy,” Saadun said.
“Public spending has soared to new record highs and it was not for vital infrastructure projects to diversify the economy,” Saadun said.
“It was mostly for wages, salaries and subsidies… and handouts for buying political loyalty especially after the Arab Spring.”
Reserves only ‘temporary cushion’
Economists are warning that even with the huge reserves many have built up, a prolonged drop in oil prices will hit Gulf states hard.
“The prevailing growth model for most oil-exporting countries has left them vulnerable to a sustained decline in oil prices,” the International Monetary Fund said in a research bulletin last week headlined: “It is high time to diversify”.
Ratings agency Standard & Poor’s is warning that an extended decline in oil prices will likely slow the Gulf economies, reducing spending on their massive infrastructure projects and hitting the private sector.
S&P has lowered its outlooks for Saudi Arabia, Oman and Bahrain, though it has maintained their ratings because of their impressive reserves.
The IMF has said that – barring Oman and Bahrain, which are already in deficit – GCC states will not be greatly affected in the short-term as they can tap into reserves estimated at US$2.5 trillion.
But these funds, the IMF warned, will “only provide a temporary cushion”.
In some parts of the region, the belt-tightening has already begun.
Regional powerhouse Saudi Arabia has insisted it will maintain its high spending levels by tapping into reserves.
But Kuwait has ordered major spending cuts and is considering lifting petrol and electricity subsidies.
‘Options are no longer easy’
Moody’s Ratings said Gulf countries are likely to start with cuts in spending on “non-strategic investment projects” but will eventually face tough choices.
“Slowing or even reversing the growth in current government spending, including subsidy reforms, will be more difficult as governments seek to meet social welfare demands,” the agency said.
As oil revenues in Gulf states surged from about US$100 billion in 2000 to US$729 billion last year, public spending grew from about US$150 billion to US$547 billion, according to IMF figures.
But the spending focused mostly on items like wages and subsidies – not crucial capital investment.
“Current expenditure has surpassed capital spending by miles,” said M.R. Raghu, head of research at Kuwait Financial Center (MARKAZ).
Cutting that spending now is difficult as it means taking courageous decisions on wage and subsidy reforms, experts say.
The Gulf states have adopted a generous cradle-to-grave welfare system with highly subsidised services and fuel and no taxation.
The World Bank has urged GCC states to start immediate cuts to energy subsidies, which cost them more than $160 billion annually, and Saadun said it was “inevitable” they would have to start introducing taxes.
Such moves would prove deeply unpopular. But Saadun said putting them off would eventually make more drastic efforts necessary, which could spark the kind of social unrest that has hit other countries in the region.
“Yes, these measures are politically sensitive, but the alternative is an Arab Spring in the Gulf. Options are no longer easy.”
– See more at: http://news.asiaone.com/news/world/gulf-braces-tough-times-over-oil-price-plunge?page=0%2C1#sthash.GL7g7PCv.dpuf
In the UAE, Dubai has announced plans to raise electricity and water charges. Similar measures are expected by other countries.
– See more at: http://news.asiaone.com/news/world/gulf-braces-tough-times-over-oil-price-plunge#sthash.kCMZFtpD.dpuf
7 Comments on "Gulf braces for tough times over oil price plunge"
Bandits on Fri, 19th Dec 2014 7:45 am
The over populated desert kingdoms will discover soon enough that they can’t eat oil. At first glance stockpiling money, investing in tourism infrastructure and even property might have appeared to be “diversification”. Those things depend on healthy globalization and faith in the currency of choice. What good is tourism in a depression. What good is “money” if food exporting countries won’t sell at any price when they have to feed their own. Maybe oil will be traded for food, I can’t know of course but I don’t think living in an over populated desert world is ideal, if the number one export is going for chump change. Yemen can attest to the result of declining oil export revenue.
shortonoil on Fri, 19th Dec 2014 8:59 am
And, things aren’t going to get any better:
http://www.thehillsgroup.org/depletion2_022.htm
So who is going to get hit the hardest? The industrial economies who are totally dependent on oil for their existence, or the oil producers who are totally dependent on oil for their existence.
Of course, living in a sand box where it hasn’t rained for forty years is not going to be an advantage!
Kenz300 on Fri, 19th Dec 2014 9:08 am
“Gulf countries are bracing for tough times as vital oil revenues fall and after they missed a golden opportunity to diversify their economies in a decade of unprecedented windfalls, analysts say.”
——————
Diversify….diversify…diversify……
It is time to end the oil monopoly on transportation fuels…….
Bring on the electric, flex-fuel, hybrid, biofuel, CNG, LNG and hydrogen fueled vehicles. The more diversification the better.
Bring on the wind, solar, geothermal and wave energy and second generation biofuel energy production.
Climate Change is real…… it is time to speed up the transition away from fossil fuels.
bobinget on Fri, 19th Dec 2014 9:43 am
Gulf nations have been busy buying low-priced African farmland.
http://www.greenprophet.com/2011/01/arab-states-buy-african-farmland-as-food-prices-skyrocket/
Note: this article is dated 2011
Here’s a more recent observation;
2014
http://www.vox.com/2014/11/20/7254883/farmland-trade-land-grab
Of course call it what YOU will. I call it genocide.
foxv on Fri, 19th Dec 2014 10:22 am
umm…
“as they can tap into reserves estimated at US$2.5 trillion.
But these funds, the IMF warned, will “only provide a temporary cushion”.”
so at a $350B loss of revenue they have a temporary cushion of only 7 years.
Not to mention I’m sure there’s lots of fat to trim in their budgets, and lots not forget cheating and over production.
I think people are fooling themselves badly if they are expecting a quick turn around in oil prices.
Shale and tar sands are in for a world of hurt.
Makati1 on Fri, 19th Dec 2014 7:21 pm
Sheikh Rashid bin Saeed Al Maktoum was responsible for the transformation of Dubai from a small cluster of settlements near the Dubai Creek to a modern port city and commercial hub[citation needed]. His famous line, “My grandfather rode a camel, my father rode a camel, I drive a Mercedes, my son drives a Land Rover, his son will drive a Land Rover, but his son will ride a camel,[2]” reflected his concern that Dubai’s oil, which was discovered in 1966 and which began production in 1971, would run out within a few generations. He therefore worked to develop the economy of Dubai so that it could survive after the end of oil production, and was a driving force behind a number of major infrastructure projects to promote Dubai as a regional hub for trade: (Wiki)
Seems he was correct about the timeline, but maybe wrong about Dubai surviving the collapse. Who want to live in a city surrounded by oil wars?
BTW: I vacationed there in 2006 and 2007. Beautiful place. Crazy buildings. Nice people.
Bloomer on Fri, 19th Dec 2014 7:31 pm
Lower oil prices will stimulate demand for goods and services. While bad for the environment it is good for the overall global economy. Enjoy it while it last, because the next leg up in crude prices will be higher then the last high.