Monday, 29 February 2016

How Does the Gulf Impact the Price of Oil the World Over?

The Middle East economy is dominated by the countries comprising the Gulf Cooperation Council, or GCC. The GCC nations include Kuwait, Qatar, Saudi Arabia, Yemen, the United Arab Emirates (UAE) and Bahrain. The Gulf not only has a sizable economy, but also a high average GDP per capita of USD 36,000. In fact, Qatar has the highest GDP per capita in the world. The Gulf nations control almost 40% of the world’s oil reserves, and oil and natural gas is the biggest sector in the Gulf economy. Qatar has another distinction of being the largest natural gas producer in the world. Clearly, the Middle East economy is awash in oil and money!

How does the Gulf impact Oil Prices?

Saudi Arabia, the largest of the GCC nations, accounts for one tenth of the world’s oil production. Even with dwindling oil reserves, the Gulf region controls over 40% of the world’s oil reserves. This combination of factors is the reason why the Gulf region has a large impact on oil prices. Saudi Arabia is the de facto leader of the Organization of Petroleum Exporting Countries, or OPEC. OPEC makes decisions on oil production, which in turn impacts the price of oil. 

Oil and gas is the largest sector of the GCC economy. However, all the nations in the GCC are attempting to diversify their economies, given the aspirations of their relatively young populations, finite oil reserves, and plenty of financial resources from selling oil. Therefore, in Saudi Arabia, the non-oil sector accounts for 60% of the economy. Saudi Arabia’s economy is dominated by petrochemicals and manufacturing. 

In Qatar, while the hydrocarbons segment accounts for 38% of the economy, financial, insurance, real estate and business services constitute the next largest segment, accounting for 13% of GDP. Construction adds another 13%, and manufacturing 9%. Kuwait may be small, but it accounts for 8.6% of the world’s proven oil reserves. Nevertheless, the Kuwaiti government is committed to diversification of the economy, through privatization of state assets and a large development plan for the economy.

The Middle East economy not only impacts oil prices, but also plays a large role as an international investor. The sovereign wealth funds (SWFs) in the region have invested in government debt worldwide, particularly in emerging market sovereign debt. In fact, the SWFs of UAE, Saudi Arabia and Kuwait rank in the top ten SWFs of the world, according to the Sovereign Wealth Fund Institute.