Friday, 22 April 2016

Does the Fall in Oil Prices Impact the Gulf Economy?

Oil prices have slumped to levels lower than that seen in 2003. This has been especially hard on the Gulf countries, who according to GeoExPro cover only 3.4% of the Earth's surface, but are home to approximately 48% of the world's oil reserves. Naturally, the Gulf countries' economies are heavily dependent on oil exports. If we go by budget revenue shares, Saudi Arabia's is 73%, Bahrain's is 70%, Oman's is 45% and Kuwait's is 60% coming from the oil sector.
The recent slump in oil prices is attributed to the economic slowdown in the European countries and China, triggering a fall in demand for oil, along with the oversupply by oil producing countries. The lifting of sanctions on Iran too has escalated the problem. The GCC market countries have in fact started taking drastic austerity measures, such as increasing fuel prices in the domestic markets, imposing taxation on expatriates, job cuts and cancellation of increments to employees. Since oil makes up for more than 80% of revenues of the GCC countries, severe impacts have been visible on their economies.

Oil Prices & the Gulf Economy

1.      According to a report by the Kuwait Financial Center
·         Huge budget deficits are being caused by the slump in oil prices. This will force the GCC countries to burrow $285-$390 billion through 2020 to finance the gap.
·         There will be a massive shortfall in oil revenues of approximately $318 billion.

2.      The governments will tweak their economic policies, with
·         The Gulf countries trying to cover losses by reducing subsidies on water, electricity and petroleum heavily.
·         Implementing heavy cuts in government spending and state sponsored projects.

3.      They will have to rethink the future
Furthermore, other causes of the reduction in oil prices perhaps include the improvements in technology and the increased and efficient extraction and popularity of shale gas. All this might also bring trouble for the GCC market, which could face even lesser demand than before. This indicates that there is a need to bring in diversification and bring down the dependency on oil, like the UAE has done with hydrocarbon, which now accounting for around 20% of its exports.
The falling prices are also expected to impact foreign investment. The declining oil prices have triggered the petro-states to take hard calls. Due to this, they are either using up their reserves or borrowing money. Anticipating depreciation of currencies in the Gulf countries, rating agencies like Standard and Poors as well as Moody’s have downgraded their ratings, which reflects the weakened investor environment that will make recovery difficult.