Friday, January 15, 2016 – Oil has remained a driver of economy, a geo-strategic non-renewable energy resource, and a commodity that even today affects everyone. Economists opine that there has been paradigm shift in oil sector. Due to increase in alternative energy resources, the shift in oil demand is affecting the market price of oil. Owing to this, Middle Eastern economies that for decades have been sustained by steady flow of Black Gold are experiencing budget deficit for the first time. The economic indicators project that these oil economies would in coming years face economic challenges. These indicators include oil price shitting a low of US$35 last month, the average price of Brent crude on course to be the lowest in 14 years, and an estimated US$1.3 trillion been wiped off value of oil companies. Some analysts have predicted that before stabilizing, the oil price could go as low as US$20 which would put pressure on oil producing block – OPEC that has already lost US$500 billion in revenue according to International Energy Agency.
As far as its effect on individual state is concerned, for instance, Saudi Arabia’s budget deficit last year was US$98 billion. Nevertheless, the Budget deficit and fall of oil prices was not as bad as the IMF predicted. Like for Saudi Arabia, it was predicted to be 21-22% of GDP but it ended up with 13% which can be attributed to kingdom’s diversification of revenue sources. Back in 2013, about 90% of Saudi Arabia’s revenue came from oil, in 2015 it accounted for 73%. Saudi government also continues to spend although market sources were predicting it will contract in terms of spending in 2015.
Despite of these slightly better figures, one should not ignore overall declining indicators. Because of low revenues from oil, the budget deficit of the regional states needs to be adjusted. For instance, for Saudi Arabia, it can be done by cutting production but despite of desiring that oil prices should go up and having the possibility to curtail the output needs, chances are negligible given OPEC nations would not agree to that. Firstly, because of the uncertainty that if production is cut, prices will go up, something the group did in 1980s and it led to tumbling effect. Secondly, the energy market has changed considerably in nature and function, far more than it did in last 100 years. Along with the exploration of shale gas factor; the demand supply factor is affecting them. Demand is not going up, markets are no more crazily consuming energy, whereas supply has been plentiful, that is pushing prices lower.
According to analysts, the prospect of Iran to bring to the market 500,000 barrels additional daily production along with Iraqi oil production of almost 4 million barrels per day can push down the pressure on the oil price. But firstly, the capabilities of Iran to flood the market are unidentified as like Saudi Arabia, Iran is not a swing producer and has technical constraints. Secondly, Iran’s economy is in tatters at the moment and it needs a lot of investment and a lot of income, but with oil price at US$30, it will be problematic for Iran to attract the investors to develop its oil sector.
In view of above, the Middle Eastern and Gulf States have already warned of bad effects on their economies, on account of being situated in a region where economies are dependent on oil despite talks of diversification. In fact, their diversification has also been partly based on oil. If something happens to oil, it poses challenges not only to these countries but on the stability of the whole region. Sensing the regional impact of the falling oil prices; analysts assume that Middle Eastern countries are looking to some measures to make some recovery to the shortfall. These can be taxing companies or individuals, to have region wide sales tax and to diversify economy.
Already being slow on reforms has cast spill-over effects on the region. For long time, increasing oil prices comforted these states. Moreover, bounty of oil didn’t put them in the need to bring reforms and diversify economy. Additionally, in the past, the so called geopolitical premium of what’s happening in the region was important when the oil prices were looked at, but it doesn’t hold the same significance today. Middle East is changing in fundamental way and is not the same as it was seven or ten years ago. Despite all havoc and uncertainty going on, oil is going down which indicates the paradigm shift in the way oil is being priced globally. The energy market has changed and technology is going to be the major push forward in the next 20 years. Not only Middle East, but all the regions globally have fundamentally shaped up.
Now with falling oil prices and the expectations that the prices are not going to recover very soon, Middle Eastern states are confronted with the reality of the need to develop alternative sources of revenue and carry out economic reforms. UAE in the Gulf region is an example for these states that has remained pro-active about the issue of reforms and diversification of economy.
Ultimately, it should be kept in mind that the Stone Age didn’t end because the world ran out of stones, similarly oil age is not going to end because world will run out of oil. Only the oil will no longer be a strategic commodity which it used to be, the market has fundamentally changed, there are lot of alternatives, there is lot of competition, lot of buyers, lot of resources and technology is changing this. Oil is an important part of economy in one sector i.e., transport sector which is also changing. Thus a new paradigm shift is on the way and economy is all about survival of the fittest. Hence the Middle Eastern state should pursue economic policies in order to serve their national and regional interests.
Published by Pakistan Observer on January 15, 2016
Link of the Article: https://pakobserver.net/detailnews.asp?id=285767
Disclaimer: Views expressed are of the writer and are no necessarily reflective of IPRI policy.