Abu Dhabi has to cut its cloth economically

24 February 2010

When oil was trading at above $100 a barrel, Abu Dhabi seemed to have money to burn. Today the emirate may have to pare back some of its plans

Abu Dhabi faces tough decisions as it tries to balance plans for economic diversification with low demand for commodities and the needs of its debt-ridden neighbour, Dubai.

When the emirate unveiled its Abu Dhabi 2030 development plan three years ago, industrialisation lay at the heart of the vision for a less petrodollar-dependent future.

A key element was the creation of huge new petrochemicals facilities. By 2008, consultants were being told that the emirate wanted to build a new petrochemicals plant every 20 months, at a cost of tens of billions of dollars. At a time when oil was trading at in excess of $100 a barrel, hydrocarbons-rich Abu Dhabi seemed to have money to burn.

Today’s world is very different, however, and Abu Dhabi may well have to pare back its plans, at least in the short term.

Demand for petrochemical commodities collapsed in 2008 and 2009, as consumers cut spending in reaction to the global financial crisis. As giant new production facilities came on stream, the market was severely oversupplied.

Demand is now recovering, but it will be at least five years before there is sufficient growth for the market to stabilise let alone for commodity prices to rise significantly.

Oil prices are currently close to $80 a barrel, after falling below $40 a barrel in early 2009, but Abu Dhabi has other financial concerns, namely neighbouring Dubai, which it bailed out to the tune of $20bn last year. More money may be needed this year, which could undermine Abu Dhabi’s ability to fund all of its planned projects.

Holding back some of its costly petrochemicals plans will hurt the emirate’s pride, but it is a valuable lesson – an industrialisation programme needs to be workable in the bad times, just as much as the good.

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