With oil prices tumbling below $40 at the start of December, the Gulf economic boom will soon become a crash that could do lasting damage to the region’s long-term development hopes.
If prices don’t recover in the year ahead, combined GCC exports will fall by almost half and GCC gross domestic product (GDP) by at least 30 per cent in the sharpest economic contraction ever recorded.
A current account surplus likely to approach $400bn in 2008 will become a deficit in 2009. Five of the GCC’s governments will go into the red.
Six tsunamis are already sweeping the global economy:
Slumps in equities
GCC banking and decline in interbank lending
Real estate asset prices
Currency turbulence – the fall and subsequent rise of the dollar
Decline in air passenger and cargo traffic
Decline in world cargo trade.
The seventh tsunami, acollapse in oil prices, is now hitting oil exporters generally and Gulf nations most heavily.
The dependence of GCC states on hydrocarbons industries has intensified as a result of the rise in oil demand and prices since the end of 2003.
In 2008, they produced an average of more than 16 million b/d, almost 20 per cent of the world total. About 13 million b/d was exported.
This year, oil and gas production accounted for 30-60 per cent of GCC GDP and more than 90 per cent of the export earnings of most GCC countries.
Being dependent on oil is a strength when prices rise, but a weakness when they fall as precipitately as they have since reaching a record level of almost $150 a barrel on 17 July.
The downturn was initially due to the unwinding of speculative positions accumulated on forecasts that oil would hit $200 a barrel. But it has been mainly driven by surplus supply.
Urged on by Western governments, GCC states lifted their output to almost 17 million b/d in July.
That month, production by the Organisation of the Petroleum Exporting Countries (Opec) approached 33 million b/d, up to 2 million b/d more than the market needed as the impact of the global crunch became obvious.
In October, Opec announced combined output cuts of 1.5 million b/d. But they had been only partly implemented by early December.
This has undermined confidence that Opec will be any more successful in halting the price crash in the second half of 2008 than they were in containing the price surge in the first six months of 2008.
Speculators, enriched by the oil boom, are preparing to make more money from an oil bust that has been largely caused by Opec’s uncertain response to the global slowdown.
Some argue that the GCC is well-insulated against the implications.
They have a case. GCC states banked balance of payments surpluses of more than $1 trillion since 1999.
Their budget surpluses since 2002 have totalled more than $500bn. Even if oil prices average $40 a barrel in 2009, GCC budget and balance of payments deficits will be no more than $60bn.
But there are compelling arguments for GCC countries to act to counter the oil price crash. Oil at $150 a barrel was too high. But it’s too low now.
At less than $70 a barrel, consumers are being encouraged to sacrifice investment in production capacity and alternative energies for the short-term pleasure of cheap petrol.
But the GCC doesn’t need $70 to justify investing in its oil industry. A price rebound is needed to maintain private sector confidence.
Gulf companies invest when oil prices rise in anticipation of increased public spending, particularly on projects, and do the opposite when prices fall.
An oil price tsunami will multiply the adverse impact on business behaviour of the six previous waves. Unchecked, it will nullify years of government action to promote non-oil, private sector economic activity.
It is for this reason that GCC governments should buck the historic pattern of cutting spending as oil prices fall and maintain and even increase capital expenditures.
Saudi Arabian Monetary Agency (Sama) governor Hamad al-Sayari said as much in an interview with MEED (5-11 December 2008). The message needs to be stated more explicitly, more often and by more GCC leaders.
But long-term private sector confidence requires oil prices reaching the right level and staying there. This will demand decisive measures by OPEC at its Algiers meeting on 17 December.
At least 1 million b/d will have to be lopped off combined production. Deeper cuts may be necessary if the bearish price sentiment is to be dispelled.
The bulk of the burden will have to be shouldered by the GCC’s Opec members, notably Saudi Arabia.
It will take guts to tell the US in recession that low oil price falls American motorists love will have to be reversed.
But these are testing times for the GCC and the wider Middle East. They call for decisive early action.