MEED Yearbook 2013: Challenges ahead for Middle East economies

06 February 2013

The most worrying outcome of the political upheaval of the past two years is the widening wealth gap between the region’s oil producers in the Gulf and the large-population, oil-importer markets of North Africa

The growing divide is creating new political and economic tensions across the region, fuelling political and religious extremism, and hardening the forces of revolution and conservatism at the same time.

The result is that the regional economy in 2013 will be characterised by an increasingly  two-speed Middle East that will see Gulf governments investing heavily in infrastructure and job creation initiatives, as well as a further tightening of security measures. Decision-making in the oil importer countries, meanwhile, will be stifled by growing social and political divisions that will prevent any meaningful progress on issues that are putting a brake on development, such as winding back the role of the state in economic activity, and cutting expensive food and fuel subsidies.

The regional economy in 2013 will be characterised by an increasingly two-speed Middle East

While the importing nations are desperate for a sharp fall in oil prices, it would raise very significant concerns for the oil exporters whose post-Arab Spring spending requires oil prices to remain high in order to balance their budgets. A protracted fall in oil revenues would put a brake on development investments and trigger a slowdown in business activity.

It is a measure of global concern about disruption to oil supplies from a flare up of geopolitical tensions over Iran’s nuclear programme or the regional risk from Syria’s civil war that oil prices have remained so high. The fundamentals of energy supply and demand suggest that oil prices should be far lower than they are. So, despite the global economic gloom caused by Europe’s sovereign debt crisis, oil prices are forecast to remain at high levels in the coming year, and the GCC states will continue their investment drive.  

However, the oil producers were given a sharp reminder in November of the need to invest and diversify their economies when the International Energy Agency made headlines in the region, forecasting that the US would overtake Saudi Arabia to become the world’s biggest oil producer within eight years.

Whether or not the forecast holds true and putting aside any misgivings there may be about the political message, the trend has interesting implications for the region’s projects market. If US oil output grows and the drive for energy efficiency steps up in the Western Hemisphere, the US will once again become an energy exporter. This combination of softening domestic demand and increased production could have a depressing effect on the global oil price. All this is predicted to happen by 2020, which gives the governments of the Middle East’s oil exporters a narrow window of opportunity in which to exploit the huge surpluses generated by high prices per barrel and relatively low break-even oil prices.

A MEED Subscription...

Subscribe or upgrade your current package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.

Get Notifications