Predicting oil prices is a tricky pastime. Those that confidently forecast earlier this year that there would a soft landing for crude, which reached an unsustainable peak of about $110 a barrel in 2012, are learning another painful lesson. On 14 October, the spot price for West Texas Intermediate (WTI) crude was $81.72 a barrel. On 14 June, it was about $107 a barrel.

Reasons cited for the fall include slowing global economic growth, increased production by Iraq and non-Opec states, and rising US liquid petroleum output. Inevitably, there are suggestions of conspiracy.

“Saudi Arabia could be pushing for crude prices to fall to $85 a barrel for years in a desperate attempt to stop the oil-fuelled rise of the Islamic State [of Iraq and Syria] (Isis) terror group by undermining its finances,” said a report by Bank of America Merrill Lynch in September. At that point, WTI was $93 a barrel.

The IMF forecast is based on oil easing gently towards $90 a barrel over a number of years

In the week ending 14 October, both Kuwait and Saudi Arabia rejected a call from fellow Opec member Venezuela for an emergency meeting to check the price slump. The consensus, however, is that Gulf producers are responding to intensifying oil price competition. Iran, Kuwait and Saudi Arabia are reported to be offering discounts to Asian buyers in an attempt to secure market share.

Volatile prices

Politics can never be dismissed as a factor shaping oil price and production trends. This is particularly true in the Middle East, which is undergoing a geopolitical shock of unprecedented proportions. The war against Isis in Iraq and Syria could last for years.

But the world economy is also becoming more complex. The role of spot markets in all financial instruments and commodities is growing more important. The oil price, once managed by oil companies and major energy exporters, has become increasingly volatile as a result.

In the past four years, WTI has fallen as low as $70 a barrel and gone as high as $110. The sharpest fall in the history of oil took place in 2008, when it dropped from almost $150 a barrel in July to under $40 in December. It was back above $100 a barrel in April 2011 in history’s sharpest oil price rebound.

The disintegrating capacity of Opec and other oil industry institutions to contain price volatility is particularly challenging for oil-exporting Middle East nations, which produced almost 27 per cent of total world crude output in September.

Oil and gas production and refining directly account for up to 25 per cent of the GDP of Middle Eastern countries and, indirectly, often more than 50 per cent. The fall in the crude price recorded since June will knock up to 5 per cent off their GDP if it is sustained for a year.

For the GCC states, income from oil and gas sales accounts for the overwhelming majority of government revenue. If oil falls below $75 a barrel, most will have to start cutting state spending or face unsustainable budget and balance of payments deficits.

So spare a thought for the IMF team responsible for developing credible long-term forecasts for the global economy. Its latest projections were published at the start of October, ahead of the annual meetings of the Fund and the World Bank in Washington. But since they were finalised, the oil price has fallen by more than $10 a barrel, or almost 10 per cent.

Unforeseeable factors

All macroeconomic models now incorporate variables that seek to take into account non-market factors such as Opec decision-making. But they remain incapable of coping with unforeseeable developments, which in the Middle East have included regime change, political instability and war since the start of 2011.

As a result, the IMF has made no attempt since 2010 to quantify the GDP of Syria. GDP figures published by the IMF in October are estimates for Yemen after 2008 and for Djibouti after 1999. The scientifically-minded will also wonder how it has been possible to compile credible data about Libya. This is compounded by the systemic doubts that surround the validity of economic data reported by many countries and not just in the Middle East.

All IMF macroeconomic data is captured at the level of individual countries. But it is often presented in terms of regions: the Euro area, major advanced economies, the Commonwealth of Independent States, emerging Asia, emerging Europe, Latin America, sub-Saharan Africa and the Middle East and North Africa. This grouping includes Afghanistan and Pakistan, but, for political reasons, excludes Israel.

A further problem is developing a benchmark for judging growth in different Middle East countries. Nominal figures – output measured in national currencies or in dollars – will flatter growth trends as inflation is included. The IMF therefore converts nominal GDP into real GDP using a well-tried technique for eliminating price increases from national account data.

The catch for Middle East countries is this can involve excluding the macroeconomic impact of oil price changes. If price increases after 2002 are excluded, the GDP of the region’s economies would be measured as if the oil price was still about $20 a barrel. The result would be a sharp underestimate of the value of output and income in major oil and gas exporters. It is a conundrum that economists have yet to address.

Rapid drop

Finally, there is the challenge of projecting oil prices. The IMF forecast is based on oil easing gently towards $90 a barrel over a number of years. Meanwhile, in the real world, it has gone down to close to $80 a barrel in not much more than three months. These factors should be borne in mind when the IMF’s October forecasts are considered.

The IMF data show the aggregate GDP of the 22 countries included in the Middle East and North Africa, plus Afghanistan and Pakistan, rose by 2.24 per cent in dollar terms in 2013 to almost $3.4 trillion. Its forecast shows the region’s aggregate economy (without data for Syria) growing by 5.3-7 per cent a year in nominal terms in 2015-19.

This looks encouraging. But what do the inflation-adjusted figures show? The IMF does not provide an aggregate for the region. At the level of individual countries, there is wide variation. The IMF’s forecast for 2015-19 shows that real growth in the region will vary from 13 per cent in total for Iran, where international sanctions are assumed to continue to be an issue, to more than 60 per cent in Libya, where reconstruction, including the restoration of oil export capacity, is expected to be significant.

Seven of the 10 fastest-growing economies in the IMF forecast for 2015-19 will be low-income emerging nations, including countries plagued by internal conflict. This can only be based on the assumption that political factors in these countries will have a smaller rather than larger impact. It is a nice thought.

The IMF current account forecast, which again does not include a projection for Syria, is positive but misleading. In aggregate, the region is forecast to have a surplus of $250bn in 2014. This is projected to fall to about $125bn in 2019. But once the surpluses forecast for the six high-income GCC states are deducted, a deficit emerges that rises to $64bn in that year.

The aggregate GCC surplus is projected to amount to almost $1.5 trillion in 2014-19. This could be cut by at least half if oil prices remain around the levels seen since the start of September. But even if they do not, there will be a huge difference in the current account position of Oman, forecast to have a deficit in 2019, and Saudi Arabia, forecast to have a surplus of about $75bn in that year.

New borrowing

The final set of IMF data is about government spending and income. The IMF provides no aggregate budget deficit data for the region, but a net borrowing figure expressed as a percentage of GDP can be used as an analogue.

These figures show that 15 of the 21 countries covered by the forecast will have a net government borrowing requirement in 2019. This will be in excess of 5 per cent for five: Oman; Libya; Bahrain; Egypt; and Lebanon. At the other extreme, Kuwait and the UAE are both forecast to have the capacity for government lending in excess of 5 per cent of GDP.

Once again, uncertainty about oil price trends will need to be taken into account. Crude prices around present levels in that year would significantly depress surpluses and increase deficits in 2019 and the years before for the major oil and gas producers.

Forming a clear view about the future based on the IMF’s forecasts is a challenge. But a sensible reading of its figures leads to the following conclusions:

• The economic performance of countries within the Middle East region will vary considerably in the years to 2019
• Major oil and gas exporters will enjoy lower rates of growth than non-oil exporters in this period because it is likely oil prices will fall rather than rise in the period. The most likely exceptions will be Iraq and Libya, which have the potential to enjoy robust increases in oil exports and reconstruction expenditure, but only if political trends are benign
• Political factors are playing a critical role in determining economic trends in most of the countries of the region and could lead to substantial underperformance compared with the IMF forecast for 2014-19
• Oil price trends in the period are likely to be more unstable than the IMF assumes and there is a higher risk of downward price pressure than the opposite.

Of course, this could be totally wrong. Ten years ago, no one was forecasting the great oil price boom that occurred in the years to 2008. No one forecast the sharp rebound after 2009. We live in uncertain times.