Two statements on 14 December made separately by Opec secretary general Abdullah al-Badri and UAE Energy Minister Suhail al-Mazrouei have left no room for doubt. Opec is not about to cut oil production to shore up plummeting oil prices.

“The decision has been made,” said Al-Badri, referring to Opec’s decision on 27 November to maintain production at 30 million barrels of oil a day – an output level set in 2011 when prices were spiking as a result of regional instability and emerging market growth.

“Things will be left as is,” he said.

Oil prices have fallen 45 per cent to about $63 a barrel on 15 December from about $114 a barrel in mid-June, raising concerns about the impact on regional growth and on government spending programmes.

The falls accelerated following Opec’s 27 November meeting, crashing 18 per cent in the three weeks since the gathering.

“We are not going to change our minds because prices went to $60 or $40,” said Al-Mazrouei. “We are not targeting a price, the market will stabilise itself.”

Structural change

We should not expect a quick rebound in oil prices. The region’s producers, led by Saudi Arabia and the UAE, see a structural change in the market based on long-term oversupply and are adopting strategies aimed at protecting their share of the global market.

It is a rational decision based on the view that the oversupply has been caused by the introduction of new capacity from outside the Opec group, in particular US shale oil.

Through its actions, Opec is arguing that if there are to be cuts, they should be made by the producers that added the un-needed additional capacity.

Rational as the Opec approach is, it does not make life simpler for business in the Gulf.

Established to provide market stability, Opec’s decision to allow oil prices to continue falling means that we can expect price volatility to remain for the foreseeable future, which makes economic forecasting very difficult.

With rising geopolitical tensions on one side of the equation and increasing global energy production capacity on the other, there are factors in play that could see energy prices spike sharply or slump dramatically. Or both.  

Forecasting oil prices

The prevailing view of analysts at the end of 2014 is that oil prices will find a new level, averaging somewhere between $60-70 a barrel in 2015 and 2016, although there are plenty forecasting outside this range.

A report by US investment bank Morgan Stanley on 9 December said oil could fall as low as $43 a barrel, although it said its assumption was for oil to average about $70 a barrel in 2015.

While Abu Dhabi Commercial Bank chief economist Monica Malik told MEED on 15 December that she felt that the consensus was oil prices will average about $80 a barrel in 2015.

There is a view that GCC producers have talked the price down since the Opec meeting, to deliberately target US oil shale producers.

This would represent a risky and aggressive approach by the region’s producers, but assumes there will be a strong rebound in prices in the second half of 2015 as global demand recovers and supply tightens.

An oil price average in 2015 close to the current prices of $60-$70 a barrel would represent a 30-40 per cent reduction in the prices seen over the past four years and will have ramifications for the region.

Impact on growth

A decline in prices will mean a fall in growth for oil exporters in 2015 due to reduced revenues, and if current prices are sustained through 2015, it could knock anything from 5-15 per cent off their GDP, although performance will vary widely from country to country.

Crude prices at current levels will depress surpluses and increase fiscal deficits. As a result, there will be delays in decision-making and in launching major new capital spending commitments, or in awarding major project contracts in the hope of negotiating better prices.

Speculative developments, particularly vanity real estate projects, are likely to be postponed. And non-strategic projects will be delayed.

But volatility in the markets will not divert the region’s governments from their long-term strategic objectives, which are to accelerate economic diversification into non-oil industries, to create jobs for locals, and to drive sustainability through energy efficiency, water conservation and food security programmes.  

Strategic priorities

With no significant debt, and huge financial reserves and overseas assets to fall back on, GCC governments will continue to invest in strategically important projects covering electricity and water supply, social infrastructure including schools, housing and hospitals, and transportation and logistics infrastructure.

And low energy and commodities prices are likely to accelerate strategic energy and industrial projects, as owners seek to take advantage of low costs. Low energy-consuming, high-tech industries such as aerospace, plastics and automotive will be a priority.

Reduced energy costs will ease the fiscal pressure on oil-importing countries such as Egypt, Jordan and Lebanon and will enable them to accelerate economic reforms through privatisation and public-private partnership projects.

There will also be increased focus on improving governments’ fiscal discipline, which could see tariffs rise, new taxes and greater opportunity for private finance in government projects and public services.

Despite the uncertainty, the Middle East will continue to offer some of the best opportunities for business anywhere in the world, although conditions are set to harden. And it will continue to be a global hot spot of long-term growth, despite a likely contraction in 2015.