Region can live with falling oil

17 October 2008
Oil demand is still growing faster than producers can supply it. The region can not only live with a correction, but can thrive on it.

With a slowdown in global economic growth looking certain, Opec this week cut its oil demand growth forecast for 2009 by 100,000 barrels a day (b/d) to 800,000 b/d, putting total daily demand at about 87.6 million barrels.

The downgrade caused the oil price to slump to a 15-month low of about $68 a barrel on 16 October.

And, even though the falls have prompted Opec secretary general Abdalla el-Badri to bring forward to next week an extraordinary Opec summit planned for November, which could lead to a cut in output, the falls mask the point that the underlying fundamentals of the market will continue to put upward pressure on energy prices in the longer term.

Global demand for energy is still growing faster than oil producers can supply it.

Even with the recent dip in oil prices, Gulf governments are in a strong position. Most based their 2008 spending plans on an oil price of $45-50 a barrel.

This year’s record highs are therefore delivering another year of bumper surpluses that governments will steer directly into the economy, or into their stabilisation funds.

Analysts expect prices in 2009 to average $75-90 a barrel. Even towards the bottom of this range, government-backed projects will be unaffected, although if prices were to fall much below that, it could mean slower project activity in the GCC.

One benefit from lower oil prices is that they will remove the worst of the pressures of an overheating economy.

Rampant inflation has pushed up the cost of living in the GCC to uncomfortable levels, and caused developers to bust project budgets.

The overstretching of the construction sector has also allowed weaker suppliers to gain a foothold in the region, and to corners being cut on safety and quality.

Provided oil prices do not fall significantly below $75 a barrel for a prolonged period, the region can not only live with a correction in the oil market, but can thrive on it.

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