Global oil prices have slumped more than 40% in the past year amid speculation that a supply glut will persist, but a string of optimistic forecasts about oil prices bottoming out next year is now emanating from key stakeholders. From HE the Minister of Energy and Industry Dr Mohamed bin Saleh al-Sada to his Saudi counterpart Ali al-Naimi; from Opec secretary-general Abdalla Salem El-Badri to Kuwait’s Oil Minister Ali al-Omair, a consensus is emerging that current oil prices are unsustainable and, driven by demand in Asia, (estimated to rise by about 16mn bpd to almost 46mn by 2040) prices will start stabilising. While al-Sada early last month sounded optimistic about signs of recovery in 2016, al-Naimi said this week that demand would soon reflect the “attractiveness” of the current level of crude prices.
The prolonged decline in oil prices, for sure, has acted like a double-edged sword to bleed producers and consumers alike. Investments have been cut by $200bn this year and will drop another 3% to 8% next year, Saudi Vice Minister of Petroleum & Mineral Resources Prince Abdulaziz bin Salman said in Doha on Monday. Nearly 5mn bpd of projects have been deferred or cancelled, he said.
Despite a glimmer of hope for a turnaround, it may still be too early for policy makers in the oil-driven economies of the Gulf Co-operation Council (GCC) countries to relax. An unenviable regime of relatively lower oil prices, contrasted with the consistent $100-levels Gulf countries had been quite comfortable with for long, is here to stay even if demand picks up next year, according various forecasts. And the plunge in oil prices is expected to lead to fiscal deficits in all six GCC countries.
Qatar’s leaders and policy makers are sounding quite realistic about the long-term impact of lower oil prices on state finances. HH the Emir Sheikh Tamim bin Hamad al-Thani has said Qatar will put together a state budget for 2016 that avoids a big deficit despite lower oil and gas revenues. The budget will be “realistic” to show a “moderate” deficit to reflect the change in oil prices, HE the Finance Minister Ali Sherif al-Emadi said in Doha on Sunday after his meeting with International Monetary Fund managing director Christine Lagarde. And on Monday, HE the Minister of Development Planning and Statistics Dr Saleh Mohamed Salem al-Nabit spoke of the need for “greater discipline” in government spending and reforms in Qatar’s subsidy and tax systems.
GCC countries, no doubt, have had notable success in diversifying away from hydrocarbon revenues and coping well with the oil fall by banking on their fiscal reserves and initiating policy reforms. But the fact remains that it’s still largely the oil-driven sovereign spending that filters down to the wider economies. Gulf policy makers now need to focus on fortifying a self-sustaining private sector to delink its growth from state spending and to cushion the impact of any oil revenue volatility in future.
