Would anybody have thought 18 months ago that Brent crude would be languishing around $38 and gas prices similarly depressed? I do think that many oil companies and oil producing governments buried their heads in the sand (in some cases metaphorically!) before realising that this was not just a temporary blip but a significant downward trend driven by a whole range of factors on both the demand and the supply sides.
In my opinion, these are not likely to go away and on the demand side a number of new developments, which in effect replace hydrocarbons as a fuel source will dampen down any upturn in pure demand for crude oil and gas.
It seems probable that prices will fluctuate around present levels for some considerable time to come and may even test occasionally a rather lower level.
Expert predictions (such as they are!) suggest that $60 might be achieved in two to three years’ time and that that might be a level for the future. Interestingly, for those old enough to remember what happened in 1986 (the price then in real terms is probably not dissimilar to where we are today) and it took quite a number of years for the price to recover materially. We have to then consider what the implications are right now and in the medium and long terms for our GCC (Gulf Cooperation Council) economies.
Right now we are seeing budgets being cut, in my opinion not drastically enough, projects being deferred, privatisation of state enterprises back on the agenda, payments slowing down, focusing on non energy related projects for exports, focus on employee benefits and salaries in the public sectors – far too generous – imposition of general sales tax and taxes across the board along with removal of subsidies.
Countries with higher populations of nationals such as Saudi Arabia and Oman have particular challenges with regard to public sector employment.
A refocus perhaps taking place on vocational training for nationals and exiting of expatriates across the board.
Given the political environment across the region there are concerns and indeed there may well be social consequences driven by the foregoing and the broader political environment in the Gulf region.
This is all very bad news generally for business. With the heavy dependency in most countries on government spending to fuel economic activity, curtailment and slowdown will have a significant impact. If the mid-to-late 1980s are any guide, there could indeed be widespread pressure on businesses across the board and consequently on the banking and financial services Industries.
It is certainly worrying that during 2015 bank lending expanded at a significant rate in several of the GCC countries.
Seen against a background of depleting revenue and government spending this perhaps is a “warning light” for the future. Thus far, we have seen little evidence of bank regulators really taking the situation very seriously and there have to be concerns about asset quality and the ability of external auditors to adequately value loan assets in the balance sheets of the banks especially with the introduction to IFRS Standards requiring external auditors to build in a view of “expected loss” into the future. This new standard arrives at a time which is extremely inconvenient!
Tough times ahead - watch this space!
Happy New Year!
* Glasgow-based John R Wright is an academic, veteran banker and a former CEO of Oman International Bank and Gulf Bank, Kuwait.
John R Wright
