May 13 2012
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Why the GCC does not need to worry about a falling oil price
That's according to research from analysts at Standard & Poor's, the credit rating agency. It argues that the health of the oil exporting GCC (Gulf Cooperation Council) economies is better now than in 2008/09 at the height of the global credit crunch even though the sovereign debt crisis in Europe continues to rage on.
So although oil prices may have fallen USD 10 from their recent peaks, there needn't be any panic that oil is going to crash, according to the research. This is all due to the outperformance of emerging markets relative to developed economies. Although we have seen China's economy slow down and its imports drop this doesn't change the overall structure of energy demand in emerging markets. Although countries in the developed world are actively pursuing policies designed to try and reduce energy consumption, the growing middle classes in the emerging world and their voracious appetite for cars should keep global energy demand growing at approx. 1.75% per year for the next decade. However, production is only expected to grow by 1% per year, which leaves a sizable deficit. This should ensure an elevated oil price for the foreseeable future, according to S&P research.
Luckily for the GCC it is particularly well placed to benefit from the shift in oil demand from the west to the east as nearly 70% of its crude exports go to Japan and developing Asia.
Secondly, the health of the GCC has important implications for the rest of the world. As the developed world is trying to wean itself off of unsustainable borrowing habits, its export sector needs to grow. The UK, for example, saw its exports to the Middle East and North Africa expand by 25% in 2011. Thus, continued strong oil revenues in the GCC is good news for exporters from the West.
Added to that, S&P says that the region needs to nurture its private sector. The oil industry tends to be government-owned and a vast number of GCC nationals tend to work in the public sector - 90% in the UAE and 55% in Saudi Arabia - where wages and benefits tend to be higher than in the private sector. However, for the GCC to avoid the fate of some Eurozone countries it should plan now for a rainy day when oil revenues may dry up. S&P urges Saudi Arabia to stick to its plan to boost the private sector as a share of its economy from 70% now to more than 80%, and Kuwait's 5-year development plan wants to see the private sector grow from 45% of the economy today to more than 60% by 2014.
These are ambitious targets, but the Gulf can see what is going on in Europe and the perils of an unsustainable public sector. It is better to try and bring about economic change when the back drop is strong as it is currently in the GCC, rather than during a crisis as Greece is finding out.
A drop in the oil price isn't the most concerning thing for the Gulf right now; a lack of meaningful economic change is much scarier in the long-term.
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