GCC Economies and Global Oil Market Developments

Mohammed Al-Assoumi: GCC Economies and Global Oil Market Developments

  • 21 March 2013

The United Arab Emirates and other Gulf Cooperation Council (GCC) countries have been working hard to diversify their economies and gradually move away from their dependence on oil as a primary source of both income and energy. In recent years, they have achieved significant success in both areas. Their efforts have been guided by dramatic new developments in energy markets which have created challenges for countries around the world, particularly oil-exporting countries. It has hence become necessary for oil producing countries to re-evaluate the historical relationship between oil and development in the region.

These developments pose real challenges which can only be overcome by implementing long-term strategies which take all changes in the energy industry, at the local and global levels, into consideration and aim at defining approaches to be followed in order to minimize the negative aspects and maximize the positive ones.

Apart from the possibility of depletion of oil and gas resources, recent developments in the energy industry raise many questions that require much research and analysis. There has recently been a lot of talk about the production of shale oil and gas in the United States and in several other countries, which is a real threat to the conventional oil and gas industry, in terms of both production and prices. Although the impact of this development on oil prices is still limited, its effect on gas prices has been disastrous. The price of gas futures fell from $11 per thousand cubic feet five years ago to $3 at present, thereby causing severe damage to the world’s natural gas exporters.

As for oil, the limited reserves of shale oil discovered so far and the extraction costs, in the range of $50-$75 per barrel, is too high compared to less than $20 per barrel of oil in the Gulf region. This has limited competitiveness of shale oil and its effect on supplies in the global oil market. This high cost means that oil prices below $80 a barrel are unlikely, which is good news for oil exporting countries, including the GCC countries. They will be able to cover their development needs in the foreseeable future. It also negates forecasts that increased production of shale oil will lead to lower prices and create financial challenges for oil exporting countries.

There is, however, a possibility that technological innovation will result in reduced costs in the future. This will increase challenges faced by oil producers. But this possibility will take a long time to materialize, which means that shale oil is not expected to be an alternative to energy in the next few years, while the global demand for oil is expected to rise from 87 million barrels per day now to 105 million barrels per day in 2030.

Naturally, the increased production of shale oil and gas will lead to a decline in US imports of oil and gas. Until 2011, the USA was the largest importer of oil in the world. But as US oil imports fell to almost 6 million barrels per day in December 2012, it was replaced by China as the largest importer of oil, with imports amounting to 6.12 million barrels during the same period, according to The Financial Times. This change was due to increased US production of shale oil and gas, in spite of the widespread protests by environmentalists because of the pollution caused, especially methane emissions which are harmful to the environment.

Another important factor in this context is the expected increase in the production of some countries, such as Iraq and Libya. Iraq aims to double its production capacity by up to 6 million barrels per day by 2016, compared to 3 million barrels at the present, while Libyan production is expected to increase significantly in coming years — especially if the security situation stabilizes there. In addition, production capacities will increase in GCC countries themselves, and oil production is expected to rise in non-OPEC countries, such as Russia, Brazil and Venezuela, which have large production capacities.

Nevertheless, this challenge will not have much effect because of the expected 20 percent increase in global oil demand by 2030, and the inability of many OPEC and non-OPEC countries to increase production due to limited reserves. The production of some countries, such as Egypt and Qatar, will even decline in the coming years in the absence of new discoveries there. It must be pointed that there have been interesting developments in the production of renewable and alternative energy, which is an important aspect of the changes taking place in the global energy industry. These developments will result in a change in the economic and energy strategy of oil-producing countries, including the GCC.

In any case, the GCC countries need to redraw their development strategies, taking all possibilities into account, and they should move at a faster pace in order to achieve economic diversification and find alternative sources of income, whether by developing non-oil sectors or imposing certain taxes — such as value-added tax (VAT) — to diversify the funding of their annual budgets. At the same time, they can restructure their government spending and reduce pressures by allowing the private sector to play a bigger role in economic diversification and create jobs for citizens, which will reduce the current burden on the budgets of these countries.

Besides the efforts of each country, the integration of the GCC economies and the application of signed agreements — especially the ones regarding the establishment of a GCC common market — remains important. The unification of fiscal policies, the implementation of several strategic projects in the fields of infrastructure, transportation and industry — such as the GCC rail network and gas network — and coordination in the field of petrochemical industries, will also contribute effectively to supporting the strategies of GCC countries and in enhancing their actions in the face of challenges awaiting the energy industry worldwide.