Arabian Gulf countries well placed to withstand oil plunge says Nobel Prize winner

Paul Krugman was speaking at the Arab Strategy Forum in Dubai.

Francis Fukuyama, American political scientist, political economist, and author, gestures during the Arab Strategy Forum in Dubai. Satish Kumar / The National

Paul Krugman, the Nobel Prize-winning US economist, believes the UAE and other Arabian Gulf countries are better placed to withstand the effects of a prolonged period of low oil prices than they ever have been.

Mr Krugman, speaking at the Arab Strategy Forum in Dubai, said that economic diversification strategies meant that oil producers in the region were better hedged against falling oil prices, and that the UAE, and Dubai in particular, might even benefit from any increase in world trade as a result of lower global energy prices.

“There is no crisis level here over the oil price. It is an oil-dependent region so there will be an effect, but the Emirates is more hedged and more diverse economically than it ever has been. If it was 15 years ago, the fall in oil prices would have been a more negative blow,” Mr Krugman said.

“Because Dubai is an entrepôt economy, it will of course be hurt by anything that affects world trade, but it can also benefit from increased economic activity from lower world energy prices.” he added.

Francis Fukuyama, the US political scientist and author of the influential book The End of History and the Last Man, told the forum that he believed Saudi Arabia was “relatively immune” from the financial effects of low oil prices because of its huge financial reserves, and that there was a “positive component” to the oil price decline.

“Countries like Russia, Iran and Venezuela will suffer and that’s a good thing. It will be destabilising and a catalyst for change in those countries,” Mr Fukuyama said.

The forum, held under the patronage of Sheikh Mohammed bin Rashid, Vice President of the UAE and Ruler of Dubai, was opened by Mohammed Al Gergawi, UAE Minister for Cabinet Affairs.

Mr Krugman, who in 2008 won the Nobel Memorial Prize in Economic Sciences, said there were three reasons for the fall in the oil price: weakness in demand because of weaker economies in Asia and Europe; a big increase in world levels of supply because of US shale oil production; and the price elasticity of shale, which has caused Saudi Arabia to maintain production at current levels with the aim of forcing a reduction in US supplies.

Asked if the falling oil price was the result of a conspiracy between the US and Saudi Arabia against Russia, he said: “Believe me, I know these people. They’re not that smart.”

Mr Krugman painted a downbeat picture of the world economy as it enters 2015. He said that the deleveraging process that had been going on since the financial crisis in 2009 had slowed global economic growth without getting rid of excessive levels of debt. “The debt problem is still there,” he said.

He said that Europe was “perilously close to deflation” and that there was “quiet terror” at the prospect in the European Central Bank. The US had recovered better, but low employment growth was still a problem, holding back a sustained recovery. Japan, China and Russia all face potentially serious economic difficulties, he said.

Next year, he said Europe would face its “moment of truth”, and that political support for the European projects was “falling apart”.

In the US, he said he was advising the Federal Reserve not to raise interest rates. “If they do that, they could wake up in a few weeks and find they’re another Japan”.

Mr Krugman said there was a “substantial opportunity China will become an open political crisis if domestic consumption falls further”.

He added: “If growth slows, they will be building ghost cities and will run out of peasants to move into them.”

Mr Krugman told the forum there was a serious risk of default in Russia as levels of foreign exchange denominated debt increased and the rouble devalued. “Russia looks scary. It is a Venezuela with nuclear weapons and that’s scary.”

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