If oil price stays low, how do we react to the ‘new normal’?
At a gathering of the leading analytical stars in the HSBC firmament in Dubai recently, a near-apocalyptic vision of life in the new regime of lower oil prices was drawn: the “glorious decade” of cheap oil and high growth for the Arabian Gulf was over; the region would have to learn to live in the “post-abundance era” of reduced energy revenues, budget deficits and lower public spending.
The HSBC experts recognised that the region had certain advantages as they embarked on this new era of austerity, notably in the huge capital reserves that have been built up over the past decade of high oil prices (except for the blip in 2009). But overall, the message was that lower oil prices were here to stay and the region had better get used to it.
Most economists agree with the basic scenario that low oil is likely to be the norm for the foreseeable future. Capital Economics (CapEcon), the London research house that has spent the past year telling us that energy prices were due for a fall, is forecasting US$65 a barrel for the end of next year and $60 for the end of 2016.
Given that Brent has been in freefall for weeks and hit a five-year low of $66 yesterday, the CapEcon figures look realistic, and more heartening for oil producers than the “extreme oil bear” forecasts of less than $50 by year-end from some US experts.
But at those prices, Gulf states do not wash their faces. The break-even levels for the GCC countries vary considerably, but the common assumption is that a range of $70 to $90 leaves them able to afford their current levels of public expenditure.
What is more, the GCC states have built up massive levels of capital resources to cushion any shock from a fall in oil price for the foreseeable future. Analysts at Moody’s Investor Services, the ratings agency, say that the GCC states can withstand the pressure of prices between $80 and $85 for 2015 (a generous assumption of next year’s price, if CapEcon’s figures are anything to go by).
Bahrain and Oman, with higher break-even levels and lower fiscal reserves, may face problems, but the rest, including the UAE, will not be forced to slash expenditure massively.
However, all will face pressure to adjust expenditure on non-strategic investment, curb government spending and introduce reforms to expensive subsidies of items such as energy, utilities and basic foodstuffs. Those measures on their own sound rather like HSBC’s “post-abundance era”.
How does the UAE react to the “new normal”? The country’s basic economic strategy is to diversify away from oil dependence, and use the revenue from oil to fuel the growth of a diversified economy.
Abu Dhabi is embarked on this strategy until 2030, but even that oil-rich emirate may have to make some hard calculations as to the pace of future growth. After 2009, the capital trimmed back budgets significantly in the face of the global recession, even though oil revenues recovered quite quickly.
In Dubai, where there is little oil revenue to speak of, the common assumption is that the “feelgood factor” of high regional energy income is good for the emirate’s general commercial well-being. If the oil bears are right, that will feel less good for some time to come.
But Dubai is on its own trajectory towards Expo 2020, and can do without the reduction in overall regional spending lower oil prices will bring. The attractions of the “three Ts” – transport, trade and tourism – remain despite lower oil, indeed could be enhanced if lower energy prices lead to a rise in global consumption and growth, as many experts believe.
The sectors most obviously at risk in Dubai are finance and property. There has already been a significant slowdown in property prices, and shares too have fallen in recent weeks.
There is nothing logically to link Dubai equity markets to oil prices, but it seems common sense that international asset managers would reduce their allotments to Dubai markets if they are cutting overall exposure to the “post-abundance era” Gulf.
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Published: December 9, 2014 04:00 AM