Some win, some lose when oil prices rise
The oil price is the double-edged sword of the global economy.
What western countries view as an "oil shock", the Gulf regards as a budget stimulus; similarly, falling energy prices are seen as a spur to economic growth in Asia, but are a threat to fiscal stability in the Middle East oil exporters.
In the current climate of global financial threat, with all the potential repercussions for the world economy, one thing that stands out has been the relative stability of oil prices.
The possibility of supply disruption from the Arab Spring kept prices high in the early part of the year, with Brent going above US$120 per barrel in April; the prospect of a global double-dip recession pegged them back slightly from then on, but they are still above $110, well within the comfort zone for Gulf states.
In the last phase of the financial crisis, in the summer of 2008, oil prices soared to a record $147 before crashing back by more than 70 per cent over the next six months on fears of recession.
The question energy economists are now posing is whether a similar crash is just over the horizon, or whether the fundamentals of the oil market are different from 2008.
Some oil professionals believe there are new dynamics at work.
"There are several moderating factors that appear to be holding oil supplies and prices steady despite wider recent market turmoil," says Badr Jafar, the president of Crescent Petroleum, based in Sharjah. "Only recently fears were for a global shortage of oil, and we believe that is still a risk."
Among the factors keeping the oil price high, he says, are: the possibility that Libya's current instability will lead to a delay in getting the country's production back to capacity; the likelihood that Saudi Arabia will cut back production once Libya does get back on stream; and the fact that current concerns about economic prospects are stronger in the US and Europe than in the fast-growing economies of Asia.
His view is not shared by other experts. Julian Jessop, the chief international economist of the consulting firm Capital Economics, based in London, said recently: "The world economy has clearly stalled and it is hard to see any meaningful recovery in demand unless commodity prices, and especially oil, continue to weaken … The reduction in total production is therefore a reflection of weaker demand than of any constraint on the supply side."
Overall, Capital Economics expects a significant fall in the oil price by the end of this year, predicting Brent at about $85 by next year.
If so, that would be a worrying trend for many Gulf countries, with the price approaching the level at which many of them drew up their national budgets.
These have come under strain as many governments leveraged up spending following social unrest in some parts of the region.
These fears are overdone, Capital Economics concludes.
Said Hirsh, the firm's Middle East economist, said after a sharp but temporary fall in oil prices early last month: "Admittedly, the current budget commitments are likely to push some of the Gulf's governments into deficit next year. However, as long as Brent prices are above $70 per barrel, we think that the risks in the next two to three years are low.
"There are concerns that the Gulf's enormous foreign currency reserves will be impacted by the weak dollar and the large falls in global equities … But we think that the political pressures to spend [following the social unrest] are still high and Gulf countries can still afford it."
In most Gulf states, fiscal surpluses are high and public debt levels are low, making it relatively easy to borrow at low interest rates to make up any shortfall in oil revenues.
"In short, we think concerns that a fall in oil prices may push the Gulf's governments to reduce spending in the medium term are overplayed," Mr Hirsh concluded.
So the Gulf can withstand a period of low oil prices, it seems, but that raises the question of the other side of the oil sword: can the world grow economically in an era of high energy prices?
A recent IMF paper reaches a surprising conclusion. In "Oil shocks in a global perspective: are they really that bad?", the authors Tobias Rasmussen and Agustin Roitman suggest a historical analysis of oil and economic statistics shows "oil price increases over the past two decades appear to a large extent a reflection of good times for the global economy".
They say this is less the case for the recession-prone US, with a large dependence on imported oil, but increasingly so for an Asian economic powerhouse such as India, which has actually grown its economy in times of oil price rises.
Whatever the prospects for the world economy, the debate on oil prices is sure to continue.
Published: September 14, 2011 04:00 AM