Falling oil prices will fuel growth

Petrol prices in the US dip below $2 a gallon this week as OPEC opted not to cut back production. AP Photo: Orlin Wagner / AP
Petrol prices in the US dip below $2 a gallon this week as OPEC opted not to cut back production. AP Photo: Orlin Wagner / AP

While the recent volatility in the global oil market is having negative consequences for many oil- exporting countries – both Russia and Iran are particularly concerned about its immediate impact on their fragile economies – it will ultimately stimulate global economic growth and is therefore good for oil producers.

For the moment, Opec’s announcement that there are still no plans to cut its output is a good move. As The National reported yesterday, the Saudi oil minister, Ali Al Naimi, said after the group’s meeting in Abu Dhabi that it’s too late to take such a step, blaming non-Opec producers for the collapse in the price of crude oil due to oversupply and describing the downwards price trend as “temporary”. But it is all about how we interpret the fluctuating price. The declining price doesn’t mean that oil has become cheap. There should be a distinction between expensive oil and high price oil. Expensive oil is not good for the global economy because it puts greater pressure on local economies and hinders growth. But high price – yet affordable – oil can help greatly in global demand creation and assist the economies of oil-importing countries to develop, which will ultimately lead to global economic growth.

GCC countries are in a relatively safe position currently. After all, even if prices slid down closer to the break-even prices on which government budgets are calculated, many factors indicate that Gulf countries have the financial resources to maintain pro-growth spending and their economies won’t be hugely impacted. Reports show a strong non-oil growth and sufficient fiscal strength in GCC countries that can help to overcome short-term negatives and prevent any budget deficiency, especially in the UAE and Saudi Arabia.

Maintaining its output at 30 million barrels of oil per day will help Opec to keep its market share – about a third of the world’s oil – which is important to sustain its influential role in the global market.

Published: December 22, 2014 04:00 AM

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