Low oil prices implications

The Gulf’s Sovereign Wealth Funds stakeholders will have to review their investment strategies whilst looking at their state budgets following the recent lowering of oil prices. 

It is however believed by experts that the Gulf countries will nevertheless continue along the same track of diversifying away from the fossil resource exports earnings.

An academic expert close to the business said when asked about the implications of low oil prices: “The GCC has enough cushion to withstand the current drop of oil prices in the short run.  As long term investors, they must have their own strategy to cope with their domestic requirements, and continue the process of diversifications.”

Balancing national budgets between external and internal demands would not perhaps have to be drastically altered.  That is if prices do not vary in the short term but if these remaining low over a certain period of time, revisiting the GCC’s investment philosophy would have to be considered.  Even here, the above referred to cushion coupled with very competitive production costs could make the revisiting exercise less dramatic than expected.

It is commonly believed however that Middle Eastern producers would be able to achieve during this period some profit at $70 a barrel even if they have to sustain deficits.  The problem is that during this period, such a low price is not enough to balance the state budgets and that the long planned and awaited diversification has not come to bear fruits yet.

Moody’s view is that a long period of low prices would definitely cut into budgets and affect economic activities and that the anticipated changes could well reach the countries’ economic structures.

Many analysts estimate that some of the GCC states may face account deficits for the first time in many 1years and others believe that the GCC countries will have a current account deficit of $60 billion, if the crude price averaged $60 dollar/barrel.  This would stop cash flow into the Gulf sovereign wealth funds entirely.

Such instances show not only the GCC’s heavy economic reliance on hydrocarbon exports but that the oil price shocks and their influence on other areas of the economy is of immense importance for the GCC economies.  In any case, the GCC funds must remain active as vehicles of further diversification, focusing on investments with high potential returns and not be sensitive to oil price fluctuations.


About FaroLaz

Professional architect with extensive experience in all aspects of international design and construction projects management.

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