GCC alarm over oil price fall

A sharp decline in oil prices could push the budgets of Gulf hydrocarbon producers back into deficits following a surge in the breakeven crude price needed to balance their fiscal system, according to a Qatari bank.

Although strong oil prices mean that the six Gulf Cooperation Council (GCC) countries could sustain fresh global economic shocks, their fiscal balances could be upset by any large fall in crude prices, Qatar National Bank (QNB) said in a study.

The study said a sharp rise in public spending in most GCC members has largely pushed up the breakeven oil price needed to balance their budgets.

It said the breakeven price has risen by at least $15 to between $40 and $50 in Kuwait and Qatar and to as high as $80 in the UAE, Saudi Arabia and Oman “Although this remains below oil prices of over $100, a sustained drop in oil prices could prompt some GCC countries to implement fiscal consolidation, which may lead to softer growth in the non-oil economy and deficits,” it said.

“However, in terms of the domestic economy, the buffers have narrowed. While rising government spending, particularly on wages, has supported the non-oil economy, it has also driven up the fiscal breakeven oil price.”

The study referred to a recent study by the IMF, which said a $30 fall in oil prices could negatively affect the GCC’s fiscal and external balances in 2013.

“It is important to note that the IMF scenario is extreme…it would probably require a series of crises to unfold, such as sequential sovereign defaults in Europe, combined with a failure to avert the US fiscal cliff and a credit implosion in China. All these events unfolding in the near future could be enough to drive oil demand and prices down to $60 for a sustained period.”

QNB said it believes oil prices would remain stable at around $110 ion 2013, adding that the IMF forecasts about GCC financial deficits assume no changes in hydrocarbon production and exports as a result of the drop in oil prices.

The report said a drop in oil prices tends to lead to lower production and exports as OPEC is inclined to lower output targets or enforce them more strictly.

It noted that GCC oil production fell by eight percent in 2009, the last time oil prices dropped significantly, adding that this would be partially compensated for by a fall in imports of goods in services owing to slowing economic activity.

“Nonetheless, it is likely that there would be a higher current-account deficit for the GCC than envisaged in the IMF analysis. Taking this into account, the current-account deficit would be around 10 percent of GDP by 2017.”

Most GCC countries have basked in massive financial surpluses over the past few years because of higher oil prices and production.

A surge in their combined income by around $182 billion last year nearly tripled the GCC countries’ fiscal surplus, according to QNB.

From $425 billion in 2010, the GCC’s collective revenue surged to $607 billion in 2011 and this boosted their consolidated budget surplus to nearly $138 billion from $43.6 billion during that period, QNB said.

The balance sharply expanded despite an increase in actual public spending from around $382 billion to $468 billion.

The 2011 surplus was the second largest positive balance recorded by the 31-year-old economic, defence and political Gulf alliance after the record surplus of nearly $229 billion in 2008, the report said.

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