Oil’s Well That Ends Well

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The Arab Gulf countries are in a strong position to absorb the hit to their income from a period of low oil prices and can afford to take a longer-term view of the market, says Jason Tuvey, Middle East economist at Capital Economics in London.

“The Gulf countries clearly feel that pushing up prices now would simply encourage further development of unconventional sources of oil, which would ultimately threaten their long-term position in the market,” Tuvey says.

According to Saudi Petroleum and Mineral Resources minister Ali Al-Naimi, oil consumption in advanced economies has increased sharply since prices started to fall last June.

“Saudi Arabia has defied the worst fears that a period of low oil prices would push its economy into recession—if anything, growth appears to have strengthened since the start of this year,” Tuvey says.

Meanwhile, the Organization of Petroleum Exporting Countries is continuing to pump oil at a rapid pace to maintain its dwindling market share and to pressure higher-cost producers, particularly the US shale-oil industry.

 “Producers will likely continue to focus on efficiency gains and shift their rigs to core areas, where initial production rates are more favorable,” says Sami Yahya, analyst at Platts’s Bentek Energy. He says US crude production increased by nearly a million barrels a day in the 12 months ending April 2015.

The International Monetary Fund has said the decline in oil prices is resulting in substantially lower export and fiscal revenues for Saudi Arabia, but that the effect on the rest of the Gulf nation’s economy has so far been limited. The organization sees GDP growing at a healthy 3.5% this year, unchanged from 2014, with support from increased oil production and continued government spending.

Tuvey sees Kuwait, with $410 billion in its sovereign wealth fund, as the best-placed Gulf economy to withstand low oil prices. The country is still running a large current-account surplus, although the economy remains sluggish, he says. Its long-term growth outlook is clouded by government spending skewed toward wages and subsidies, rather than capital investment, he says.

The Gulf countries, Tuvey said, should be able to stomach low oil prices for at least a few years, but some adjustment is likely to be needed down the line He thinks fiscal policy “will do most of the work” along with reduction in capital spending and postponing some infrastructure projects.