A necessity for diversifying

There has been some de-linkage between oil prices and economic growth, as countries try to diversify, but at the end of the day, oil revenues are what drive the economies of the region

Governments are the biggest employers and biggest spenders. When they are earning more, they are spending more. In the Middle East, the economic activity is directly linked to government spending.

Regarding the fact that oil revenues are what drive the economies of the region, it leads to the price of oil is being watched more closely than ever.
A billion dollars a day, that is how much Saudi Arabia was making when oil prices were high, now it is earning just $700 million.

It might seem like a marginal difference, but for the oil exporting nations of the Middle East, those falling revenues are hitting hard. As demand for oil wanes, in the wake of the global recession, prices have more than halved. And whilst that’s good news for consumers, it is not good news for producers.
In a year that has seen prices soar as high as $150 a barrel and as low as $40, that volatility has hit both consumers and producers.

Nowadays the general feeling is that prices will not rise again until there is some solid evidence of an economic recovery. In addition, it is no longer an issue of how high prices can go; instead it is about how low they can go.

And it is that concern that has reignited calls for governments to speed up their diversification.
Countries across the region are planning for a future after oil or as a parallel path to reduce their reliance on oil revenues, and find alternative sources of income. So if oil prices do continue to fall, they will either spend less or find other ways of making the money.

Saudi Arabia and Kuwait are the most vulnerable to fluctuations in the oil price. They derive almost 90 percent of their national income from oil exports. But at the same time, they are also the two countries with the biggest cash reserves. That could see them through the worst of the storm.
The real problem will be in countries like Oman and Bahrain. They could suffer the most because they have smaller cash reserves and less oil wealth.
Yet those cash reserves could now become more important than ever.
Just six years ago, Gulf countries could sell oil at $20 a barrel and still balance their budgets.
But with today’s increased public spending, ambitious construction projects and heavy infrastructure development, they now need to sell oil at around $50 a barrel. Even at that level, most will just break even.

In the oil exporting countries, oil prices and government spending go hand in hand. That means some projects are being put on hold as the price of oil falls and funds run out. Those nearing completion will still be finished, but many new projects are likely to be delayed or scrapped altogether.

Hence, everyone now recognizes that by diversifying, they are better prepared to deal with oil price volatility. But just as the rest of the world relies on Middle Eastern oil, Middle Eastern governments rely on its income.
Consumers are slowly learning to wean themselves off oil. Now could be the time for producers to do the same.


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