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Shams Al-Shakarchi

The great global oil glut and the Gulf

Saudi Arabia and its Gulf neighbours are facing economic and social reform [Getty]

Date of publication: 13 September, 2016

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With oil receipts typically accounting for 80 percent of a Gulf nations' revenues, how will the regimes cope with continued low oil prices?

As oil prices continue to plummet amid a global supply glut, Gulf residents are asking how their governments will cope.

Low oil prices are certainly a concern for Saudi Arabia, which has overtaken the US as the world's biggest oil producer for the first time since 2014.

Although Riyadh's tactics of not cutting production made Saudi Arabia a leading producer again, low crude prices are hurting the coffers.

Hopes that the market would recover next year were dashed when the International Energy Agency forecasted that the global oversupply of crude will continue for longer than expected - until at least the first half of 2017.

Oil prices slipped as much as three percent on Tuesday, following the IEA report.

The oil-rich Gulf - used to spending lavishly and taxing minimally - has already felt the effects, but a pessimistic outlook has restated the need for an economic and social shake-up.

Emad Mostaque, strategist at research consultancy Ecstrat, told The New Arab said there looks there to be more tough days for Gulf states.

"It's not looking positive going into next year - it's more bearish than expected," he said.

"The Gulf is looking for recovery of oil prices while it continues to cut [infrastructure] projects."

Trim the fat

In Saudi Arabia, where oil receipts typically account for more than 80 percent of Riyadh's revenue, the government has already begun to trim the fat.

The Middle East's richest nation suffered an unprecedented budget shortfall of 16 percent gross domestic product last year - resulting in cutbacks on fuel and utilities subsidies, which rankled many citizens in the kingdom who have become accustomed to state handouts.

"Saudi Arabia has $20 billion worth of contracts it's renegotiating. The expatriate labour force has been cut to the bone because they want Saudis to be employed, they're cutting salaries of public sector workers,"  Mostaque added.


"The social contract is changing. It's not good news for the people there. Even if the oil price recovers, a lot of this reform will still go on."

Diversify

Gulf states have been looking to "diversify" their economies in order to remain sustainable in an era of low prices or post-oil future.

In Dubai - oil accounts for just five percent of revenue - with tourism and services keeping its economy bouyant.

There is speculation of a possible production freeze, aimed at supporting prices, being agreed between Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC member Russia, at a meeting in Algeria later this month.

Read also: Iran and Saudi Arabia unlikely to cut oil production


But Mostaque described any attempt to coordinate a unified response by producers as "the world's biggest game of chicken".

Oil supplies from Saudi Arabia, Kuwait, the UAE and Iraq are all at, or near, all-time highs the IEA report said.

Saudi Arabia's vigorous production has allowed it to overtake the US and become the world's largest oil producer once again.

Iran, meanwhile, has been quick to ramp up its production following the lifting of years of nuclear-linked sanctions at the start of the year.

"If everyone cut back production by 2 percent, oil prices would rise by 30-40 percent, at least. There would be no more oversupply," Mostaque said.

"But no one's going to do that. They can't coordinate themselves, there are political factors at bay. That's the ridiculousness of the whole situation."

Balance

The IEA - which advises oil consuming nations on energy issues - said the timing of the world oil market's return to balance is "the big question".

"Supply will continue to outpace demand at least through the first half of next year," it said.

"As for the market's return to balance - it looks like we may have to wait a while longer," it added.

As a result of the stubborn supply glut, producers have been hurt by a plunge in crude prices from around $100 in mid-2014 to 13-year lows of below $30 at the start of this year.

A sharp drop in demand coupled with rising supply has not balanced out as expected, the IEA said.

China and India - which had been key drivers of demand growth - are "wobbling" economically, it added.

Meanwhile a slowdown in the US and economic concerns in developing countries have also making it look like low prices at the pump can be expected for some time to come.


Agencies also contributed to this story.

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