Kingdom Unfazed by Oil Price Slump
Saudi Arabia is keenly watching the oil scene. As the fluctuating oil prices show signs of decline, countries are debating how low they can go and whether such a scenario is beneficial in the long run. The Kingdom, however, remains least impacted by the declining oil price and is confident that it will rise and stabilize sooner than expected.
Economists believe cheaper oil is and will benefit emerging Asian economies. Although they can gloat over the immediate favorable impact, like paying less for their oil imports, there is an ongoing debate about the benefits or otherwise of the declining oil price.
The price of oil is currently around $55 a barrel, having dropped by more than half of what it was last June — $115.
On last Thursday, oil jumped 5 percent on fears that the conflict in Yemen could disrupt cargoes on the neighboring Bab El-Mandeb Strait, where 3.8 million bpd of crude and oil products flow.
However, oil tumbled 5 percent on Friday, erasing the previous session’s gains, as Yemen’s conflict looked less likely to disrupt Middle East crude shipments.
The current oil price volatility underscores the urgency of re-engineering the fiscal systems of the GCC countries. Traditionally, oil price volatility has been handled by amassing reserves for the proverbial rainy day. However, the rapid growth in government expenditure, partly as a result of population growth, partly due to the investments needed to diversify the economies, is making this an increasingly difficult balance to manage. Problematically, not even the most diversified regional economies have been particularly successful in linking government revenues to nonoil sector dynamics.
From a global standpoint, savings in energy expenditures for oil importers are effectively wealth transfers from oil exporters from the lower oil prices; GCC would be subsidizing growth in Asia at the cost of reducing its export revenues.
According to Asiya Investment, fiscal positions for GCC countries are being significantly affected from the oil price slide due to their strong dependence on oil export revenues.
One of the costliest systems operated by the Gulf states is the generous regime of energy and other subsidies. This involves not only a fiscal cost, it also has broader economic implications as companies reliant on subsidized prices have less of an incentive to seek productivity gains and innovate. This in turn has adverse growth implications. Similarly, subsidies are a very inefficient way of achieving social policy objectives as they do not differentiate among people or companies.