Register

Peak Oil is You


Donate Bitcoins ;-) or Paypal :-)


Page added on October 25, 2014

Bookmark and Share

Gulf states need to reform spending as oil price slips

Public Policy

Gulf Arab oil exporters will have to reform their state spending and make cuts in some areas because of weak oil prices, Kuwaiti Finance Minister Anas al-Saleh said on Saturday.

“We must undertake comprehensive economic reforms including the reform of imbalances in public finances,” Saleh told a meeting of Gulf Arab finance ministers, central bank governors and the International Monetary Fund in Kuwait.

“This must be undertaken through strengthening of efforts to diversify away from oil and decrease dependence on oil revenue, which is now inevitable.”

Global oil prices tumbled to four-year lows below $83 per barrel this month, threatening – if current levels are sustained for a long period – to push the state budgets of some of the six members of the Gulf Cooperation Council into deficit after several years of big surpluses.

The IMF has estimated Saudi Arabia will need an average oil price of $90.70 a barrel in 2015 to balance its budget; the United Arab Emirates would face a level of $73.30, Kuwait $53.30 and Qatar $77.60. Oman and Bahrain need much higher budget break-even prices.

A sustained oil price decline of $25 in effect reduces the revenue of most GCC countries by the equivalent of about 8 percentage points of gross domestic product, and could therefore push many of them into fiscal deficits, IMF chief Christine Lagarde said.

“That’s why it is important to address the fiscal situation now, although clearly the GCC countries have the buffers to fiscally and financially resist the consequences of such a situation,” she told a news conference after the meeting.

Most Gulf states accumulated vast fiscal reserves during the oil-boom years that will enable them to keep spending up even if oil prices stay weak over a long period.

For example, Saudi Arabia has accumulated $736 billion of foreign assets, while the UAE is estimated to have a similar amount in its largest sovereign wealth fund. Also, very low levels of public debt – Saudi Arabia’s was at just 2.7 percent of GDP in 2013 – mean GCC countries would have easy access to the debt markets if needed.

Despite the reformist rhetoric of some Gulf officials, it is not clear how far they will proceed with budget reforms. Cuts in social welfare spending are politically very sensitive, while infrastructure projects are designed to diversify economies and reduce their dependence on oil in the long run.

However, there are some signs that officials are using the oil price drop to justify reforms. This month Kuwait revealed plans to slash costly state subsidies on diesel, kerosene and jet fuel – relatively minor reforms – and it is studying hikes in electricity and water costs that would have a bigger effect. Oman has said it is considering cutting subsidies on petrol.

“Electricity is still under study by the higher planning council committee, and once it is done it is a law that will have to go to parliament,” Saleh said without giving details.

He said, however, that spending on economic development projects in Kuwait would not be affected by weakness in the oil market.

Economic growth in the GCC region is expected to be around 4.5 percent on average in 2014 and 2015 but the risk that it will slow has increased because of soft oil prices, Saleh said.

 

reuters



10 Comments on "Gulf states need to reform spending as oil price slips"

  1. Kenz300 on Sat, 25th Oct 2014 9:24 pm 

    Quote — “This month Kuwait revealed plans to slash costly state subsidies on diesel, kerosene and jet fuel – relatively minor reforms – and it is studying hikes in electricity and water costs that would have a bigger effect. Oman has said it is considering cutting subsidies on petrol.”

    Subsidies for fossil fuels all need to be cut.

    The subsidies contribute to wasteful energy use and reduce conservation efforts.

    Climate Change is real…… it is time to show the true cost of fossil fuels and the cost of the damage to the environment.

  2. Dave Thompson on Sun, 26th Oct 2014 4:54 am 

    Once we get past the election and the consumer driven holidays, the price will go back up. (my humble prediction)

  3. Davy on Sun, 26th Oct 2014 7:15 am 

    Dave, I am seeing markets that are corrupt, manipulated, and central bank liquidity driven. The markets are corrupt because there is current of legalized criminality. Markets are allowed to be manipulated by the TBTF financial concerns who receive small fines for major infractions. There is a revolving door or patronage and system corruptions. Bankers become lobbyist that become politicians. Lobbyist create the laws that politicians vote in for the benefit of financial concerns. They all dwell as a den of thieves concentrated in NY & DC with their branches branching out into the hinterland. This gets extended globally and is much the same in London or Shanghai. Moving further into this new normal of corrupt and manipulated financial and political power centers is a market that for all practical purposes is cornered by the central banks with repressed interest rates and managed liquidity. We have seen how far the markets have come with the last downturn. The markets for all practical purposes tanked when they knew QE was going to completely taper. It was only the jawboning of the Fed that more would flow if needed that got them to stabilize and turn around. So long story short the Fed controls the market now. The Fed is experiencing issues with its balance sheet and market manipulation. They are now approaching dysfunctions and excesses that occur because the QE policy cannot continue indefinitely. It has limits and has hit diminishing returns of effectiveness as the market gets driven ever higher. Fundamentals are now warped by all normal indicators. The business cycle has gone longer than normal in a bull market. The oil markets at this point are still largely driven by demand. We know here the supply issues but they have not kicked in like we know they surely will in a few short years. It appears it could be oil demand destruction that lead to production destruction which will ultimately damage supply. We know that if the Fed had managed to maintain the market highs oil supply issues would eventually destroy demand. This happening by higher production costs and depletion both creating lower economic energy contributions per price of production. IOW oil becomes too expensive for the economy to digest into real growth. At this point short term all eyes are on the Fed’s continued actions and on how dysfunctional QE will become with time. The next year should be very interesting for the equity and oil markets.

  4. Makati1 on Sun, 26th Oct 2014 7:33 am 

    http://www.arabnews.com/economy/news/650241

    “Middle East braced for lower oil prices”

    http://journal-neo.org/2014/10/17/the-world-market-and-oil-prices/

    Who really knows???

  5. rockman on Sun, 26th Oct 2014 8:08 am 

    “…braced for lower oil prices”. Same song…second verse: “…braced for oil prices 250% higher then just 10 years ago”. LOL. It reminds of the US gov’t saying it will “cut the budget” of Dept X when in reality that budget will increase but at a lower level then originally planned.

    All bullish*t wrapped in glossy spin IMHO. Next thing you know the US oil patch will be asking DC for financial support to help it weather this “catastrophic price collapse”. To make your personal charitable please go to rockman.org. LOL

  6. pat on Sun, 26th Oct 2014 8:43 am 

    the comment above of Davy ‘I am seeing markets that are corrupt,….’ one of the best and it all leading to the next big collapse the recession worst of all.

  7. shortonoil on Sun, 26th Oct 2014 9:18 am 

    “Most Gulf states accumulated vast fiscal reserves during the oil-boom years that will enable them to keep spending up even if oil prices stay weak over a long period.”

    Maybe this should be rephrased to say:

    “Most Gulf states accumulated vast amounts of sovereign junk debt from bankrupt Western economies during the oil-boom years that will enable them to keep spending up even if oil prices stay weak over a long period.”

    Now, when they go to cash in those bonds, MBS, and Treasuries exactly where is the money to redeem them supposed to come from? The money the FED has been printing to cover the federal deficit has recirculated within the US economy. When all that money starts leaving the country there is going to be a problem.

    Good thing that the US has invested heavily in its military. In the near future, as oil prices continue downward, there is likely to be a lot of ticked off creditors out there!

  8. JuanP on Sun, 26th Oct 2014 10:37 am 

    Davy’s and short’s points on QE and paper investments are true.
    I think all these countries are basket cases and will fare very badly in a post peak world. They are some of the worst places to be in the world when the SHTF.
    The princes and sheikhs won’t have any problems, though. They will fly their private jets to their farms in Brazil, Uruguay, etc. In Uruguay there are dozens of the best farms in these suckers’ hands. They are one of the reasons farm prices have gone up like crazy down there in the past 15 years. They don’t care about a ROI. They just want to say they have a farm in South America, it’s a status thing. It became the thing to do for them for a while.

  9. Bob Owens on Sun, 26th Oct 2014 12:05 pm 

    Most moves by OPEC over the past decades have, in retrospect, just been reactions to price/demand forces. This OPEC move is a reaction to $100/bbl oil. The disturbing reality is that the world is not able to afford oil at $100/bbl and world price is starting to reflect that. OPEC denies that reality by machinations about market share. Reality is they need $100/bbl and the world can’t provide that price and continue to function. The oil vice is getting tighter for both the oil exporters and users.

  10. Northwest Resident on Sun, 26th Oct 2014 1:19 pm 

    “Good thing that the US has invested heavily in its military. In the near future, as oil prices continue downward, there is likely to be a lot of ticked off creditors out there!”

    Gee. It’s almost like they saw it coming and planned ahead for it.

    And it isn’t just the ticked off creditors abroad that the U.S. Military is preparing to deal with. There’s going to be plenty of ticked off investors and creditors right here on the home turf too. Not only ticked off, but hungry, panicked, disillusioned and most of all, desperate.

Leave a Reply

Your email address will not be published. Required fields are marked *