Current Oil Market Developments And Their Impacts On The Gulf Cooperation Council

Current Oil Market Developments and Their Impacts on the GCC comes at a time when global oil markets are witnessing substantial change. Oil prices have fluctuated from unprecedented highs to free falling by the end of 2008, and experiencing another steep drop by 2014. Other dramatic changes include a surge in global oil supply, weakness in demand (partly caused by slow growth in emerging countries), exploitation of oil shale, advancements in oil-extraction technology, and the emergence of renewable and clean energy sources. These developments have all impacted oil markets in particular and the global economy in general. In addressing the topic, this book consists of four chapters that examine these developments in depth to determine their implications and potential effects, suggesting recommendations that will serve the goals and development objectives of the Gulf Cooperation Council (GCC) countries and beyond. It focuses on global oil supply and demand, geopolitical factors related to the Russian–Ukrainian crisis, potential Iranian–Western convergence, and the implications of all these factors on both GCC and global energy markets. Its chapters examine issues such as the latest energy market developments and challenges to conventional oil supply. The developments detailed require constant monitoring to safeguard global energy security and serve development goals around the world. While the GCC has great interest in oil-related issues, the countries are also planning for the future by simultaneously working on establishing diversified, knowledge-based economies that are less dependent on conventional resources.

Our paper examines the effect of oil price changes on Gulf Cooperation Council (GCC) stock markets using nonlinear smooth transition regression (STR) models. Contrary to conventional wisdom, our empirical results reveal that GCC stock markets do not have similar sensitivities to oil price changes. We document the presence of stock market returns’ asymmetric reactions in some GCC countries, but not for others. In Kuwait’s case, negative oil price changes exert larger impacts on stock returns than positive oil price changes. When considering the asymmetry with respect to the magnitude of oil price variation, we find that Oman’s and Qatar’s stock markets are more sensitive to large oil price changes than to small ones. Our results highlight the importance of economic stabilization and reform policies that can potentially reduce the sensitivity of stock returns to oil price changes, especially with regard to the existence of asymmetric behavior.

Global economic activity is gaining momentum. Global growth is forecast at 3.6 percent this year, and 3.7 percent in 2018, compared to 3.2 percent in 2016. Risks around this forecast are broadly balanced in the near term, but are skewed to the downside over the medium term. The more positive global growth environment should support somewhat stronger oil demand. With inflation in advanced countries remaining subdued, monetary policy is expected to remain accommodative. GCC countries are continuing to adjust to lower oil prices. Substantial fiscal consolidation has taken place in most countries, mainly focused on expenditure reduction. This is necessary, but it has weakened non-oil growth. With the pace of fiscal consolidation set to slow, non-oil growth is expected to increase to 2.6 percent this year, from 1.8 percent last year. However, because of lower oil output, overall real GDP growth is projected to slow to 0.5 percent in 2017 from 2.2 percent in 2016. Growth prospects in the medium-term remain subdued amid relatively low oil prices and geopolitical risks. Policymakers have made a strong start in adjusting fiscal policy. While the needed pace of fiscal adjustment varies across countries depending on the fiscal space available, in general countries should continue to focus on recurrent expenditure rationalization, further energy price reforms, increased non-oil revenues, and improved efficiency of capital spending. Fiscal consolidation should be accompanied by a further improvement in fiscal frameworks and institutions. The direction of fiscal policy in the GCC is broadly consistent with these recommendations. Policies should continue to be geared toward managing evolving liquidity situations in the banking system and supporting the private sector’s access to funding. While countries have made progress in enhancing their financial policy frameworks, strengthening liquidity forecasting and developing liquidity management instruments will help banks adjust to a tighter liquidity environment. Banks generally remain profitable, well capitalized, and liquid, but with growth expected to remain relatively weak, the monitoring of financial sector vulnerabilities should continue to be enhanced. Diversification and private sector development will be needed to offset lower government spending and ensure stronger, sustainable, and inclusive growth. This will require stepped-up reforms to improve the business climate and reduce the role of the public sector in the economy through privatization and PPPs. Reforms are needed to increase the incentives for nationals to work in the private sector and for private sector firms to hire them. Increasing female participation in the labor market and employment would benefit productivity and growth across the region. Where fiscal space is available, fiscal policy can be used to support the structural reforms needed to boost private sector growth and employment.

The oil market is undergoing fundamental change. New technologies are increasing the supply of oil from old and new sources, while rising concerns over the environment are seeing the world gradually moving away from oil. This spells a significant challenge for oil-exporting countries, including those of the Gulf Cooperation Council (GCC) who account for a fifth of the world’s oil production. The GCC countries have recognized the need to reduce their reliance on oil and are all implementing reforms to diversify their economies as well as fiscal and external revenues. Nevertheless, as global oil demand is expected to peak in the next two decades, the associated fiscal imperative could be both larger and more urgent than implied by the GCC countries’ existing plans.

The GCC region’s non-hydrocarbon growth momentum remains strong, driven by higher domestic demand, increased gross capital inflows, and reform implementation. Oil production – which depends on OPEC+ decisions – will be subdued in the near term. Inflation is contained and current account surpluses are high. Fiscal balances remain healthy, supported by fiscal reforms and high oil prices. The primary non-oil deficits are expected to decrease to 24 percent of GDP by 2028, with higher non-oil revenue reflecting sustained fiscal and structural reforms and contained expenditures. High global uncertainty is weighing on the outlook.

This book delves into the economic development of the six Gulf Cooperation Council (GCC) countries. Since the 1960s, the GCC states have harnessed their potential to exploit the wealth accrued from the oil boom to build their infrastructure and grow their economies. However, the high level of dependency on oil as the primary source feeding their output made their economies volatile and vulnerable to fluctuations in the global oil prices. Moreover, the plunge in oil prices and the threat of depletion of this natural resource pose serious challenges to the GCC countries. Consequently, the GCC governments have realized the importance of diversifying their economies following the need to move away from reliance on hydrocarbon. This book contributes to the theoretical literature by enriching the debate on the transition of the GCC countries from rentier states to diversified economies. It helps students and scholars understand this transformation with an expansive comprehension of the contemporary challenges facing the region, as well as outlining prospects for the future.

The global and regional economic environment remains challenging. Global growth remains tepid, and although some pick-up is expected, risks are tilted to the downside. Recent volatility in financial markets is having a significant impact on some large emerging markets, highlighting the challenges that will be faced in unwinding the Federal Reserve’s quantitative easing policy. Geopolitical uncertainties in the Middle East are also high.

The waste of oil and gas in the Gulf erodes economic resilience and increases security risks. This is the first report to offer practical recommendations that address the key challenges of governance, political commitment, and market incentives from the perspectives of member countries of the Gulf Cooperation Council (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, UAE).