Sustained high oil prices pose unprecedented risks to the global economy and for the oil-exporting Gulf region, leading analysts have warned, as oil prices hit nine month highs. John Lonski, chief economist at Moody’s Investors Service told Emerging Markets: “A surge in energy prices constitutes the biggest risk to the world’s economy, much greater than the US sub-prime market,” he said.
“A pronounced deceleration of industrialised economies, caused by such high prices, would result in stepped up efforts to use oil more efficiently and make alternative fuels more competitive, which would actually negatively impact Gulf countries.” Fears of UN sanctions against Iran and the continuing conflict in the Niger region has caused an upward curve in oil prices in recent months, from a low of $51.7 in January this year. But analysts maintain that although prices have generally fallen back from their 2006 highs, the near-term economic outlook for the Gulf is positive.
JP Morgan’s head of emerging markets research Joyce Chang observed: “the majority of emerging markets net oil exporters appear to be either saving a good portion of the windfall or using it to prepay debt.”
Saudi Arabian Monetary Agency governor Hamad al-Sayari told Emerging Markets he remains comfortable with the oil market outlook, “the dominating factor for the current account surplus.” He admitted that “last year was unusual with high oil prices”, but there was no cause to panic.
Despite the recent spike in prices, the IMF projects a tighter 2007, with oil export revenues for Middle East exporters projected to decline to $570 billion, based on an average oil price of $61 a barrel, down from $64 last year. The IMF cautions in particular that the current account surpluses across the Middle East would decline as the price of oil falls and import growth accelerates.
“Naturally, the revenue projections are highly sensitive to oil prices, with a $5 a barrel decline estimated to reduce the region’s annual exports by $45 billion, and fiscal receipts by $35 billion” said Mohsin Khan, director of the IMF’s Middle East and Central Asia Department. Al-Sayari admitted that these factors would lead to lower surplus, but said that “so long as there is a decent surplus, that’s still not bad.” Only if oil prices were to plummet, leading to a renewed budget deficit, “would it be a problem,” he said.
Khan accepted that Gulf countries are increasingly resilient to any shock to their economies through their declining external debt, increases in international reserves and stronger macroeconomic policies. Still, he maintained that “the potentially adverse global developments include the possibility of slower world growth, perhaps triggered by a sharper-than-expected slowdown in the United States, or a sustained rise in financial market volatility.”