The Gulf Falcons’ path to diversification

Updated 18 May 2016

The Gulf Falcons’ path to diversification

Imagine a future where oil is no longer the main source of energy in the world. Imagine a future where the cutting-edge energy technology is invented in the Silicon Valleys of the Gulf, bustling with young entrepreneurs from the region. Imagine a future where cities of the Gulf are beacons of knowledge and innovation.
To achieve this future, these countries need to change from oil-dependent economies to innovative and vibrant ones.
This change requires ambitious goals and daring actions.
This change is difficult, yet necessary to improve productivity and provide employment for its young population.
The Gulf Cooperation Council (GCC) countries enjoy high living standards today, and to continue to enjoy them tomorrow, the pursuit of diversification is key.
On their way, the GCC countries will have to navigate uncharted territory. In the land where many of the navigation instruments were invented, supporting voyages and caravans to distant lands and seas, today’s generations will have to chart their own way. Policymakers and societies will have to work together to carry out this tremendous task.
They will have to experiment, sometimes taste failure, and learn from these mistakes to continue on their path to diversification.
Our recently published book, Breaking the Oil Spell: The Gulf Falcons’ Path to Diversification, brings together successful experiences from other countries, such as Brazil, Korea and Malaysia to help guide the GCC countries today.
The book is based on the high-level diversification conference organized by the International Monetary Fund (IMF) and the Ministry of Finance of Kuwait, with the IMF-Middle East Center for Economics and Finance (CEF) about two years ago at the time when oil prices were still high and the topic was not as pressing.
Today, diversification is back on top of the policy agenda, as underscored by the recent release of Saudi Arabia’s Vision 2030, which sets the goal of a far-reaching transformation of the economy to reduce its dependence on oil, increase the role of the private sector, and create more jobs for nationals.
The stories of the countries profiled in the book reveal that for diversification to take hold, incentives for firms and people need to be realigned.
True economic diversification focuses on developing non-oil exports in tradable industries to create needed productivity gains and spillovers to the rest of the economy.
The investment in people and skills will help foster local talent needed for export-driven firms. Other countries’ experiences show that policies to support exporters include the use of venture capital funds, development banks and export promotion agencies while the emphasis on technological upgrading and competition in international markets are crucial.
Singapore has made major strides in high-tech manufacturing. Malaysia has developed not only rubber-related but also electronics exports.
The Brazilian Development Bank has spearheaded efforts in building pharmaceuticals, sugarcane, and software industries in Brazil.
The policies to support industries also need to be combined with early childhood education, training and skill development programs, and improvements in education quality.
The task of changing incentives for firms and workers falls primarily on the shoulders of the state. The standard growth policy advice focusing solely on the facilitating state may not be enough to achieve true diversification.
As discussed in the book, the leading hand of the state should help in the diversification process to encourage firms to enter the tradable sector and export while supporting workers to gain the relevant skills.
To create incentives for workers in the private sector and skill acquisition, the public sector should not be the “employer of first resort” and should keep firm limits on public wages and employment.
The challenge facing policymakers may seem daunting, but the experiences of other countries, their successes and failures, and policies pursued and tools used, could help blaze the path forward.
— Reda Cherif and Fuad Hasanov are economists at the IMF. Min Zhu is IMF deputy managing director.

Oil prices rise on gains prompted by tensions between US and Iran

Updated 25 June 2019

Oil prices rise on gains prompted by tensions between US and Iran

  • Russian energy minister praises international cooperation to stabilize oil markets

LONDON: Oil prices rose on Monday, extending large gains last week that were prompted by tensions between Iran and the US, as Washington was set to announce new sanctions on Tehran.

West Texas Intermediate crude was up 50 cents, or 0.87 percent, at $57.93 a barrel.

Brent futures were up 9 cents, or 0.14 percent at $65.29 a barrel by 1040 GMT.

US President Donald Trump said on Friday he called off a military strike in retaliation for the shooting down of a US drone by Iran, saying the potential death toll would be disproportionate, adding on Sunday that he was not seeking war.

Oil prices surged after Iran shot down the aircraft on Thursday that the US claimed was in international airspace and Tehran said was over its territory.

Brent racked up a gain of about 5 percent last week, its first weekly gain in five weeks, and WTI jumped about 10 percent, its biggest weekly percentage gain since December 2016.

But US Secretary of State Mike Pompeo said “significant” sanctions on Iran would be announced on Monday aimed at further choking off resources that Tehran uses to fund its activities in the region.

British Foreign Minister Jeremy Hunt said the UK believed neither the US nor Iran wanted a conflict but warned tensions could lead to an “accidental war.”

Also boosting prices, global supply may remain tight as OPEC and its allies including Russia appear likely to extend their oil cut pact at their meeting July 1-2 in Vienna, analysts said.

“An extension of OPEC+ production cuts through the end of the year seems highly likely given recent price action,” US investment bank Jefferies said in a note.

“The market expects an extension though, and any failure could see oil price gap down. The probabilities favor restraint however,” it added.

Russian Energy Minister Alexander Novak on Monday said international cooperation on crude production had helped stabilize oil markets and is more important than ever.

“There is a good example of successful cooperation in balancing the oil market between the OPEC countries and non-OPEC. Thanks to joint efforts, we today see a stabilization of world oil markets,” Novak said.

Boosting oil demand, prospects of a near-term interest rate cut by the Federal Reserve aimed at bolstering the US economy have weakened the dollar.

Oil is usually priced in dollars, and a slide in the value of the weaker greenback makes it cheaper for holders of other currencies.

Separately, Iranian crude exports have dropped so far in June to 300,000 barrels per day (bpd) or less after the US tightened the screws on Tehran’s main source of income, industry sources said and tanker data showed, deepening global supply losses.

The US reimposed sanctions on Iran in November after pulling out of a 2015 nuclear accord between Tehran and six world powers. Aiming to cut Iran’s sales to zero, Washington in May ended sanctions waivers to importers of Iranian oil.

Iran has nonetheless sent abroad about 300,000 bpd of crude in the first three weeks of June, according to two industry sources who track the flows. Data from Refinitiv Eikon put crude shipments at about 240,000 bpd.

“It’s a very low level of real crude exports,” said one of the sources.

The squeeze on exports from Iran, a member of the Organization of the Petroleum Exporting Countries, is a key factor for the producer group and its allies, which meet on July 1-2 to decide whether to pump more oil in the rest of 2019.

Iran’s June exports are down from about 400,000-500,000 bpd in May as estimated by the industry sources and Refinitiv and a fraction of the more than 2.5 million bpd that Iran shipped in April 2018, the month before President Donald Trump withdrew the US from the nuclear deal.

Iranian exports have become more opaque since US sanctions returned in November, making it harder to assess volumes.

Tehran no longer reports its production figures to OPEC and there is no definitive information on exports since it can be difficult to tell if a vessel has sailed to a specific end-user.

Refinitiv Eikon data showed Iran has exported 5.7 million barrels of crude in the first 24 days of June to the United Arab Emirates, Turkey, Singapore and Syria, although these may not be the final destinations.

Kpler, another company which tracks oil flows, estimates that Iran loaded 645,000 bpd of crude and condensate, a light oil, onto tankers in the first half of June, of which 82 percent are floating in Gulf waters.

That would put actual crude exports in the first half of the month even lower than 300,000 bpd.

“American restrictions are having a clear effect on Iran’s ability to sell into global markets,” Kpler said.