What the US-China trade war means for Gulf oil producers

The worries of Gulf countries are of little concern to Trump and Xi in their confrontation. (Shutterstock, AFP)
Updated 29 August 2019

What the US-China trade war means for Gulf oil producers

  • Any budget pressures get translated into reduced economic activity
  • Saudi Arabia is the biggest oil trading partner of China, India and Japan

DUBAI: The battlegrounds of the US-China trade war range from soya beans to Harley- Davidson motor cycles, with Apple iPhones and aluminium in between. But for the Middle East, it is all about oil. While American President Donald Trump and Chinese counterpart Xi Jinping swap tariff salvos across billions of dollars worth of commodities and manufactured goods, for economic policymakers in the oil-exporting countries of the Arabian Gulf the main concern is what effect the confrontation between Washington and Beijing will have on their most important product — crude oil. 

Each barbed tweet from Trump, followed by a tit-for-tat response from Xi’s government, sends another shiver through global financial markets, worries the economists already concerned about slowing growth, and hits the oil market that is at the heart of the Gulf economies. 

Artyom Tchen, senior analyst with US consultancy Rystad Energy, summed it up recently when he wrote: “We believe that the United States- China trade war and resulting weak economic growth sentiment is among those factors that balance supply risks and cap oil prices.” 

Tchen forecast a decline in demand for oil for the rest of the year, and the International Energy Agency — the oil market’s most authoritative source — agreed with him last month with its own reduced forecast. The IEA expects demand growth to be at 1.1 million barrels per day (bpd) for 2019. 

That is down from its estimates last year of 1.5 million bpd, and while 400,000 barrels might not seem much in a global market of over 100 million bpd, it is a bellwether of the global economy and an alarm signal for Gulf producers. 

Although nobody is really sure of the exact oil price level Gulf countries need to balance their national budgets — in any case the figure varies widely across the regional economies — most experts agree that it is higher than the current level of just below $60 a barrel. 

Much lower than that and the fiscal policymakers have trouble making the sums add up without raiding reserves built up in previous “good” years, or tapping into volatile global capital markets to borrow the difference. 

Because of the nature of Gulf economies — still mostly dependent on oil-fueled government spending — any budget pressures get translated directly into reduced economic activity and lower growth rates. 

For example, the London-based consultancy Capital Economics recently reduced its estimate for Saudi Arabia’s growth in 2019, denting prospects for a nascent economic recovery some experts had predicted earlier this year. 

“The slowdown can be pinned on the oil sector,” said analyst Virag Forizs, noting that oil production had fallen below 10 million bpd in the second quarter of this year, because of lower global demand and the production limits agreed between Russia, Saudi Arabia and other Opec countries, designed to keep the oil price up. 

Of course, the worries of Arab budget planners are of little concern to Trump and Xi as they play out the much wider confrontation over global trade that some have labelled a “new Cold War” between East and West. The US-China spat has intensified in the Trump presidency, and is now arguably the most serious threat to global economic well-being. 

At its core, the confrontation reflects American resentment at the rising world status of China, which is already the biggest trading country and is challenging the US for the title of biggest economy. 

Some time in the next decade, it looks likely that China’s GDP will overtake that of America — if trade wars do not put a sharp halt to the three-decade pattern of economic growth in China. 

On a whole range of indicators, such as export figures, air freight traffic and shipping volumes, global trade is slowing down, and while trade is not the only component of economic growth, it was the major factor in the 20-year boom the world experienced until the global financial crisis derailed it in 2009. 

This past decade, the world economy has been largely treading water as the globalization tide receded. Authoritative institutions such as the International Monetary Fund have been reducing their estimates of future growth, both for the world and the Middle East. 

For the Gulf economies, East- West trade war is another complicating factor in the process some experts have called “Easternisation” — the reorientation on the global economy away from the old powers of Europe and North America towards the fast-growth economies of Asia. 

That trend was a positive factor for the Middle East for a number of years. China, India and Japan as well as the “tiger” economies of south east Asia, needed Arab oil to fuel their growth. In particular, the infrastructure spree China embarked on after the financial crisis, which many experts believe was the most important factor in minimizing the post-crisis recession, was fueled by increased oil exports from the Middle East. 

IN NUMBERS

$110bn GCC’s total trade with China in 2017

1st China’s trading partner rank with Saudi Arabia, UAE, Kuwait and Oman

10.1% UAE share of world aluminium exports

Now, Saudi Arabia is the biggest oil trading partner of China, India and Japan, and other Gulf exporters such as the UAE are also major players in the “Easternisation” strategy in the oil industry. 

The eastward tilt grew stronger as the US oil industry, which for many years had been a net importer of crude from the Middle East, developed its indigenous shale-oil industry to a point where the US is now the biggest energy producer in the world, ahead of Saudi Arabia and Russia, measured by barrel output of oil and equivalent products. 

The result has been, in the words of Fatih Birol, the IEA’s executive director, “a world awash with oil.” Asian importers have more choice than ever, and can command price discounts for large contracts in oil and gas, putting further downward pressure on global prices. 

The real measure of the world’s glut of crude is the fact that, despite several security alarms in the Arabian Gulf and the Strait of Hormuz, the price of oil has barely been affected. In the past, when there have been threats to the vital Hormuz sea-lanes, the oil price tended to spike in direct proportion to the gravity of the situation. 

Now, despite Iranian seizure of oil vessels in the Gulf, as well as attacks on oil facilities in Saudi Arabia and shipping off the eastern coasts of the UAE, the price of crude has remained firmly in the $60 range. The days of $100 per barrel are well and truly over, many analysts believe, with all that means for future policymaking in the Gulf economies. 

As the China-US confrontation intensifies, the global economy and world oil markets are heading into uncharted territory. 

Oil and gas expert David Hodson, managing director of Dubai-based energy consultancy BluePearl Management, said we will have to live with the new volatility for some time to come. 

“What with the insults flying back and forth on Twitter and the sheer amount of information we’re getting, almost on a hourly basis, if you’re a fund manager or oil trader you have to watch the news around the clock. We’ve never before lived in a world like this.” 


Lebanon removes banking secrecy rules to fight corruption

Updated 28 May 2020

Lebanon removes banking secrecy rules to fight corruption

  • The move opens the way for investigations into bank accounts of current and former officials such as Cabinet ministers

BEIRUT: Lebanon’s parliament approved on Thursday a law to remove decades-old banking secrecy rules in order to better fight rampant corruption that has pushed the country to the edge of economic collapse.
The move opens the way for investigations into bank accounts of current and former officials such as Cabinet ministers, legislators and civil servants, state-run National News Agency reported.
The restoration of stolen public money in the corruption-plagued nation has been a key demand of protesters who have been demonstrating since mid-October against Lebanon’s ruling elite, which they blame for widespread corruption and mismanagement.
The approval of the law came two months after the Cabinet approved a draft resolution to abolish the country’s banking secrecy laws, which have turned tiny Lebanon into the region’s Switzerland, attracting clients from around the Arab world who prized the anonymity its banks offered.
The new law gives powers to National Anti-corruption Commission and a Special Investigative Committee at the central bank to investigate bank account of officials, the report said.
For Thursday’s session, Lebanese lawmakers convened inside a Beirut theater so that they could observe social distancing measures imposed during the pandemic. Dozens of anti-government demonstrators briefly clashed with riot police outside as legislators met.
As lawmakers in face masks arrived at the theater, known as the UNESCO palace, paramedics sprayed them with disinfectant before they entered, one at a time.
Lebanon has been facing its worst economic crisis in decades, with unemployment figures soaring and the local currency losing more than half of its value against the dollar.
After the banking secrecy measure was passed, Parliament Speaker Nabih Berri suspended the session until later in the afternoon when the legislators were to discuss a draft general amnesty law.
The amnesty issue has deeply divided parliamentary blocs, with Christian groups calling for pardoning Lebanese who fled to Israel after it ended its occupation of southern Lebanon in 2000, while former Prime Minister Saad Hariri and others want the release of hundreds of Islamists held as terror suspects.
Lebanon and Israel are at a state of war and some Lebanese who fled to Israel now hold Israeli citizenship. Scores of protesters demonstrated in Beirut and southern Lebanon on Thursday against pardoning those living in Israel.