DUBAI: The coronavirus crisis, which has already battered oil prices, could further undercut Gulf economies.
The six Gulf states — Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and UAE — count China as their main trading partner and crude buyer, which soaks up about a fifth of their oil.
But China’s energy demand has sagged as authorities lock down millions of people in several cities to prevent the spread of the disease, now named COVID-19, that has killed more than 1,100 people so far.
The knock-on effects for a global economy that is dependent on a buoyant China — the powerhouse which accounts for one third of the growth in oil demand — have seen prices sink to a one-year low.
Analysts believe the crisis, which the World Health Organization said this week spells a “very grave” global threat, will undercut the industry and dampen prices.
“There is no question that the virus is having a significant impact on Chinese oil demand,” Bill Farren-Price of Petroleum Policy Intelligence (PPI) told AFP.
If the lockdowns continue into the year’s second quarter,” he said, “then it starts to look more serious and will have deeper impacts on the real economy.”
Non-oil trade between Beijing and the Gulf Cooperation Council (GCC) has grown from just several billion dollars two decades ago to nearly $200 billion last year.
One industry that has taken an early hit is tourism.
Over 1.6 million Chinese tourists visited the Gulf states in 2018, most of them heading to Dubai, and the number had been rising fast.
In recent weeks, however, Chinese visitors have been rarely sighted even in Dubai as airlines have suspend routes following the outbreak, threatening the ambitious tourism targets.
The latest shock comes shortly after the International Monetary Fund warned that Gulf states must undertake much deeper reforms or risk seeing some $2.5 trillion in accumulated wealth drain away in 15 years as global demand for oil slides.
Oil income is highly sensitive to Gulf states as it contributes more than 70 percent of public revenues.
Since Jan. 30, a month after the disease was discovered, oil prices have dropped by around 20 percent, slashing tens of billions of dollars from GCC revenues.
An oil price crash in mid-2014 had already seen public revenues dwindle and growth rates tumble, forcing borrowing and a drawdown on assets to plug budget deficits.
Major energy-producing countries, which had already cut production in an effort to revive the market, now face a “double whammy” of slumping prices as well as more fundamental economic trauma, said Ellen Wald, author of the book “Saudi Inc.”
“The declines, coming at a time of curtailed output, threaten economic shocks that, if long-lasting, could lead to the kind of political and regional instability that was avoided during the last steep drop,” she said in a Bloomberg news agency commentary.
London-based research consultancy Capital Economics also warned that a prolonged impact from COVID-19 could trigger a major economic downturn.
“Fears about the coronavirus outbreak have weighed on oil prices and clouded the near-term outlook for the Gulf countries,” it said in a report.
“Lower oil prices and a possible deepening of oil production cuts will act as a headwind to growth in early 2020.”
As a result of the sharp decline in oil prices, a technical committee for OPEC and its partners last week recommended additional production cuts of 600,000 bpd to add it to the 1.7 million bpd of cuts already in place.
Russia has been reluctant to commit, promising a decision soon.