Although the slowdown in global economic growth is likely to have an impact on oil demand, the combination of fresh OPEC supply cuts and historically low stock levels is expected to keep oil prices firm in 2001. An average price of $24 for Brent crude is forecast this year, compared to $28.4 a barrel average for 2000. The benefits of firm oil prices to the region should continue to flow this year as well, and will help support positive real GDP growth rates in the various Gulf countries. The non-oil private sectors are expected to grow at a faster rate than last year, supported by improved consumer confidence and a generally good year for local business activities. Several projects that have been put on hold for some time will be reconsidered.
Two factors will be driving the oil market in the coming months, a) the impact of the economic slowdown in the US and its trading partners on world demand for oil, and b) OPEC’s response to a possible decline in oil prices.
The International Energy Agency expects world demand for oil to average 77.3 mbpd this year, dampened by slower world economic growth. Given non-OPEC production of around 49.8 mbpd, OPEC needs to supply 27.5 mbpd to maintain equilibrium in the world oil market. After reducing output by 2.5 mbpd this year, OPEC’s production quota (excluding Iraq) dropped to 24.2 mbpd. assuming exports of natural gas liquids of 2 mbpd, there will be a shortfall of 1.3 mbpd that is left for Iraq to supply. Baghdad exported an average of 1.3 mbpd in the first quarter this year, but exports are forecast to reach 2 mbpd for the rest of the year. No additional cuts in OPEC’s quota is expected this year.
All the Gulf countries recorded double-digit growth rates last year, with that of Saudi Arabia at 15.5 percent, the UAE at 20.4 percent, Oman at 22 percent, and Qatar at 26 percent. This strong growth was mainly in the oil sector and reflected mostly higher oil prices. In real terms growth was lower, 4.1 percent in Saudi Arabia.
The non-oil sectors in the Kingdom had a ‘business as usual’ year, with the government sector growing at 1 percent and the non-oil private sector showing real growth of around 2.5 percent.
The government accumulated no new debt last year, and the budget surplus was largely devoted to building foreign reserves and payment of arrears to contractors, farmers and suppliers.
Real growth this year is estimated at around 2 percent, with a decline in nominal GDP due to lower oil prices, while the non-oil private sectors are expected to grow at 3 percent.
In Kuwait, nominal growth last year is put at 11.5 percent and in real terms at 4 percent. Real growth is expected to moderate to 3.0 percent in 2001, as the effect of higher oil prices and government expenditure feeds through the economy and confidence returns to the business community. So far, the Kuwaiti private sector is not equipped to boost economic growth, which will remain tied to government spending, especially on large-scale projects, and developments in the oil sector. However, assuming the government’s reform schedule falls through, stronger foreign investment flows in addition to greater private sector initiative via privatization could translate into substantially higher real private-sector-led growth over the next few years.
In Oman, a strong privatization drive, the implementation of market friendly reforms, the country joining the WTO, and the initiation of major industrial projects based on Oman’s gas resources should trigger new inward investment flows and solid real growth over the next few years. Real growth is estimated at 4.5 percent in 2000 and 3.3 percent in 2001.
The Qatari economy is estimated to have grown by an impressive 7 percent last year, the highest among the GCC countries, and the country is set to record the highest growth rate again this year of 4.5 percent. This is due to the start-up of new liquefied natural gas exports in 2000 and 2001, the sustainability of the privatization program and rising investments in the non-oil sector.
Real GDP growth in the UAE is estimated at 6.5 percent in 2000 supported by a number of new projects including the Dubai Internet City and the oil and gas investment projects of Abu Dhabi National Oil Company. Real growth in 2001 is likely to moderate to 4.0 percent and will principally be driven by the non-oil private sector.
The Bahraini economy grew by an estimated 3.5 percent in real terms in 2000 and growth is forecast at 3.0 percent in 2001, as efforts to open the economy further to foreign investment start to bear fruit.
While conditions in oil markets remain favorable this year as well, the region should take advantage of the current trends and proceed more quickly with their domestic reform agendas.
