Many investors fear it may 2008 all over again. That was the year the US housing market went under in a sea of mortgage debt, bringing oil prices to as low as $30 a barrel.
But economists say that unlike 2008, Saudi Arabia and the region’s other governments are adequately cushioned for another slump in the world oil price, if it comes.
“There is definite panic in the markets because they are worries how it will affect them. Two, three years ago they were affected very badly, especially in Dubai,” Said Hirsh, Middle East economist for London-based Capital Economics, said.
“They don’t trust the government will spend if oil prices drop.”
The nervousness about the global outlook has been growing as Europe fails to put out its debt fire, but Gulf markets swooned after Standard & Poor’s cut the US credit rating for the first time ever two weeks ago. Germany’s economic growth came to a near-standstill in the second quarter. Reflecting a downgrade in export outlook due to slower growth in the US and Europe, Deutsche Bank this week cut its projection for Chinese growth by 0.2 percentage point to 8.9 percent for 2011.
Meanwhile, the outlook for world oil demand looks increasingly weak.
The Organization of the Petroleum Exporting Countries (OPEC) in a recent report said “dark clouds over the economy” had begun to cool demand for oil.
It estimated that world demand will average 1.21 million barrels per day this year, 150,000 barrels less than it predicted just a month earlier. Worries about the global economy and its impact on oil have taken on an added political dimension with the Arab Spring.
Saudi Arabia and other Gulf governments have boosted spending this year to create jobs and build infrastructure.
The Saudi government’s 2011 budget, for instance, forecasts a seven percent increase in expenditures to $154 billion. On top of that, the Kingdom committed itself in February to extra spending of $36 billion, Oswald Clint, a London-based analyst at Sanford C. Bernstein & Co., said in a report this week. To pay for all of this, however, the kingdom needs oil prices to remain above $85 a barrel — its so-called breakeven price — assuming they export three quarters of what they produce. Now, with oil prices easing, the Saudis may start cutting oil output “much sooner” than they did after the financial crisis in 2008, Clint said in his report.
But other economists are more sanguine.
The price of benchmark Brent crude for delivery was $109.33 a barrel on Thursday, giving the Saudi’s a lot of room before their spending begins to fall.
Hirsh said economic growth is likely to drop across the Gulf, but he said markets are overreacting.
In Saudi Arabia, the government has built up foreign reserves — by some $40 billion this year alone to $500 billion — while the country’s banking is in better shape than the last time global recessions struck.
“I would not call $85 a danger point, but they would start looking at spending if oil dropped to $60. At $85, it would mean they go into deficit next year, but that’s not such a big deal,” he said.
Jean-Paul Pigat, head of Middle East and North Africa analysis, Business Monitor International, said that even if the global economy and oil prices do sink, he is confident that the Kingdom will keep to its spending plans.
“Even if Saudi Arabia’s breakeven has been raised because of the stimulus, it’s important to know why they have undertaken it,” he said.
“They would be quite willing to drawn down their foreign assets rather than put a halt to spending measures.”Bahrain has a relatively high oil breakeven of $100 a barrel, but it will likely get assistance from its wealthier neighbors if the government needs it, said Pigat.
Elsewhere in the Gulf, the situation remains relatively safe, Oliver Cornock, regional editor for GCC countries at the Oxford Business Group, said.
“We have to be aware of the fact Qatar and Saudi Arabia and UAE and Kuwait have all significant buffer,” he said.
“Over the last eight years these economies have becoming increasingly healthy. They all have more than adequate reserves for a rainy day, and I don’t believe that rainy day has come yet.”
