This is mainly because the geographic distribution of growth between developed and emerging markets for the next three to five years should keep oil prices firmly on an upward trajectory.
World demand for oil tends to rise at about one-half the rate of global GDP growth. Based on S&P projections for the latter, oil demand rising by about 1.75 percent a year over the next decade. This is mainly because improvements in energy efficiency in developed markets tend to be partly offset by the increasing number of vehicles in fast-growing emerging markets such as India and China. On the other hand, world oil supply increases by about 1 percent a year, according to the International Energy Agency (IEA), creating a potential annual deficit between supply and demand of about 0.7 million barrels per day (bpd).
This deficit will likely lead to fast-rising oil prices in the coming decade. But such a simple projection also needs to take into account the specifics of global oil markets. This is because two groups of producers, with very different characteristics, are balancing supply and demand. The first group — which includes Saudi Arabia, Kuwait, Iraq, and the United Arab Emirates (UAE) — relies on oil fields with relatively low production costs. The second group, which includes the US and Canada, relies on what is often called unconventional oil — that is, petroleum produced or extracted via methods other than oil wells — such as shale oil. In the US, shale oil production has reached about 1 million bpd this year, equivalent to 10 percent of US oil imports. But the marginal cost of unconventional oil is much higher than that of the bigger oil fields of the first group. For instance, production costs in conventional oil fields in the Middle East averaged about $17 per barrel in 2008-2009, according to the Energy Institute; in comparison, US offshore production averaged $52 per barrel over the same period.
As price-setters, the first group's strategic interest is to maximize the difference between market prices and their breakeven costs by fine-tuning their production levels. The second group aims to minimize the gap between their breakeven costs and market prices, but their influence on cyclical variations in market prices is limited due to their still-relatively-small share in total world oil supply. Consequently, the large oil producers of the first group, (in which GCC countries alone possess 40 percent of global proven oil reserves) are likely to maintain a major influence on oil prices in the foreseeable future.
Oil demand
The distribution of GDP growth that we project for the next three to five years supports our view that oil prices will remain on a mildly upward trend. We anticipate that after a marked slowdown in the second half of 2010 and in 2011, growth in emerging markets will recover gradually throughout 2012 on the back of easier monetary policies. Meanwhile, we believe GDP growth in the Organization for Economic Cooperation and Development (OECD) economies will remain weak this year and next because of tight fiscal policies. This contrasting outlook implies to us that oil demand growth will be mainly dominated by China, India, Brazil, and Saudi Arabia this year and in 2013, while oil demand from OECD countries will contract modestly. According to the IEA, global oil demand will reach 90 million bpd this year (1 percent above that in 2011), with incremental demand from China alone amounting to 0.71 million bpd. Demand from OECD countries, on the other hand, will drop 0.2 million bpd.
Strong demand from emerging markets will particularly benefit the GCC economies: More than 70 percent of GCC exports are destined for Japan and the developing Asian countries.
Gulf economies
The sharp revival in oil production is bolstering external positions in GCC economies. The drop in oil prices at the onset of the 2008 crisis led to a significant reduction in current account surpluses.
As oil prices recovered in 2010, GCC exports of goods and services rose by 25 percent, while imports increased by 7 percent. Furthermore, sharp increases in oil production to offset losses in Libya caused GDP growth to accelerate in 2011, to average 7 percent for the GCC as a whole. Looking ahead, S&P forecasts that GDP growth will moderate somewhat this year and in 2013 — to 5 percent and 4 percent, respectively — as oil production will expand less rapidly in percentage terms than in 2011 when shortages in Libya lifted production in the Gulf.
Thanks to declining global nonoil commodity prices, we expect inflation to remain moderate overall at about 3 percent this year. However, S&P believes the rate of inflation will vary across GCC countries, with Saudi Arabia and Kuwait at the higher end of the range and the UAE and Qatar at the lower end. Importantly, moderate inflation should allow monetary policies to remain accommodative: According to S&P, domestic credit growth will continue to gain momentum in 2012 after some easing in the past couple of years.
Fast-growing population
Population in the GCC region has grown by an average 4.2 percent over the past decade. More than 55 percent of the population is below the age of 30. Meanwhile, the labor force has expanded by an average 3 percent per year over the past decade to reach 15.3 million in 2009. This makes it imperative that economic diversification in the region continues to create more jobs, especially as the oil sector is more capital-intensive than labor-intensive.
Unemployment data for the GCC is hard to find. According to the Saudi authority, unemployment in the Kingdom reached 5.4 percent in 2009. But this number hides a concerning picture: 10.5 percent of Saudi nationals were unemployed that year and 43.2 percent of those nationals below 24 years old were without a job. A similar picture emerges from the data published by the UAE statistical office: The official unemployment rate in the UAE was 4.2 percent in 2009, a number that breaks down between non-nationals (2.8 percent) and nationals (14 percent). The situation is complicated by the fact that the employment of nationals is generally concentrated in the public sector, while foreign nationals are primarily employed in the private sector. About 90 percent of nationals in the UAE and 55 percent in Saudi Arabia are employed in the public sector, where wages are generally higher and social benefits more attractive.
Most GCC governments have recognized the necessity to encourage the shift of the national work force from the public sector to the private nonoil sector and to foster the expansion of the latter. The Saudi Ninth Development Plan (2010-2014), for example, aims to lift the non-hydrocarbon sector share of the Kingdom's GDP from 70 percent to 81 percent. Similarly, Kuwait's Five-Year Development Plan has the non-hydrocarbon sector share rising from 44 percent to 61 percent by 2014.
Achieving those targets will be important to position the GCC economies on a long-term sustainable growth path.
Short-term strengths
The GCC economies appear well positioned to benefit from the upward trajectory of oil prices over the next five years. Their market share in emerging markets, where most of the incremental demand for oil will come from, is bound to consolidate their strong current account position, a key strength at a time when demand for funding on international debt markets becomes more competitive. Such strengths should not lead to complacency, however. The GCC economies face important demographic challenges that in our view can only be met through continuous efforts to diversify their structure away from hydrocarbons.
