Economic Research Forum (ERF)

Arab oil exporters: coping with a new global oil order

1098
What are the implications of recent developments in global oil markets for the oil-exporting countries of the Arab region? This column outlines key issues discussed at an ERF conference hosted by the Arab Fund for Economic and Social Development in Kuwait in November 2017.

In a nutshell

The world is changing in fundamental ways and that is not appreciated as much as it should be in the Arab region.

In countries where there is consciousness of the new global order and when politics allows, there has been a first wave of relatively easy, technical reforms.

But a next generation of reforms is needed that is much more fundamental: of institutions, governance, transparency, accountability and society at large.

The large and unexpected decline in oil prices since their peak in June 2014 is an opportunity, pushing politicians in the countries of the Arab region to take diversification much more seriously because of the threats to their public finances. But whatever happens to oil prices, it is not simply diversification that is needed: a fundamental transformation of Arab economies and societies is essential to fulfil the aspirations and expectations of their young and growing populations.

That was how Hafez Ghanem (World Bank) opened a two-day ERF policy conference on global oil markets and their consequences for the Arab region. Hosted by the Arab Fund for Economic and Social Development in Kuwait, the event brought together international experts, regional researchers and policy-makers.

Discussions included the medium to long-term outlook for oil prices (whether we are in a ‘new normal’ or ‘new global oil order’); how fiscal and monetary policies should respond; the role and strategies of sovereign wealth funds; diversification and structural transformation; and the longer-term reforms needed to achieve sustainable development – not least significant changes to education systems, the position of women and the size of the private sector.

The oil market outlook

Kamiar Mohaddes (University of Cambridge) noted that as with all markets, lower oil prices will eventually lead to higher demand and lower supplies. The beneficial income effects of lower oil prices will show up in higher oil demand by oil importers including the United States, while the loss of revenues by oil exporters will act in the opposite direction. But the net effect on the global economy is likely to be positive.

He added that oil prices are likely to fluctuate within a wide range, the ceiling being the marginal cost for US shale oil producers (around $60 per barrel). For the Arab energy exporters, there will be a decline in economic activity, mainly because lower oil prices weaken domestic demand as well as external and fiscal balances. There are also negative growth effects for energy importers that have strong economic ties with oil exporters.

Former governor of OPEC Majid Al-Moneef laid out five factors that will determine the long-term oil market outlook: the technological advances and cost advantages of renewables, electric vehicles and smart mobility; the commitment to the Paris agreement on climate change; China as a leader in the emerging energy landscape; shifting trade patterns in oil and gas, and the geopolitics surrounding them; and the reviving role of the United States in global energy production.

He then outlined five potential factors determining the impact on Arab oil-exporting countries: their degree of dependence on oil to fuel economic growth; their adaptability to oil price swings or demand decline; their ability to form business, economic and political alliances; the effectiveness of new fiscal, energy, labour and industrial policies in response to the outlook; and the future role of the state and the private sector in the economy.

Policy responses

Several speakers explored potential policy responses by Arab oil-exporting countries. Allison Holland (International Monetary Fund) said that since the growth outlook remains subdued over the medium term, fiscal consolidation should continue to secure macroeconomic stability. At the same time, structural reforms need to be accelerated, including active labour market policies to support private sector job creation, enhancement of the business environment and the scope to exploit opportunities in global trade, and greater use of technology to improve access to finance

Magda Kandil (Central Bank of the United Arab Emirates) pointed out that pro-cyclical cuts in priority public spending threaten to undermine non-energy growth and diversification: there is a difficult balance between the pursuit of fiscal consolidation and growth. Beyond current macroeconomic policy though, there is a pressing need to adopt far-reaching structural and institutional reforms to move to a more competitive, knowledge-based economy, led by the private sector.

Hilde Bjornland (BI Norwegian Business School) also looked at the longer term, explaining that management of natural resource wealth should be seen as part of a strategy for sustainable, inclusive and broad-based growth. While the fiscal rule adopted in her native Norway has not managed fully to shelter the economy from oil price fluctuations, the goal of saving resource revenue for future usage has been accomplished. Her findings highlight the strengths and weaknesses of the fiscal framework adopted in resource-rich economies.

Hanan Morsy (European Bank for Reconstruction and Development) discussed the challenges of structural transformation. Diversifying away from oil is difficult, she noted, and it takes a long time. Success hinges on adopting appropriate policies ahead of the decline in oil revenues – and what worked for the few successful diversification cases (Indonesia, Malaysia and Mexico) may not work now.

Sovereign wealth funds

Another group of speakers focused on sovereign wealth funds. One study by ERF managing director Ibrahim Elbadawi and colleagues explored the potential role of these funds in supporting macroeconomic policy and helping to break the link between resources windfalls and government expenditures that exacerbates cycles of boom and bust.

Another study by Elbadawi and colleagues examined why cross-border investments by these funds within the Arab region are relatively low: the answer lies in the poor quality of economic governance institutions in potential recipient countries. With what is expected to be stiff competition for the resources of sovereign wealth funds under the ‘new global oil order’, capital-scarce Arab economies must significantly improve those institutions.

A new global order

Chairing the final policy panel, Mustapha Nabli (North Africa Bureau of Economic Studies and ERF) pulled together some of the threads running through the conference.

The world is changing in fundamental ways, he said, and that is not appreciated as much as it should be in the Arab region. In countries where there is consciousness of the new global order and when politics allows, there has been a first wave of relatively easy, technical reforms. But a next generation of reforms is needed that is much more fundamental: of institutions, governance, transparency, accountability and society at large.

 

Tags: , , , ,

Most read

EU climate policy: potential effects on the exports of Arab countries

The carbon border adjustment mechanism aims to ensure that Europe’s green objectives are not undermined by the relocation of production to parts of the world with less ambitious climate policies – but it could impose substantial costs on developing countries that export to the European Union. This column examines the potential impact on exporters in the Arab world – and outlines possible policy responses that could mitigate the economic damage.

Financial development, corruption and informality in MENA

Reducing the extent of informality in the Middle East and North Africa would help to promote economic growth. This column reports evidence on how corruption and financial development influence the size of the informal economy in countries across the region. The efficiency of the financial sector in MENA economies reduces the corruption incentive for firms to seek to join and stay in the formal sector.

Green hydrogen production and exports: could MENA countries lead the way?

The Arab region stands at the threshold of a transformative opportunity to become a global leader in green hydrogen production and exports. But as this column explains, achieving this potential will require substantial investments, robust policy frameworks and a commitment to technological innovation.

Climate change threats and how the Arab countries should respond

The Arab region is highly vulnerable to extreme events caused by climate change. This column outlines the threats and explores what can be done to ward off disaster, not least moving away from the extraction of fossil fuels and taking advantage of the opportunities in renewable energy generation. This would both mitigate the potential for further environmental damage and act as a catalyst for more and better jobs, higher incomes and improved social outcomes.

Freedom: the missing piece in analysis of multidimensional wellbeing

Political philosophy has long emphasised the importance of freedom in shaping a meaningful life, yet it is consistently overlooked in assessments of human wellbeing across multiple dimensions. This column focuses on the freedom to express opinions, noting that it is shaped by both formal laws and informal social dynamics, fluctuating with the changing cultural context, particularly in the age of social media. Data on public opinion in Arab countries over the past decade are revealing about how this key freedom is perceived.

Child stunting in Tunisia: an alarming rise

Child stunting in Tunisia seemed to have fallen significantly over the past two decades. But as this column reports, new analysis indicates that the positive trend has now gone dramatically into reverse. Indeed, the evidence is unequivocal: the nutritional health of the country’s youngest citizens is rapidly deteriorating and requires immediate and decisive action.

Exchange rate undervaluation: the impact on participation in world trade

Can currency undervaluation influence participation in world trade through global value chains (GVC)? This column reports new evidence on the positive impact of an undervalued real exchange rate on the involvement of a country’s firms in GVCs. Undervaluation acts as an economy-wide industrial policy, supporting the competitiveness of national exports in foreign markets vis-à-vis those of other countries.

New horizons for economic transformation in the GCC countries

The countries of the Gulf Cooperation Council (GCC) have historically relied on hydrocarbons for economic growth. As this column explains ahead of a high-level ERF policy seminar in Dubai, emerging technologies like artificial intelligence, blockchain and robotics – what some call the fourth industrial revolution – present a unique opportunity for the region to reduce its dependence on oil and make the transition to a knowledge-based economy.

Shifting public trust in governments across the Arab world

The Arab Spring, which began over a decade ago, was driven by popular distrust in governments of the region. The column reports on how public trust has shifted since then, drawing on survey data collected soon after the uprising and ten years later. The findings reveal a dynamic and often fragile landscape of trust in Arab governments from the early 2010s to the early 2020s. Growing distrust across many countries should raise concerns about future political and social instability.

Corruption in Iran: the role of oil rents

How do fluctuations in oil rents influence levels of corruption in Iran? This column reports the findings of new research, which examines the impact of increases in the country’s oil revenues on corruption, including the mechanisms through which the effects occur – higher inflation, greater public spending on the military and the weakness of democratic institutions.




LinkedIn