The Government of the United Arab Emirates has expressed the opinion that the current global oil price of around US$50 per barrel has many positive effects. Is such a low oil price really beneficial?
Low global oil prices do indeed have certain positive effects, but we need to differentiate which industries are the main beneficiaries. First of all, cheap crude oil comes as good news for industries that use oil as a production input. The most important industry in this respect is the petroleum refining industry with crude petroleum accounting for 74% of B2B costs globally[1], followed by plastic manufacturers with petroleum and petroleum products (24%), chemicals (14%), road transport (20%), and air transport (29%). Industries that rely on oil as an input benefit from falling costs and growing profit margins. As the crude oil price has halved since the middle of 2014, automobile owners around the globe now benefit from cheaper automotive fuel. For example, in the US, diesel prices for end users have decreased by 36% since June 2014. Low global oil prices have helped to reduce inflationary pressure in oil importing countries, such as Japan, India and Germany, resulting in healthier economies for these countries and consumer prices being prevented from rising. As a result, consumers have higher disposable income that can be spent elsewhere, fuelling the economy and adding to GDP growth.
So in a sense, low oil prices do have certain positive effects globally. On the other hand, the price fall is negatively affecting oil producing countries (Russia, Venezuela, Nigeria and others) that are losing revenue. However, not all oil producing countries are in the same position to sustain these losses in the short term.
How well prepared is the United Arab Emirates economy to survive the further lows of global oil prices, or prolonged periods when oil prices stay at the current level?
The United Arab Emirates Government invested a great deal in diversifying its economy when oil prices were high, therefore, a significant part of its economy is now related to non-oil revenues and is much more resistant to oil price fluctuations. Oil revenues currently account for only about 30% of the country‘s GDP, while in the 1970s the share was as high as 90%. Furthermore, both the United Arab Emirates and Saudi Arabia have accumulated considerable foreign currency reserves in recent years, which will help these countries to sustain government spending.
Of course, since revenues from oil still contribute to about one third of the country‘s GDP, the United Arab Emirates’ economic growth will be slower in 2015. The country is expecting somewhat slower GDP growth of 3.5%, compared to the 4.5% that was forecast at the beginning of the year, and the government has already taken some saving measures. In order to save money, the United Arab Emirates cancelled government subsidies on petroleum products, tying their prices to the market from August 2015.
To conclude, the United Arab Emirates has one of the strongest positions in terms of its ability to sustain several years of declining oil revenues in the region, where crude oil production is already defined by lower production costs compared to global competitors‘.
How much can the oil prices fall and can we expect them to recover in the foreseeable future?
Increases in global oil inventories are putting downward pressure on already very low global oil prices and currently there are many unknown variables that could affect oil price development in 2016. Among those variables, for example, are the possibility of Iranian oil exports after the sanctions were lifted, and the rate of recovery of global demand. There is a small risk of further decline, yet Euromonitor International believes that low prices and inventory limitations will force producers, mainly in the US, to decrease their outputs, which should help the price of crude oil to recover slightly, reaching up to US$60 per barrel as early as 2016. However, one thing is safe to say; thee price of oil will not reach the heights of pre-2014 anytime soon.
[1] Based on nine countries (Brazil, China, Germany, France, UK, India, Japan, Russia and US) accounting for 62% of global GDP in 2014