Are the GCC companies still financially and economically strong after the recent fall in oil prices?
GCC market and economy: The Gulf Co-operation Council companies are formed by countries like Kuwait, Bahrain, Qatar, Saudi Arabia and UAE. Since its inception in 1998, the growth rate of its GDP has increased. Similarly, the population in these countries also shows a steep increase. The main revenue of GCC countries was generated through the export of oil and gas. Prior to the discovery of shale and crude oil reserves in U.S, Canada, and Europe; GCC group of companies was the main provider of oil to markets in North America, Europe and Asia. GCC has amassed huge foreign currency reserves in the process. With the emergence of U.S and Russia as a major competitor in the oil industry, the oil prices have come down significantly. Over the years, the GCC countries have diversified their assets, so as to generate revenues from non-oil resources. Today, GCC countries are the major investment destination for major infrastructure projects. There has also been a bloom of tourisms and financial sectors in these countries. (Economist Intelligence Unit, 2010)
Fall in oil prices and negative effects on GCC companies: The fall in oil prices can lower the economic growth of the GCC. In Saudi Arabia, 95% of the government’s revenue, are generated through the export of oil. In addition, oil and gas accounts for 85% of the country’s export. According to a forecast of the GCC, the GDP of Saudi Arabia is likely to fall from $23,400 to $25,600 for the years 2017. This small drop in GDP may not have a catastrophic effect on the economy. Considering that the Saudi’s economy is still undiversified, unlike many of its partners in the GCC, the slowing of economic growth, may weigh down the progress of the country in the long run. The surplus wealth that the GCC has generated in the past years will enable it to buffer the falling oil prices. It is possible that the government compensates for the fall in revenue by decreasing public funding, increasing taxes and by cutting down the subsidies (Hall, 2016). If such efforts are taken by the government, it may become unfavorable for citizens to do business and can severely affect corporate earnings. This can further impair the economic growth. The country may also reduce its foreign investments and there will be decrease in jobs as well. Oman is also highly dependent on hydrocarbon export for its revenue (Nereim, 2014). The demand for crude oil has become weaker with time. This could be the reason for the all-time low price of oil for less than $50/ barrel. The rise in population in the GCC countries has increased the domestic budget demands. In the long run, low prices will severely affect the economy and lead to bankruptcies. Saudi needs an oil price of $104/ barrel and Oman need an oil price of $77/barrel, in order to have a stable economy (Hall, 2016). Though the GCC companies have taken efforts to diversify its economy, the fall in oil prices can make oil producing firms in the country go bankrupt. Some of these firm or cooperation’s have huge foreign debts. Shutting down of oil companies will leave many people without jobs. The GCC companies could cut down the number of expatriate workers and its expenditure, during this period of financial austerity (Bowler, 2016). In 2015, Oman has reported the highest level of spending recorded in its history. (Parasie, 2016)
Fall in oil prices and positive effects: The positive effect of falling oil prices is largely for the oil importing companies. The fall in oil prices can boost the economies of these countries to some extent. China is the largest importer of crude oil in the world. Experts expect that the fall in prices will boost the economy of china by 0.1% (Bowler, 2016). The GCC’s honeymoon period of generating easy revenues from crude oil has ended. Oil exporting companies of this council should speed up the diversification of infrastructure and ways to generate revenues. The current revenues of the companies could be sufficient to buffer the economy for a while.
References:
Bowler, T. (2016). Falling oil prices: Who are the winners and losers? - BBC News. [online] BBC News. Available at: http://www.bbc.com/news/business-29643612 [Accessed 17 May 2016].
Economist Intelligence Unit, (2010). The GCC in 2020 The Gulf and its People. Dubai: The Economist Intelligence Unit Limited.
Hall, J. (2016). Oil Stocks Moving Up and Down on Higher Prices, Bankruptcies, Uncertainty -- The Motley Fool. [online] The Motley Fool. Available at: http://www.fool.com/investing/general/2016/05/16/oil-stocks-moving-up-and-down-on-higher-prices-ban.aspx [Accessed 17 May 2016].
Nereim, V. (2014). Drop in oil price gives Omanis cause for concern | The National. [online] Thenational.ae. Available at: http://www.thenational.ae/world/middle-east/drop-in-oil-price-gives-omanis-cause-for-concern [Accessed 17 May 2016].
Parasie, R. (2016). Gulf Markets Fall on Lower Oil Prices. [online] WSJ. Available at: http://www.wsj.com/articles/gulf-markets-fall-on-lower-oil-prices-1418292867 [Accessed 17 May 2016].
