by SignalFactory · February 12, 2020 | 07:48:13 UTC
The
Arab monarchies of the Persian Gulf face a budget reckoning and risk
squandering they’re $2 trillion in financial wealth within 15 years as oil
demand nears peak levels, according to the International Monetary Fund.
Global
oil demand may start falling sooner than expected, putting a strain on the
finances of the six-member Gulf Cooperation Council, which accounts for a fifth
of the world’s crude production, the IMF said in a report Thursday.
Without
decisive economic reforms, the richest Middle Eastern states could exhaust
their net financial wealth by 2034 as the region becomes a net debtor, the fund
projects. Within another decade, their total non-oil wealth would also be
exhausted, the IMF said in the report prepared by a team of its the Middle East
and Central Asia specialists as well as the research department.
“Countries in the region need to think long-term and
strategically because the oil market is changing structurally both from the
demand and the supply side,” Jihad Azour, director of the IMF’s Middle East and
Central Asia Department, said in an interview.
Economic
reforms already underway in some countries need to accelerate, he said.
Development plans need to shift spending and job creation from governments to
the private businesses and develop more non-oil sources of income more quickly,
he added.
GCC
countries would have to be more aggressive in their pursuit of an economic
transformation to preserve their current wealth. “If we stop here, it’s not
enough,” Azour said.
International
oil companies and producing states have come to recognize that alternative
energy sources, alongside greater efficiency, are already eroding demand. While
Gulf producers like Saudi Arabia and the United Arab Emirates are developing
new industries in preparation for a post-oil era, they’re not moving quickly
enough to avoid running out of cash, the IMF said.
Gulf
oil producers sharply increased budget spending from 2007 and until 2014, when
crude plunged. Despite patchy reforms, they haven’t fully offset the drop in
oil revenue with spending cuts, leading to deficits that have eroded wealth,
according to the report.
Regional
governments will likely need to cut spending further, save more and introduce
broad-based taxation to make ends meet, the IMF said.
A
further decline in oil prices this year, in the face of geopolitical tensions
and threats the coronavirus poses to growth, is making that task even harder.
Should global oil demand trend downward before those plans take root, the
countries would have to cope with their longer-term economic problems even
sooner, according to the fund.
“The world’s demand for oil is expected to grow more slowly and
eventually begin to decline in the next two decades,” the IMF said.
Global
oil demand is likely to peak around 2041 at about 115 million barrels a day and
gradually decline from there, according to the report. While that forecast is
firmly in line with most industry estimates, some, including the IMF, see the
potential for oil use to permanently decline even earlier.
Saudi
Aramco, citing forecasts from oil industry consultant IHS Markit Ltd., said in
its initial public offering prospectus last year that oil demand could peak
around 2035. Improved energy efficiency or the imposition of a carbon tax by
governments worldwide could bring oil’s demand peak forward to as soon as 2030,
the IMF said.
Saudi
Arabia, the U.A.E., and Kuwait are the biggest producers in the GCC and are all
OPEC members. Risks differ for the GCC states, which also include Qatar, Oman,
and Bahrain.
The
IMF’s outlook offers a broad timeframe in which global oil demand might crest.
Revenue may not peak until the middle of the century and Gulf producers could
see demand for their oil sustained from other quarters.
Increased
use of oil for petrochemicals might help mitigate the slowdown in demand, the
IMF said. Even as oil demand peaks, the lower costs of production will allow
Gulf states to gain market share over rivals elsewhere.
Even
then, under the IMF’s
scenario, Saudi Arabia, the U.A.E., and their neighbors face a future of
slumping income and reliance on debt to support spending.
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