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09 February 2020

GCC oil wealth could be over by 2034 without reforms, says IMF

Without decisive economic reforms, the oil-rich Gulf countries could exhaust their net financial wealth by 2034 as the region becomes a net debtor

Increased use of oil for petrochemicals might help mitigate the slowdown in demand/Bloomberg

by Kudakwashe Muzoriwa

The International Monetary Fund (IMF) said that the Arabian Gulf countries face a budget reckoning and risk squandering their $2 trillion in financial wealth within 15 years as oil demand nears peak levels.

In a report, the Washington-based fund said that global oil demand may start falling sooner than expected, putting a strain on the finances of the six-member bloc, which accounts for a fifth of the world’s crude production.

The fund projected that without decisive economic reforms, the oil-rich Gulf countries could exhaust their net financial wealth by 2034 as the region becomes a net debtor. Furthermore, the IMF said that within another decade, the GCC’s total non-oil wealth will also be exhausted.

Jihad Azour, the Director of the IMF’s Middle East and Central Asia Department, said, “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.”

Economic reforms already underway in some countries need to accelerate, said Azour. GCC countries would have to be more aggressive in their pursuit of an economic transformation to preserve their current wealth.

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, added Azour.

International oil companies and producing states have come to recognise that alternative energy sources, alongside greater efficiency, are already eroding demand. The IMF stated that while GCC producers like Saudi Arabia and the UAE are developing new industries in preparation for a post-oil era, they’re not moving quickly enough to avoid running out of cash.

Gulf oil producers sharply increased budget spending from 2007 and until 2014, when crude plunged. According to the IMF report, despite patchy reforms, the Arabian Gulf countries have not fully offset the drop in oil revenue with spending cuts, leading to deficits that have eroded wealth.

Regional governments will likely need to cut spending further, save more and introduce broad-based taxation to make ends meet, said the IMF.

The fund said that 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, added the IMF.

In its initial public offering prospectus last year, Saudi Aramco said that oil demand could peak around 2035 citing forecasts from oil industry consultant IHS Markit. 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.

Saudi Arabia, the UAE 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. Even as oil demand peaks, the lower costs of production will allow Gulf states to gain market share over rivals elsewhere.


RELATED STORIES: International Monetary Fund GCC OPEC Saudi Arabia Kuwait UAE Qatar Oman Bahrain





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