Credit Suisse last week warned that oil prices could fall to $50 under its worst case scenario. In late 2008 oil prices plunged to $34-a-barrel in the global financial crisis so this is not an unreasonable guess if the euro-zone sovereign debt crisis morphs into something similar this year.
What economists describe as a simultaneous global economic slowdown is certainly happening, and is a drag on oil prices. That is one reason why the Dubai Financial Market has given up almost all its recent rally and is back to seven-year low territory.
Forward thinking
For while there has definitely been a real economic recovery in the UAE, as HSBC senior economist Liz Martins told ArabianMoney in a video interview (click here), this is an assessment of what has happened rather than what is to come. Stock markets try to guess the future, though the DFM did a very poor job of forecasting the current recovery in the UAE.
However, oil is the root of all economics in the Gulf States. The record oil revenues of last year gave the UAE a 3% current account surplus, and recapitalized the banking system. No need for any bailouts. The money printing of the rest of the world was enough to support oil prices at record levels in a global economic downturn and that benefited the oil producers.
Take away that cash flow and the future is not so rosy. The public spending by Saudi Arabia that has fuelled up demand in the region may be cut back, although the kingdom has never been averse to running a big deficit in the past and remains one of the world’s few good credits.
Arab Spring Part 2
Indeed, the motivation for such spending – principally a worry to keep populations happy in the wake of the Arab Spring – has not gone away. If anything it has intensified with the civil war in Syria and its contagion, and Egypt could have an Islamic Brotherhood President.
This could well be enough to keep the lights burning in the Gulf States long after they have dimmed elsewehere. It is not as though these regimes lack the reserves. There is the oil wealth in the ground and the huge sovereign wealth funds.
Spending to secure your own survival is a pretty powerful incentive at the best of times and can also be expected in the worst of times, and maybe that is where we are heading for the global economy over the next couple of years.
