Al Badri: Current dip in oil prices is not detrimental to the countries that have a diverse economy

Abdullah Al Badri: Oil prices are down now, and we expect them to rise again Dubai, 14th December, 2014 (WAM) – Abdullah Al Badri, Secretary-General of the Organization of Petroleum Exporting Countries (OPEC) and Henry Azzam, an economic expert, headlined session three of the day long Arab Strategy Forum reviewing different scenarios of Arab economy in 2015.

Discussing oil price movement and regional implications, Al Badri’s and Azzam’s key takeaways were: 1) The current oil situation is a good wake up call for all GCC countries to adopt a strategy of economic diversification 2) Terminating investments in oil will lead to shortage in the future The Current Oil Situation is a Good Wake Up Call for All GCC Countries to Adopt a Strategy of Economic Diversification In his address, Al Badri said: ‘ The situation is quite different economically in the Arab region. There are 3 scenarios in this region.

We have countries that are in the middle of active conflicts such as Syria and Iraq, which put neighboring countries such as Lebanon and Jordan under economic pressure that hinders their progress. We also have countries of the so-called Arab Spring such as Egypt and Tunisia that are under huge economic pressure because of the recent instability which has affected their economic development. Finally, there are Gulf countries which was set for a healthy 4.5% growth.” Al Badri added that the OPEC convened a meeting on November 27 to discuss the declining oil prices in the global market. The organization submitted its annual report to the member states, providing clarification on the global situation of supply and demand, in addition to the future outlook for 2015.

He said: “This report was discussed by all the ministers of member states. The market fundamentals were not clear, so it was uncertain how many barrels of oil should be produced. In this scenario, the member states agreed to maintain the current production ceiling. I would also like to point out that certain sections of the media have inaccurately reported that there are sanctions against Iran or Russia – this is not true as Iran is an OPEC member state and has agreed to maintain the production ceiling.” Al Badri confirmed that the current dip in oil prices is not detrimental to the countries that have a diverse economy.

He highlighted that at some stage during the last century, oil barrels were sold at US$12 dollars without causing the collapse of oil producing countries. Adding that the current low price will not affect GCC economies for at least three years due to the surplus they enjoy, he said: “The current situation is a chance to review the public budgets of OPEC countries. It is no cause for alarm and a good wake up call for all GCC countries to adopt a strategy of economic diversification – away from dependency on oil and gas.” Terminating Investments in Oil Will Lead to Shortage in the Future On the subject of oil investments, Al Badri said: “There are some fears about low government spending on oil production due to the low prices. Such opinions ignore the fact that prices remained steady at around US$100 a barrel for a considerably long period. Therefore, there are huge surpluses that could be invested. I don’t think there are any tendencies to reduce investing in oil production or stop any current investment projects. Terminating investments in oil will lead to shortage in the future and risk a return to the 2008 scenario when prices hit US$147 per barrel.”

Al Badri underlined that dependency on oil is still a reality despite the diversification in OPEC members’ economies noting that shale is not yet capable of competing with oil, Al Badri pointed out that the large debt sowed by American shale organizations, especially mid-sized companies, could lead to economic inflation. He added that OPEC is working with a vision that extends beyond 2025 and there are expectations that demand will exceed 50 million barrels a day.

In his address, Henry Azzam, economic expert said: “We are witnessed the second boom in the Gulf countries. The fall in oil prices will have a positive impact on some countries, especially the ones that import oil except Syria that already suffers from economic collapse. The non-oil-exporting countries such Libya, Iraq and Algeria will also not be in a good situation.

“According to a study conducted by McKinsey, if the oil prices remain at US$70 rate per barrel, investments in shale gas will fall. Shale constitutes 17% of the total world fuel production. There’s no doubt that we will see an increase in consumption and a decline in investment in conventional oil. Within a year or two oil prices will healthier and fairer levels.” Azzam added: “Some investment projects will continue but the pace of their execution will be slower. There’s a good opportunity today to increase revenues from non-oil investments as well as reduce indirect taxes and increase prices of utility services. This is the right time to start thinking of revenues from non-oil sources.

“Energy security is a strategic goal for the US and if oil prices fall more, the US might go for tax protection in order to preserve shale oil. It is imperative that the prices remain at affordable rates for both producers and consumers. We have to make sure of the possibility of import and production. However, this process may take longer,” confirmed Azzam.

Azzam predicts the GCC and OPEC will not reduce their oil production as they have cash reserves/surplus that can help them finance the deficit.

Azzam concluded:”There is a correlation between the decline in oil prices and the fall of the stock markets. It is an indicator of the lack of confidence and trust the private sector feels. Private sector companies are fearful of a slowdown in the implementation of projects and a reservation of banks in lending. It is well known that the private sector formed the engine of the GCC economies and has contributed to their prosperity.”

SOURCE: WAM