Structural Changes in Global Oil Markets and Implications for Middle East Resource-Rich Countries
The purpose of this paper is to identify the major shifts in global oil supply and demand dynamics and assess the implications for resource-rich Middle East countries with special focus on GCC. It is argued that regardless of whether the shocks currently hitting the oil market are structural or temporary in nature, there is general consensus that oil prices cant be sustained at a much higher level than the current range for long and therefore it is important for resource-rich countries to adjust their economies to a lower price environment. It is shown that the adjustment process has already started following the price collapse in 2015 and 2016, but governments may become more constrained in their choices as reforms accelerate, especially given that there is still a strong sense of entitlement among the citizens of hydrocarbon-rich countries and thus governments should introduce compensatory schemes to offset the negative impact on welfare. In the medium to the long-term, one of the key uncertainties facing these countries is the speed of the energy transition and the prospects for global oil demand. Because the share of oil in the energy mix is unlikely to fall sharply and because the Middle East is expected to continue to play a role in meeting global oil demand, the oil and gas sector will continue to dominate the GCC economies for the foreseeable future. But the energy sector needs to play a more active role in the diversification process by extending the value chain and creating new industries through fostering backward and forward linkages. Given that the speed of the energy transition is highly uncertain, resource-rich countries should assess the impact of multiple scenarios, including one in which oil demand goes into structural decline. In face of structural decline in oil demand and oil revenues, these countries have limited options but to diversify their economic base and revenues away from oil to ensure a long-term sustainable growth path. However, there are multiple features of GCC economies that limit their ability to undertake deep reforms. These include a non-energy sector largely geared towards non tradable and as such contributes little to exports earnings. Also the fiscal structure is designed to heavily rely on oil revenue with few other additional sources. In this structure, the private sector and individuals are not taxed, but instead receive subsides. A meaningful diversification can only be achieved by deep structural reforms and removing many of the barriers that hinder private sector development which is a complex and lengthy process. It is concluded that if the transition does not go smoothly and countries struggle in their diversification efforts and reducing their reliance on oil revenues, this could result in lower investment in the oil sector and some countries could even see output disruptions which would result in more volatile oil prices. Also, in the absence of diversification, oil exporters will continue to push for higher oil prices through their output policy. These have the effect of speeding up the global energy transition. In contrast, if these countries succeed in their diversification objectives, they will not only increase the resilience of their economies, but this would allow them to pursue a more flexible and proactive oil policy and adopt long-term strategies that could influence the speed of global energy transition and secure the long-term demand for oil.