Economic Development and Globalization Division Financing for Development Section

The impact of the global financial crisis on the world oil market and its implications for the GCC countries Salaheddin Abosedra, Regional Advisor, ESCWA

Overview Expected impact of the crisis on the oil market conditions (largely based on the EIU estimations): –Oil demand –Oil supply –Oil prices Scenarios for the future of oil prices Outlook for the GCC economies Conclusions

Impact on oil market conditions: Demand Decrease of world oil demand…: –It declined by 0.2% in 2008 –Is expected to decline by 0.4% in 2009 …Largely driven by OECD’s demand…: –A decline of 2.9% in 2008 –An expected decline of 1.8% in 2009 …While non-OECD demand is expected to grow: –By 1.4% in 2009

Impact on oil market conditions: Demand Oil consumption EIU estimates China Other Asian countries Total OECD Total non-OECD World total US Department of Energy estimates China Other Asian countries Total OECD Total non-OECD World total Table 1: World oil demand, In million barrel/day

Impact on oil market conditions: Supply A total cut of 4.2 million b/d in OEPC’s output: –A cut of 1.5 million b/d (November 2008) –A further cut of 2.7 million b/d (January 2009) An expected growth in non-OPEC production (by 2.7% in 2009) An expected fall in global output (by 1.15% in 2009)

Impact on oil market conditions: Supply Oil production EIU estimates OPEC Non-OPEC World total US Department of Energy estimates OPEC Non-OPEC World total Table 2: World oil supply, In million barrel/day

Impact on oil market conditions: Prices The crisis has affected oil prices mainly thru two channels: –Many operators have liquidated their positions in the commodity markets fall in oil prices –The severe slowdown in world demand fall in oil prices However, the EIU expects a recovery in 2010, with an increase in oil prices by almost 43%

Impact on oil market conditions: Prices Prices EIU estimates West Texas Intermediate (WTI) US Department of Energy estimates WTI Table 3: Crude oil prices, In US dollar/barrel

Three Scenarios for the future of oil prices Scenario 1: Two turbulent years followed by moderate growth in 2011, due to…: –Loss of confidence in the stock markets –More bank failures –Further tightening of financial capital –Declining housing prices …And resulting in: –A decline in world GDP by 0.4% in 2009 –A sluggish recovery of 1.5% in 2010 $35 in 2009$50 in 2010 – Average oil price of $35 in 2009, and $50 in 2010

Three Scenarios for the future of oil prices Real GDP growth (%) USA Japan Euro Area World World trade growth (%) Goods Inflation USA Japan Euro Area Table 4: Global outlook

Three Scenarios for the future of oil prices Scenario 2: Six turbulent months followed by moderate growth in late 2009, due to: – Confidence in the US economic recovery –Low oil prices –Strengthening of the US dollar The average oil price in this scenario would be $45 in 2009 and $60 in 2010

Three Scenarios for the future of oil prices Scenario 3: Three turbulent months followed by moderate growth in the second half of 2009 –It differs from scenario 2 in two aspects…: A less pronounced decline in demand and employment A faster impact of the three positive effects of scenario 2 –…Resulting in an average oil price of $50 in 2009 and $65 in 2010

Three Scenarios for the future of oil prices Chart 1: GCC oil and gas revenues as percentage of total revenues, 2004, 2007 In percentage

Three Scenarios for the future of oil prices Chart 2: GCC oil and gas exports as percentage of total exports, 2004, 2007 In percentage

Outlook for GCC economies A/ Fiscal balance –Expected decline in surpluses Table 5: Budget balance Percentage of GDP Country Bahrain Kuwait Oman Qatar Saudi Arabia United Arab Emirates (UAE)

Outlook for GCC economies B/ Economic growth –Expected decline in growth rates Table 6: Economic growth Percentage change, market exchange rate weights Country Bahrain Kuwait Oman Qatar Saudi Arabia UAE

Outlook for GCC economies C/ Inflation –Lower expected inflation rates Table 7: Consumer price inflation Percentage change Country Bahrain Kuwait Oman Qatar Saudi Arabia UAE

Outlook for GCC economies D/ Current account –Moderate expected current account surpluses Table 8: Current account Percentage of GDP GCC Bahrain Kuwait Oman Qatar Saudi Arabia UAE

Outlook for GCC economies: “sensitivity” check If oil prices were to stabilize at higher levels, this would mean: –A moderate decrease in fiscal surpluses –A less severe economic slowdown –Higher current account surpluses

Conclusions The current crisis has a particular feature: it is accompanied with falling oil prices: –Thus significantly hurting GCC countries However, the impact would likely be short lived

Thank you