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HomeWorldSliding oil price 'may hit Middle East projects'

Sliding oil price ‘may hit Middle East projects’

The Middle East oil exporting states will probably ride out weak oil prices comfortably, but if oil drops below the price at which they can balance their budgets infrastructure and other projects will slow down, warns an expert.

Fortunately, ‘governments are more prudent and forecast better now than they did many decades ago, and can juggle things to maximise the use of limited funds or make their cash go longer,’ said Ziad Makhzoumi, the chief financial officer of Arabtec, the UAE’s biggest construction firm by stock market value.

Across the Middle East, executives like Makhzoumi are wrestling with the implications of the plunge in oil prices over the last several weeks. If the lower prices are sustained, or if oil falls further, it could be the most significant event for some economies since last year’s Arab Spring uprisings.

Cheaper oil may boost growth in some of the weakest states while cooling it in the booming Gulf energy exporters.

There could be political as well as economic implications: some nations engulfed by the Arab Spring, such as Egypt, may find it easier to regain social stability. It may become harder for Iran to defy international sanctions designed to curb its disputed nuclear programme.

Overall, said Liz Martins, senior economist for the Mena at HSBC in Dubai, the oil price drop could be good for the region, ‘by bringing the cost of oil down to a level which is more sustainable for everyone in the long term.’

After averaging nearly $120 in the first quarter of this year, Brent crude oil has slipped as low as $95 a barrel this month – the lowest level since January 2011 – because of loose supplies and signs the global economy is slowing.

A further slide is possible; the Organization of the Petroleum Exporting Countries (Opec) said on Tuesday that the supply-demand balance could weaken more in the second half of 2012.

That is good news for the North African energy importers, Egypt, Tunisia and Morocco, which have close links to Europe and are therefore vulnerable to shrinking foreign trade and lower remittances from their overseas workers as the euro zone debt crisis worsens.

Egypt, which exports natural gas, looks likely to benefit relatively little from cheaper energy prices; its oil import bill was under 3 per cent of its gross domestic product last year, according to the International Monetary Fund. Morocco, where the ratio was above 10 per cent, could get a big boost.

Assuming an oil price averaging $115 per barrel this year, the IMF has forecast Morocco’s GDP growth will slow to 3.7 per cent in 2012 from 4.3 per cent in 2011. If oil instead averages $100, that might by itself add roughly 1 percentage point to growth – at least offsetting the impact of a deeper European recession.

But the benefits of cheaper oil to North Africa go beyond growth rates. Rising oil prices have been increasing the cost of fertilisers and therefore the cost of food, fuelling the social discontent which triggered the Arab Spring; governments have damaged their finances by paying heavy subsidies to keep fuel prices down for consumers.

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