Don't miss the trees for the woods

June 5, 2016

  

Let us accept it. The topic of oil price discussion has come to a tiring point now. Every other debate or discussion is around oil price predictions, outlook for oil price and predicting the future of GCC oil economies. Three questions predominate the narrative:

  1. Is the current fall in oil price cyclical or structural?

  2. When can we see a strong rebound? (2016 or 2017 or beyond) &

  3. Can GCC survive a long spell of low oil price?

In fact, the second question is related to the first question. If the current fall in oil price is structural, then we cannot expect any strong rebound. So, may be implicitly we should pray that this is just a cyclical phenomenon. From a mean reversion perspective, a period of low oil price should be succeeded by period of improving strong oil price and hence it may not be out of place to expect a rebound since we have been suffering from low oil price for some time now. Also, with trillions of reserves earned during good times, GCC may be well entrenched to whither the oil storm for longer than we think. So why worry about oil price?

 

The answer lies in demography and welfare state model of GCC. Both of them will make sure that government expenditure is on the rise which implies requiring higher oil price to balance the budgets. As population grows at a healthy rate (emphasis youth population), the pressure on infrastructure investments, job creation and essential services (education and healthcare) increases manifold. Surround this with challenging geopolitical situation, you can guess the answer. The answer to the challenges enumerated above does not lie in high oil price as we have figured out by now. The answer lies in creating meritocratic institutions that focusses on nurturing innovation and creativity. The answer lies in fostering reforms across the board so that doing business even by local family businesses gets lot easier and cheaper. GCC should restructure their economic business model in such a manner that it no longer depends on just one commodity for its survival. We should use the oil industry to champion the change. We should focus on reduction of wasteful expenditure rather than augmenting non-oil income (through subsidy rationalization and taxes). While subsidy rationalization is essential (given the extremely low pricing of services), it should succeed efforts to augment efficiency in the existing model which can reign in extraordinary savings.

 

GCC must embark on a path that will make those 3 questions redundant in the next 10 years.

 

PS: This is the editorial written by the author for Marmore Bulletin-a quarterly thought leadership publication focussed on Mena region.

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