Full throttle GCC growth fuelled by high oil prices
Economic prospects for the GCC economies look healthier for the next few years than in the initial phase of the global financial crisis in 2008-2009, credit rating agency Standard & Poor’s said yesterday.
“This is mainly because the geographic distribution of growth between developed and emerging markets — with the latter outperforming the former — that we forecast for the next three to five years should keep oil prices firmly on an upward trajectory,” said Jean-Michel Six, Standard & Poor’s chief economist for Europe.
Strong demand from emerging markets will particularly benefit the GCC economies. More than 70 percent of GCC exports (essentially crude oil) are destined for Japan and the developing Asian countries. “The GCC economies appear well positioned to benefit from the upward trajectory of oil prices that we foresee over the next five years,” said Six.
The sharp revival in oil production is bolstering external positions in GCC economies. As oil prices recovered in 2010, GCC exports of goods and services rose 25 percent, while imports increased 7 percent. Furthermore, sharp increases in oil production to offset losses in Libya caused GDP growth to accelerate in 2011, to average 7 percent for the GCC as a whole. The rating agency recently said that based on the surge in oil prices GCC states have strong credit rating outlooks.
“Oil-rich economies in the Gulf are increasingly pulling ahead of the region’s other economies, on the back of continuously high oil prices,” said Standard & Poor’s credit analyst Tommy Trask.
Looking ahead, S&P forecasts that GDP growth will moderate somewhat this year and in 2013 — to 5 percent and 4 percent, respectively — as oil production will expand less rapidly in percentage terms than in 2011 when shortages in Libya lifted production in the Gulf.
S&P economists forecast world demand for oil to rise at about one-half the rate of global GDP growth. Based on their projections, S&P sees see oil demand rising by about 1.75 percent a year over the next decade.
According to International Energy Agency (IEA) estimates, world oil supply increases by about 1 percent a year, creating a potential annual deficit between supply and demand of about 700,000 barrels per day. This deficit, S&P says, will likely lead to fast-rising oil prices in the coming decade.
Although some of the unconventional sources of oil extraction such as the production of shale gas and shale oil in the US and Canada are likely to impact oil prices, the rating agency said the high production costs of these new sources will limit their ability to influence oil prices significantly. While production costs in conventional oilfields in the Middle East average about $17 per barrel, US offshore production averaged $52 per barrel.
As high oil prices are expected to support strong economic growth in the Gulf countries over the longer term, S&P anticipates that sustainable growth in the GCC countries would depend on increasing employment in the non-hydrocarbon private sector.
“The GCC economies face important demographic challenges that in our view can only be met through continuous efforts to diversify their structure away from hydrocarbons,” said Six.