Why GCC economies will thrive in the MT

The future economies of Gulf Cooperation Council (GCC) nations will be robust in the medium term based on data from Standard and Poor’s (S&P).

This will hold true as long as current crude oil prices, as well as those in the years ahead, continue to pick up.  S&P forecasts that demand for crude will increase by 1.75 percent annually in the next 10 years owing to marked improvements in productive use of energy resources among developed countries, which is somehow balanced by India and China’s growing number of oil-fed vehicles.

On the other hand, the International Energy Agency (IEA) predicts that global crude supply will rise by 1 percent annually. These translate to a possible 0.7 million bpd year-on-year demand-supply deficit which may hasten hikes in crude oil prices in years to come.

Analysts noted, however, that demand-supply forecasts should factor in the marked diversity in costs incurred by countries supplying the world’s oil requirements.  UAE, Kuwait, Iraq, and Saudi Arabia – all GCC member-countries, generate crude from oil fields  at very little cost.  The other group – Canada and the United States generate unconventional oil (shale) which is more costly to produce.

There is a very big difference in marginal costs incurred by the two groups.  The mid-east group spends $17 pb of oil produced while costs for the U.S. go as high as $52 pb.  Both are based on 2008 to 2009 data.

On the subject of strategy, GCC countries are bent on widening the gap between breakeven cost and selling price while, for the U.S. group, the goal is to narrow that gap.  Apparently, between the two groups, the GCC countries will have more impact on crude oil prices per barrel in the future since they already hold 40 percent of the world’s oil reserves.

Saudi Arabia, China, and India will lead the demand for oil in 2012 and 2013.  Emerging markets are seen to increase their demand for oil and this certainly presents a very good opportunity for GCC, since more than 60 percent of its exports are actually earmarked for developing Asian countries.

The oil industry is largely capital intensive rather than labor-intensive, thus GCC states are expanding jobs in the private, non-oil sectors to encourage workforce shifts into these industries.

The bottom line is that GCC countries will fare very well over the medium term as oil prices will tend to go up within this period. Their key strengths lie in having a stable current account, a large share in oil demand from developing markets, vast oil reserves, and minimal external debts. They should, however, continue to achieve job creation targets within the non-oil sector if it wants to maintain steady growth well into the long-term.