As oil prices plunge

Dr Ahmed Mokhtar :
Between thinking about a conspiracy and attributing the situation to supply and demand forces, analysis of the dropping prices of oil worldwide after the OPEC meeting last week is seen from different perspectives.
According to the conspiracy scenario, Western European countries along with the United States of America are asserting pressure on the market with the aim of a negative impact on the Russian economy, as one tool to solve the Ukrainian crisis despite knowing that this will not affect Russia’s strong economy and its growth plans in the long run, because of the country’s rich natural resources and its huge reserves of gold and foreign currencies. Regarding supply and demand, there are reports on the slowdown of the international economic growth and a weak demand on oil during the coming weeks, which will result in more prices dropping to the extent of reaching 30 dollars per barrel according to speculations by the International Monetary Fund. Some attribute the oil prices fall to the success of the USA in producing large quantities of oil at home.
Accordingly, Sultan bin Saeed Al Mansoori, the UAE’s Economy Minister, said that supply and demand has always been the controlling factor in the oil market. “As world growth increases, so does the demand on oil,” he was quoted by the media, adding that crude oil drilling projects in the USA cannot isolate Washington from the international fuel markets because all markets are connected. Without being biased to any of the two scenarios, whatever is happening in the crude oil markets must be dealt with according to two factors. The first would be taking into account the demand volume against supply, while the other factor is fear of the future.
Therefore, after observing the crude oil markets during the last couple of years, similar events took place at the time of the economic crisis in Asia during late 1990s or after the collapse of the Soviet Union. Throughout these events, during which the world economy suffered from severe turbulence, crude oil prices were fluctuating as a result of fear of the future. However, oil markets were able to recover and became even stronger than before. That is why it is believed that the current nosedive of prices will not last long because it has nothing to do with factors related to production and consumption, and the fear of the future is not even that serious.
Regardless of the reasons behind the current situation in the global markets, Gulf States are required to be prepared for similar situations in the future. The UAE was successful in realising this at an early stage in 1971, when it adopted a clear policy about diversifying income sources and not risking the sole dependence on crude oil sales as a main income.
Oil sales represent 30 per cent of the UAE’s GDP as of last year, compared to 90 per cent in the past, due to concentration on other sectors like industry and services.
The risks of relying solely on incomes from oil or any other source does not allow the needed flexibility for decision makers in reprioritising when it comes to big projects such as the infrastructure ones underway in many Gulf States, consuming huge investments capital.
From here, we wonder about the possibility of creating a sovereign fund by the Gulf Cooperation Council, and could be managed through sparing a percentage of oil incomes by the participants of the fund’s establishment, while granting each participating country the right to withdraw through financing segments based on each country’s share in the fund. Adopting such an approach allows for a collective action to face any market turbulences in the future, as well as the ability to direct a portion of the fund’s resources to finance different projects that will achieve diversification in income resources of the participating countries.
Regardless of how long oil markets will take to restore normal rates at about 100 dollars per barrel, the economic boom witnessed in the Gulf States must include projects for manufacturing petroleum products, which will bring high added values for their economies, and will achieve the needed diversity in the structure of main recourses of the Arab economy in general, especially the Gulf’s economy.

(Dr Ahmed Mokhtar is the deputy editor in chief of Al Ahram Al Masaai.)