Cheap Oil’s Silver Lining for the Gulf
Plunging oil prices have inflicted a massive shock on the economies of Middle East producers. What these countries have to understand is that, unlike past price declines, this one will not be transitory – and thus represents a perfect moment to launch comprehensive economic reforms.
BEIRUT – In June 2014, a barrel of Brent crude – the main benchmark of the international oil market – sold for $115. Today, less than two years later, the price is $45 – or even less. Not surprisingly, that collapse has been a massive shock to Saudi Arabia and the Gulf oil sheikhdoms, which rely on oil for some 85% of their revenues. And what they need to realize is that, unlike past price declines, this one will not be transitory.
This “new normal” for oil reflects new realities: China’s economic growth – and so its demand for oil – is bound to be lower; the world’s energy efficiency will increase, not least because of commitments made in December at the Paris conference on climate change; and disruptive innovation is making shale oil and gas, along with renewable energy sources, far more competitive. With the return of Iran, Libya, and Iraq as major oil exporters, low oil prices must surely be both inevitable and enduring.
Saudi Arabia and the other Gulf states should not let this crisis go to waste. They now have a perfect opportunity finally to undertake comprehensive economic reforms.