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Oil price rally a two-edged sword for Gulf Arab countries

23 August 2012 23:56 (UTC +04:00)

Baku-APA. While rising oil prices mean higher budget surpluses for the Gulf Cooperation Council (GCC), they also accelerate the usage of alternative energy means in the West, rivaling the "black gold’s" quasi-monopoly in the car industry.

Ongoing warmongering in Israel against Iran, the civil war in Syria and improving economic data in the United States fuelled a price spark in oil prices that triggered euphoria in Gulf Arab states and despair among European car drivers and global airliners.

On Thursday, oil prices continued to advance above a four-month high. The Dubai Mercantile Exchange (DME) Oman Crude contract gained 1.25 percent to hit 113.48, representing the highest level since early May.

For the six GCC countries, Saudi Arabia, Kuwait, Bahrain, Qatar, United Arab Emirates and Oman, the oil rally seems to be a blessing at a first glance. As of today, the GCC has a share of 70 percent of the world’s oil production. According to the International Monetary Fund (IMF), combined GCC current account surpluses in 2011 were about 315 billion U.S. dollars, almost double that in the year before, whilst this trend is expected to continue in 2012.

However, the GCC will not reap benefits like during previous price increases, as the break-even price for a positive fiscal balance has moved up in 2012 for all GCC countries. "Intensified social demands prompted large jumps in government spending," the IMF said in its assessment of the Middle Eastern economies in the spring this year. Qatar and Bahrain, for example, must earn 20 U.S. dollars more per barrel than in 2010 in order to reach fiscal break-even.

Another danger for Arab oil exporters in the Gulf is the growing desire of Europe and the United States for alternative energy in order to ease pressure from energy prices on car drivers and oil-dependent industries.

Peter Berezin, managing editor at Bank Credit Analyst in Montreal, Canada, said the United States is on the brink of a breakthrough to a wide usage of electric cars. "What is missing is a network to recharge e-vehicles. But the grid is being built up and in 2025 we estimate a global excess supply for oil."

Similar developments towards a replacement of conventional cars by vehicles with electric gear are seen in Germany, France and Switzerland. In Germany, a lively debate about the future of conventional cars has been ongoing since July, when most Germans went in summer holidays and were hit by rising oil prices.

Since 2005, petrol prices in Europe’s largest economy rose 40 percent, currently a liter fuel costs 1.80 euros (2.26 U.S. dollars). Wolfgang Rose, president of the Autoclub Europe, estimates that the price will hit 2 euros (2.51 U.S. dollars) per liter in the next two years.

According to Berezin, any spike in oil prices will dampen oil demand faster than during the price rally in the last decade, and this could put GCC fiscal budgets in limbo.