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2014-10-27 12:40:00

SAUDI: TEMPORARY OIL PRICES

SAUDI: TEMPORARY OIL PRICES

The decline in oil prices may continue for a year or so but will prove temporary as population growth spurs higher consumption and supports prices in the longer term, a leading Saudi petrochemicals executive said on Sunday.

The comments by Mohammed al-Mady, chief executive of the state-controlled petrochemicals producer Sabic , reported by Reuters, come as oil-dependent states in the Gulf grapple with demands to curtail public spending and speed up reform programmes. The price of oil has fallen by a quarter since the summer. Brent crude closed at $86.05 on Friday.

At a meeting of Gulf Co-operation Council finance ministers in Kuwait over the weekend, Anas al-Saleh, Kuwait's finance minister, said oil exporters must "undertake comprehensive economic reforms, including the reform of imbalances in public finances". To achieve this they must strengthen efforts to diversify away from oil, he said.

Calls for diversification away from hydrocarbons are not new, but the rapid decline in oil prices has caused alarm across the region.

A period of lower oil prices may force Gulf Co-operation Council members to borrow more to sustain state budgets or to dip into sovereign funds earmarked for future generations.

Kuwait has said it is reducing subsidies on fuel products to alleviate budgetary pressure. A quarter of its state spending is earmarked for subsidy support. Oman, a poorer Gulf state, is also considering cutting fuel subsidies.

But curbing long-held privileges, such as cheap fuel and utilities, threatens to have political consequences for Gulf monarchies, whose rule has been underpinned for decades by a compact of generous state support for citizens.

Unrest triggered by the 2011 pro-democracy Arab uprisings that swept through most of the monarchies in the region prompted several Gulf governments to commit themselves to funding big investment projects and spending more on welfare.

Most regional governments can fund large spending programmes in the short term as they built up financial surpluses in the past decade, when oil prices were high.

"The substantial fiscal buffers that have been built up in most countries over the past decade will allow governments to maintain spending plans in the near term," said Christine Lagarde, managing director of the International Monetary Fund, at the Kuwait meeting.

GCC economies have grown 4.5 per cent this year. Outside the oil sector, growth is expected to remain strong at 6 per cent, driven by infrastructure investments and private sector confidence, according to an IMF statement released at the meeting.

However, a decline of $25 a barrel in the price of oil would reduce government revenue by the equivalent of 8 percentage points of gross domestic product, Ms Lagarde said.

Urging regional producers to address the situation now, the IMF chief warned of the need for "fiscal consolidation in the medium term". She singled out the need to encourage private-sector employment of nationals in a region where a majority work in the public sector.

"Getting the economic incentives right so as to encourage workers to seek employment in the private sector, and firms to produce in exported-oriented sectors, is a key missing element of policies to date," she said.

ft.com

Tags: OIL, PRICES, BRENT, BARREL

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U.S. INDUSTRIAL PRODUCTION DOWN 0.1%

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