This is the editorial written by the author for Marmore Bulletin-a quarterly thought leadership publication focused on Mena region.
Let us accept it. The topic of oil price discussion has come
to a tiring point now. Every other debate or discussion is around oil price
predictions, outlook for oil price and predicting the future of GCC oil economies.
Three questions predominate the narrative:
1.
Is the current fall in oil price cyclical or
structural?
2.
When can we see a strong rebound? (2016 or 2017
or beyond) &
3.
Can GCC survive a long spell of low oil price?
In fact, the second question is related to the first
question. If the current fall in oil price is structural, then we cannot expect
any strong rebound. So, may be implicitly we should pray that this is just a
cyclical phenomenon. From a mean reversion perspective, a period of low oil
price should be succeeded by period of improving strong oil price and hence it
may not be out of place to expect a rebound since we have been suffering from
low oil price for some time now. Also, with trillions of reserves earned during
good times, GCC may be well entrenched to whither the oil storm for longer than
we think. So why worry about oil price?
The answer lies in demography and welfare state model of
GCC. Both of them will make sure that government expenditure is on the rise
which implies requiring higher oil price to balance the budgets. As population
grows at a healthy rate (emphasis youth population), the pressure on
infrastructure investments, job creation and essential services (education and
healthcare) increases manifold. Surround this with challenging geopolitical
situation, you can guess the answer. The answer to the challenges enumerated
above does not lie in high oil price as we have figured out by now. The answer
lies in creating meritocratic institutions that focuses on nurturing
innovation and creativity. The answer lies in fostering reforms across the
board so that doing business even by local family businesses gets lot easier
and cheaper. GCC should restructure their economic business model in such a
manner that it no longer depends on just one commodity for its survival. We
should use the oil industry to champion the change. We should focus on
reduction of wasteful expenditure rather than augmenting non-oil income
(through subsidy rationalization and taxes). While subsidy rationalization is
essential (given the extremely low pricing of services), it should succeed
efforts to augment efficiency in the existing model which can reign in
extraordinary savings.
GCC must embark on a path that will make those 3 questions
redundant in the next 10 years.
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