The International Monetary fund (IMF) has said in a new report that global oil demand will peak around 2040 – or ‘much sooner’ and that this could have a ‘significant’ impact on oil-exporting countries, including those of the GCC who account for a fifth of the world’s oil production.
IMF’s report titled ‘The Future of Oil and Fiscal Sustainability in the GCC Region’ stated that new technologies are increasing the supply of oil from old and new sources, while rising concerns over the environment are seeing the world gradually moving away from oil. In the meantime, the study added that GCC countries have recognised the need to reduce their reliance on oil and are implementing reforms to diversify their economies as well as fiscal and external revenues.
The report also added that as global oil demand is expected to peak in the next two decades, the associated fiscal imperative could be both larger and more urgent than implied by the GCC countries’ existing plans since at its current fiscal stance, the region’s financial wealth could be depleted by 2034.
IMF stated that the oil market has experienced a significant turnaround in recent years. The sudden and unexpected oil price decline of more than 50 percent during 2014–15 was among the largest in the past century and amounted to a transfer of nearly $6.5 trillion from oil-exporting to oil-importing countries. This was in the form of cumulative oil revenue decline, and many oil-exporting countries are still adjusting to the effects of this oil decline, it added.
Although the importance of non-oil sectors has increased in recent decades, many of them still rely on oil-based demand either in the form of public spending of oil revenue or private expenditure of oil-derived wealth. The 2014–15 oil price shock, which notably slowed non-oil growth in most of the region, was a stark reminder of this dependence, the report said.
On what can be done for the future, the report stated that ongoing reform efforts in the region will provide momentum over the next five years, but they need to be accelerated. As the region transitions toward a non-hydrocarbon economy, moving from wide-ranging fees toward fewer broad-based taxes, for example, could provide much-needed revenue diversification while also reducing distortions and facilitating SME development.
The report also estimated that governments will likely need to downsize. Progress has already been achieved in some areas, such as reduction of energy and water subsidies in several countries. But there remains significant scope for rationalising other categories of spending, including reforming the region’s large civil service and reducing public wage bills which are high by international standards, the report speculated.
Meanwhile, emphasis could be made on sustained structural reforms to generate lasting non-oil growth momentum, the report said adding that countries should re-evaluate their approach to saving. The impact on non-hydrocarbon growth has been typically short-lived and, as the economies have developed, growth multipliers from these investments have begun to decline. Therefore, from the optimal portfolio allocation and wealth preservation perspectives, financial saving will be more important going forward.
In its concluding chapter, IMF stated that the biggest challenge will be managing the broader economic transition. Ongoing reforms are moving the GCC region in the right direction, but they need to accelerate. Even with rapid diversification, sizable fiscal adjustment will be needed in the long term.
Achieving this adjustment will require countries to step up their efforts to raise non-oil fiscal revenue, reduce government expenditure, and prioritise financial saving. The economic well-being of future generations would be helped by a strong early start with these reforms, although they will entail greater effort by the current generation, the report summarised.