Over the last few months, the price of oil has been in steady decline, from above $105 a barrel in June down to $82 in October. In most places in the world, this would prompt a cheer from owners and operators of heavy equipment and vehicle – after all, the price of diesel is a significant operating cost. Yet here in the Gulf, it’s well-recognised that the price of oil is of extreme importance for the health of the construction sector.
Saudi Arabia is the largest net exporter of oil in the world, and the UAE the third largest, followed by Kuwait (America is the largest producer of oil, but also the largest importer). The government budgets which provide funding for a large number of the construction projects across the GCC all rely on oil, though to differing degrees. A low oil price can also lead to a slow down in project speeds, with funding for additional stages released at a slower rate.
Nevertheless, the good news is that – despite the price dip – government budgets across the region are well-balanced. According to figures in The Economist, the UAE, Qatar, Kuwait and Oman all have very low break-even points for their countries’ budgets – all will be able to balance their budgets with the price of oil below $80 a barrel, or even at $70. Saudi Arabia has a much higher break-even point, closer to $95 a barrel, in order to balance its expenditure with its oil revenue. But KSA also has significant foreign reserves, enough to continue spending for three years at the current rate, and there is also the prospect of borrowing to finance continued spending if the cost of oil remains depressed in the long term.
But the importance of the construction work underway across the region shouldn’t be forgotten, as it is helping diversify economies away from reliance on oil exports. Take the mighty Sadara project in Jubail, Saudi Arabia, which – costing $20bn – is the largest chemical complex in the world constructed in a single phase. A joint venture between Saudi Aramco and Dow Chemicals, it will produce chemicals used in production of consumer goods, helping diversify the Kingdom’s economy.
Or consider the construction work in the Emirates, aimed at increasing the global profile of Dubai and Abu Dhabi and the other states, in order to attract more big-spending tourists. The RTA has announced plans for 35 megaprojects, including improving transport infrastructure in the lead-up to Expo 2020.
The strategic importance of these projects and others gives hope that there will be no let-up in construction activity.