Sustained low prices may make producing countries reform, panel says
Continuing lower crude oil and natural gas prices could make many Middle Eastern and Central Asian producing countries’ governments consider serious institutional reforms, speakers at a Washington forum generally agreed.
Continuing lower crude oil and natural gas prices could make many Middle Eastern and Central Asian producing countries’ governments consider serious institutional reforms, speakers at a Washington forum generally agreed. But it’s not certain whether regional political unrest will make them direct more money to military programs instead of economic management if they successfully reduce or eliminate price subsidies and tax breaks, they said during a June 8 discussion at Johns Hopkins University’s School for Advanced International Studies.
“It has become increasingly clear that prices will stay low for a long time, a major difference from their simply being low,” noted Min Zhu, deputy managing director at the International Monetary Fund, which cosponsored the event with the Middle East Institute and SAIS. “It’s not just single cuts, but comprehensive policy reforms that reflect a dramatically changed situation. Crises always provide opportunities,” he said. “Countries which act early will be leaders in the future because they will have begun to try putting their national economies on a sustainable footing.”
Low oil and gas prices and other major shocks have hit the Middle East-North Africa (MENA) and Caucasus-Central Asia regions with serious and persistent impacts, a recent IMF study concluded. Several governments have taken important policy actions already, but additional responses are needed in a number of areas. All countries will need to strengthen policy frameworks and institutions and accelerate structural reforms, it said.
“This is not business-as-usual,” said Martin Sommer, deputy chief of IMF’s Middle East and Central Asia regional studies division and one of the study’s authors. “Oil and gas countries have fallen a long way, but several of these countries already have begun to take steps. They’ll need to take more, because significant challenges remain.”
The report, which was generally based on information as of April, concentrated on low price-related challenges facing Gulf Cooperation Council members (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE); Algeria; and oil exporters in the Caucasus and Central Asia (Azerbaijan, Kazakhstan, Turkmenistan, and Uzbekistan).
To keep the focus on impacts from lower prices, it did not cover developments in MENA exporting nations where conflicts also are having an impact (Iraq, Libya, and Yemen) or where sanctions are being removed (Iran).
“Policymakers are looking at lower budgets,” Sommer said. “Some are looking at reducing or beginning to reduce domestic energy prices. But the bad news is that this type of reform will take a long time.” Countries with more diversified economies will be starting in better than those which rely almost exclusively on oil and gas exports, he said.
“It was very dramatic when prices fell from $110/bbl to $40/bbl,” said another speaker, IHS Financial Services Vice-Pres. Roger Diwan. “This was the first since the 1980s that we’ve seen what high prices can do to supplies. Several countries got a windfall, but it wasn’t broadly based. Low prices had a different impact in others where major investment has slowed down, if not outright stopped.”
The extent to which Iran, Iraq, Saudi Arabia, and other Persian Gulf countries can increase production is a key question, he said. “The next 3-5 years could determine the longer term price range,” Diwan said. “The world still has some demand as well. India’s grew the most for the first time in 2016’s first quarter.”
He said global prices have recovered significantly since the beginning of the year, increasing 85% from February to the end of April. “We could move into a $55-80/bbl range in the next few years. It’s not certain whether stability at this level would make producing countries feel it’s less urgent to make reforms,” Diwan said.
Dialogue has shifted
“In reading about and visiting much of the Gulf region, I’m struck by how much the policy dialogue has shifted in the last 2 years,” said another speaker, Aasim M. Husain, deputy director at IMF’s Middle East and Central Asia department. “Reforms which were unthinkable are being discussed seriously. Where gasoline prices were virtually free, they’ve risen and begun to move with other countries.”
It’s also significant that there’s more talk about government and the public sector can no longer be a country’s primary employer, he said. “Taxes are being introduced or increased. Privatization is being discussed. The idea that even a part of Saudi Aramco would be privatized was unthinkable two years ago,” Husain said.
Husain considers the move and signals very positive overall, but added that sustaining reforms will be a challenge. “If government spending has driven economic growth, the private sector will need to step in, particularly since jobs will be hard to find,” he said. “Countries are using external markets better. I hope that the lessons from this price drop won’t be forgotten, even if prices climb back to $100/bbl eventually.”
But another speaker suggested that decisions producing nations’ governments made when prices were high could make implementing reforms more difficult. “When these countries’ economies, especially in the gulf, were growing, the additional jobs did not necessarily go to the local population,” said Jean-Francois Seznec, a Middle East Institute scholar and SAIS adjunct professor.
“Many have serious youth unemployment and have begun new efforts that will need to be put on steroids now to create small and medium-sized private enterprises that can put them to work,” he said. “There also are geopolitical risks, such as tensions between Iran and Saudi Arabia which are huge. They could work together—Saudi Arabia could use Iran’s natural gas—but the Saudi government is uneasy because it believes Iran has taken over several other countries’ governments, and it feels surrounded.”
The biggest change could be that continued low oil prices will force regime changes in consuming countries which producers have supported, according to SAIS Dean Vali Nasr. “Many which have small tax systems but large ministries to dispense wealth to the population will need to get use to the US no longer needing their oil and gas production,” he said. “Producing countries will need to decide whether to keep spending money on client governments or direct it elsewhere.”
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