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Mideast: Oil Price Decline Hits Hard

  • Breffni O'Rourke

Prague, 1 October 1998 (RFE/RL) -- The dramatic decline in world oil prices has hit the Middle East region hard. Last year's collapse of the high-growth Asian economies resulted in reduced demand for oil, and this downward trend has been worsened by the deepening Japanese recession, turmoil in Russia and the general uncertainty spreading through the global economy.

Present oil prices are little more than $14 a barrel, compared to $18 or $19 a barrel last year, and $20 in 1996. For Mideast oil producers, the consequences are serious. The region's total oil revenues are forecast this year to be about $57 billion -- a decline of a full 30 percent in one year.

Experts say that even the most prominent producers like Saudi Arabia and Kuwait might soon seek to borrow money to finance their development. A country like Iran, which lacks access to world capital markets, is much more vulnerable and some analysts say it could default on its debts. Deutsche Bank Mideast analyst Hanno Sonntag says:

"The problem then is that with oil prices declining so dramatically it will be very hard for the Iranian government to achieve the required external surplus they need to make their debt repayment, and that could be a quite worrying development for them, particularly as it looks like a recovery in oil prices will be prolonged."

Sonntag says Iran is in the coming period facing substantial repayments, namely some $5 billion, under a 1994 debt rescheduling agreement with international creditors. The country is now almost wholly dependent for revenues on oil exports, as a result of the decline in other export lines like Persian carpets, which are now unprofitable because of Iran's exchange rate regime.

Sonntag says that Iran has long made strong efforts to repay its external debt. But he says that in view of the present conditions, he considers there is a serious risk it may not be able to sustain debt servicing this year.

Another Mideast specialist, Beirut-based Konrad Petersen of ING-Barings, agrees that the picture for the oil producers is generally bleak:

"Growth this year will be much lower than in previous years, with probably negative growth rates forecast this year and also probably next year for Saudi Arabia, Kuwait and the United Arab Emirates. Very large efforts have been made to diversify the economy of the region, but oil is still the mainstay for state revenues".

Petersen says the existing over-production in the oil sector is likely to be worsened by Iraq's gradual move back to higher exports under the U.N.-monitored oil-sales program.

But he says the region has survived previous hard times, and has emerged without permanent damage. He's optimistic that it can do the same this time.

Looking beyond the present troubles however, at the broader economic picture in the gulf, some analysts see problems of another sort hindering future development. Sonntag of the Deutsche Bank puts it this way:

"I think that there is a basic compromise within all these countries, namely that in reward for not being properly represented in policy making -- and that is the situation in all these countries -- they receive generous welfare state benefits. Sometimes, in the case of Kuwait for instance, that includes a specific work guarantee, so where is the incentive then for a Kuwaiti national to become active and work quite hard in the private sector?"

Sonntag says Kuwait is probably the clearest example of this practice, and that only 7 percent of Kuwaitis are employed in the private sector.

Lack of incentive, stemming ultimately from a lack of democratization, is therefore seen as a powerful drag on the gulf countries' efforts to build strong and diversified economies.