Speculation over the oil price fluctuations still overshadow global economic sentiments, setting off volatility in the capital markets, currencies and commodities.

This signifies the central role of oil as a primary source of energy which remains at the top on the list despite the rapid development of alternate sources.

More important is the repercussion on the economies of oil-producing and exporting countries, whose suffering has increased with the ongoing deterioration in prices.

The severity varies from one country to another according to the relative size of the economy, and on the management of cash reserves accumulated over the years when oil prices were soaring even as recently as mid last year.

So, it has become important to know the direction of prices in the coming period to determine the fiscal policies to be followed and avoid the negative effects as much as possible.

Based on new data, oil prices are predicted to continue their softness in the short term, and will only gain in the medium and long term. This requires a need to take action to cope with the significant declines.

In the short term, the recurrent global crises may culminate in a new — and even more severe — one that could lead to reduced demand for oil. In parallel, there will be an increase in global production after the lifting of sanctions on Iran and higher output by both Iraq and Libya.

Available data indicates a slowdown for the Chinese economy, while the Brazilian economy has virtually entered a recession, and with consequences on the global economy as a whole.

Full-blown recession

There are also other indicators that predict the economies of some countries — such as India, Canada and even those in Europe — could witness a slowdown or a full-blown recession, consequently pushing oil prices to new lows — to below $40 (Dh147) a barrel again.

In the medium and long term, there are encouraging indicators to suggest oil prices could gradually recover by a significant proportion. The first indication lies in the possibility of a decline in US shale oil production.

As mentioned earlier, prices below $70 a barrel would reduce the feasibility of shale oil extraction. It has been noticed there is a decline in the number of rigs in the US and some of which have already been closed down.

This could lead to a possible bankruptcy of shale oil companies due to the accumulation of debts from low prices and declining revenues. Recently, one declared bankruptcy after its debts accumulated to $4.2 billion.

Others may be forced to do the same in the medium-term, while some oil and gas projects worth $200 billion undertaken by global oil majors, have been cancelled or put on hold.

With falling prices, in addition to declining shale oil production, production in some other countries will also drop, as announced by the Russian Energy Minister who said that his country will cut production if prices fell below $40. And this is quite possible.

Stability

In the medium term, there is also the possibility that the global economy, especially the larger ones, will overcome the slowdown that happen within the course of a normal economic cycle and which will lead to higher demand for oil, and consequently pushing prices up.

Until then, oil-producing and exporting countries have to cope with such conditions by taking adequate fiscal measures, some of which may be painful, yet essential, to overcome the crisis and maintain economic and social stability.

To do so, the populace need to be fully aware of these measures and not to listen to rumours and campaigns of incitement. These communities should understand that as they enjoyed higher prices, they should bear the temporary consequences of low prices.

Such cooperation is essential to overcome difficulties that are not the first of their kind. Oil producers have in the past managed to overcome the toughest phases and even sharper declines.

This suggests that they will be able to deal with the current decline and emerge stronger and with more stability.

 

Dr Mohammad Al Asoomi is a UAE economic expert and specialist in economic and social development in the UAE and the GCC countries