The financial markets may finally have got the Christmas present they were looking for this week as oil prices showed some stability for the first time since late November.
The fact that prices have fluctuated daily between $62 (Dh228) and $59 shows that “stability” is only relative, but at least the large price swings that shaved $20 off the price of oil — and caused chaos in regional equity markets — since the decision by the Organisation of Petroleum Exporting Countries (Opec) last month to maintain production levels seem to be over.
The unfortunate and somewhat comic side-effect of this is that now many people are asking: “When will oil prices return?” It is a sad state of affairs that despite renewed calls for economic diversification over the past few months, many people’s idea of an economic recovery is oil at $80 or higher. Current forecast suggests it could return to that pricing level by the end of 2015, but there are still some unanswered questions that could affect prices, such as whether China’s economy will improve and whether the sustainability of shale oil production can be ensured at the current market price range. Oil’s return is by no means a certainty.
The better question that oil-producing countries should be asking themselves is: What if higher oil prices do not return? Only once before in the commodity’s history has it seen a period of sustained prices over $80 (1979-1982). For most of the next 20 years, prices averaged between $40 and $50. Countries that have based their budgets on the presumption that oil’s journey into the $100 range would be permanent were only fooling themselves. Some economies will have to go through the painful process of readjusting.
In the light of oil’s new reality, it is now time to start taking economic diversification seriously. The phrase has been thrown around for generations, with very few Opec-member countries actually making substantive moves in that direction. The UAE has shown that diversification in the Arabian Gulf is not an impossibility. It is now time for the rest of the region to follow suit.
