When oil prices plummeted two years ago, considerable pressures were placed on GCC states to cut their production in order for prices to stop the slide. But the latter resisted as they recognised that any output cuts will prompt non-Opec producers to increase theirs.
This would have brought down the share of Opec in the global market given that non-member states had initially refused to cooperate in output reduction.
This well thought out Gulf vision forced non-Opec member states to cooperate and agree on reducing output, especially after their revenues suffered setbacks. They recognised they are not on an equal footing with GCC states in enjoying stable financial conditions.
Interestingly, the GCC vision had its positive impact on oil prices, doubling from $27 (Dh99) per barrel to more than $50 after inking an agreement between Opec members and non-Opec producers to cut output. The agreement, which is going to be effective from June, has resulted in revenues for involved countries.
However, the GCC’s adopted strategy aims to maintain gains and resist pressures. But if prices hit $70 a barrel, shale oil production would increase, taking oil prices back to the depths.
Therefore, the Gulf oil policy seeks to fix an average of $55-$65 a barrel so that shale oil production gains increase within bounds and in parallel with global demand. Opec has to cut its output and distribution quotas depending on projected global demand and economic conditions.
This singular GCC understanding did not come out of nowhere but from the accumulation of expertise and historical dealings within the maze of the global oil market. They have adopted a moderate stance in tackling price volatility, which led them to achieve significant gains.
If things were left to the desires of extremist regimes such as Iran and Venezuela, prices would continue to deteriorate, incurring on oil producing countries huge and irreplaceable losses.
The GCC strategy focuses on maintaining the stability of production and prices and gradually increasing output depending on market circumstances as well as the economic conditions. The strategy aims to revise the unanimous decision taken by oil producing countries inside and outside Opec.
It also aims to maintain the supply and demand equation and prices at the required levels within the strategy.
But what truly matters is the possibility of the agreement being breached by radical regimes, which could flex their muscles. For instance, Iran, which was excluded from the agreement, is threatening to boost production, meaning that the agreement could be destroyed.
But on the other side, the market monitoring committee which has been set up as part of Opec has indicated that other oil producing countries are committed to cut their output to the agreed levels.
If all countries succeeded in sorting out their differences and reduce production, the Gulf’s strategy would lead to noticeable revenue gains in 2017 compared to 2016. This will reflect positively on financial and economic conditions and reduce budget deficits significantly.
Hence, the Gulf’s leadership of Opec represent the backbone of market stability and maintaining fair oil prices. It also serves the stability of the global economy significantly and adds to the interests of oil producing and importing countries alike.
Dr Mohammad Al Asoomi is a UAE economic expert and specialist in economic and social development in the UAE and the GCC countries.