Implications of the Collapse of Oil Prices for the Middle East

Three experts shared their insights on the impact and implications of lower global oil prices for the Middle East.

On February 2, 2016, the Middle East Program at the Woodrow Wilson Center hosted the event “Implications of the Collapse of Oil Prices for the Middle East” with Aasim M. Husain, Deputy Director of the Middle East and Central Asia Department at the International Monetary Fund; Franziska Ohnsorge, Lead Economist in the World Bank Development Economics Vice Presidency; and David F. Gordon, senior advisor to the Eurasia Group. Henri J. Barkey, Director of the Middle East Program at the Woodrow Wilson Center, moderated the event.

Husain explained what lower oil prices mean for oil exporters in the MENA region. Though oil prices have been falling since 2014, he focused his discussion on the last few months, during which time prices fell from $50 to below $30 per barrel. This has profoundly affected the MENA oil exporters’ fiscal balances. In many countries, deficits have increased and are only expected to worsen. Because almost all countries experiencing shock from the price drop have large fiscal reserves, they did not anticipate the need to adjust in any major way. This year, spending cuts have been much larger, and many countries have decided that shifting to a value-added tax will help to ameliorate the problems. Despite these reforms, oil revenue has fallen so much that deficits are not expected to shrink. Husain predicted that these steps will not be enough, and what is needed is a long, more sustained process of diversification. He discussed the relationship between oil prices and the non-oil sector and voiced the region’s need to shift the main engine of growth from the public sector to the private sector.

Ohnsorge posed the following questions: what have been the drivers of the oil price decline, what has been the impact, and what are the policy implications? She explained that oil prices are just catching up to what other commodities had previously been doing, because all have suffered price drops. While there have been four episodes of similar oil price decline in the past—after which prices increased again—it is now expected that oil prices will take much longer to recover, and prices will never again reach their previous peak levels. Ohnsorge stated that although about 65 percent of the drivers behind the price decline were supply driven, there are increasing demand pressures. She supported Husain’s point that there is a need for greater structural reform, and that these lower prices may present a window for diversification reforms.

Gordon expressed that a loss of confidence in the markets has been a major determinant of added pressure. On the question of the involvement of Gulf Arab states, specifically Saudi Arabia, in this issue, Gordon said that low oil prices reinforce the geopolitical competition between Saudi Arabia and Iran. He suggested that because Iran is reentering the market, there will be more of a zero-sum game between the two countries regarding competition in the oil market. But the huge uncertainty surrounding Iran will make firms wary about entering the region, Gordon predicted. In this kind of market, the deals Iran is going to make with companies to get big investments are going to have to be fairly considerable.

Barkey entered the conversation by citing the 1980s oil glut as a major contributor to the collapse of the Soviet Union. He then asked the panel what will now be the major impact of the price plummets. Husain responded that the outcome could virtually be anything. This time, he said, as oil-exporting countries are approaching the situation with large fiscal reserves, this allows for a more gradual adjustment of spending. If done in a sustained manner, diversification might finally begin to happen in these oil-producing states, but it is also possible the outcome could be on the other side of the spectrum. Ohnsorge noted that if oil prices stay this low, we may see these countries shift from being oil exporters to oil importers. She predicted that either oil reserves will erode or diversification reforms will happen, and the future of the region depends on which happens first. Gordon echoed Husain’s comments that the reforms that could free these oil-exporting countries are ones that help diversify.

The panel was unanimous in their expectations that improving the present condition will be a long-term process. All agreed that seriously undertaking reforms is crucial.

By Elena Scott-Kakures, Middle East Program