DUBAI (AP) — Energy-rich Arab states could burn through all their savings in the next 15 years as worries about climate change and supply from new competitors dampen oil prices, the International Monetary Fund (IMF) warned on Thursday, advising the nations to rein in their spending.
The stark alarm from the IMF comes as the island nation of Bahrain faced defaulting on a loan in 2018 and received a USD10 billion bailout from its neighbours. Its public debt is 93 per cent of its gross domestic product (GDP).
But even oil behemoth Saudi Arabia and reserve-heavy Kuwait face the same potential economic problems confronting the Gulf Cooperation Council (GCC), a group of six nations that also includes Oman, Qatar and the United Arab Emirates (UAE), the IMF warned.
“With continued improvements in energy-saving technologies, adoption of renewable sources of energy, and a stronger policy response to climate change, the world’s demand for oil is expected to grow more slowly and eventually begin to decline in the next two decades,” the IMF said in its report. “If these expectations materialise, they would reshape the economic landscape of many oil-exporting countries, including those in the GCC.”
Oil production in the GCC represents 20 per cent of global supplies. While the cost of extracting remains incredibly low, especially onshore in Saudi Arabia, new shale production in the United States (US) is challenging their hold on global oil prices.
While GCC nations largely grew their reserves from 1997 to 2007, they began spending rapidly in the decade that followed in part to head off dissent amid the 2011 Arab Spring protests. Oil prices meanwhile crashed to USD30 a barrel in January 2016.
While prices later rebounded, they remain far below the highs once reached of USD120 a barrel. The ongoing coronavirus outbreak in China has seen tens of thousands of flights cancelled, dragging down benchmark Brent crude prices to just above USD50 a barrel.
Assuming prices around USD55 a barrel, the IMF warns the region “could exhaust its financial wealth in the next 15 years”.
“The region’s aggregate net financial wealth, estimated at USD2 trillion at present, would turn negative by 2034 as the region becomes a net borrower,” it said.
Eventually, even with higher prices, the region will spend its reserves, the IMF said. The monetary body recommended faster diversification away from an oil-based economy, a renewed push to save money and “reforming the region’s large civil service”.