Middle East feeling the pinch from oil price fall

Project awards, delays and cancellations signal pressure

The oil price is beginning to hit the Middle East.
The oil price is beginning to hit the Middle East.

Lower oil prices present a number of challenges for the resource-dependent economies of the Middle East with slowing project awards, delays and cancellations signalling that the region is under pressure, according to Wood Mackenzie.

The hydrocarbon sector accounts for more than 40% of GDP in Saudi Arabia, Kuwait, Oman, Qatar, UAE and Iraq.

Lower oil prices are eroding export value and stressing public spending plans as the gap between the oil price and fiscal breakevens widens.

Investment is also being impacted, according to the research note.

“In the 12 months to end-April 2015, the value of contracts awarded for investment projects in the Middle East fell by $93bn to $81bn - a 53% contraction on the preceding year,” said Wood Mackenzie.

“Middle East oil exporters sit on some of the largest sovereign wealth funds and foreign exchange reserves in the world and governments are calling on these reserves to cushion the impact of lower oil prices.

“We expect non-investment public spending will be prioritised to dampen the risk of civil unrest.

“As a result, a sustained period of low oil prices is a threat to public capital expenditure and hence economic diversification. Greater investment in non-oil sectors is required to broaden the economic base and reduce exposure to oil price volatility.

“But, Middle Eastern economies will find it difficult to break their dependence on hydrocarbons.

“It is evident that low oil prices are likely to undermine greater economic diversification in the Middle East, despite providing a clear signal that this is exactly what the region desperately needs.”
 

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