The drop of the oil price to below $60/barrel in the first quarter of 2015 is a robust stress test of the resilience of oil exporting economies, particularly in the Gulf region. The International Monetary Fund (IMF) expects oil export losses of the Gulf Arab countries to reach roughly $300 billion or 21 percentage points of GDP. Current account surpluses are projected to decline to 1.6% of GDP this year. This is troubling news for most oil exporters in the Gulf, who need oil prices to remain higher than the baseline scenario of $57/barrel projected this year to cover government spending.
But though international energy markets today do not play into their hands, most Gulf Arab economies are much better prepared to deal with oil market volatility than in the past. Only a decade ago, a fairly straight line could be drawn between oil revenues and the fiscal and overall health of the economies in the Gulf region. Their choice to save some of their oil and natural gas based revenues and store them in dedicated savings accounts in times of plenty has provided them with a substantial war chest to sustain a period of depressed prices. That war chest leaves them with room for manoeuvre — as they design fiscal policies, pursue their interests in global markets or as they follow other geopolitical objectives.
In a way, diminishing oil revenues also foreshadow a state of play that countries in the region had anticipated a while ago: a time when economic growth had to be sustained with the diminishing contribution of petrol. The current situation might come somewhat early, as the region’s economic transformation to prepare it for the time “beyond petrol” has yet to be fully rolled out. Also, it might not last very long, as demand might pick up again and alternative supply is exhausted. But, in a way, the current price situation is the first test for Gulf Arab governments to examine how robust the economic policy choices they made some decades ago really are.
Sovereign wealth funds (SWFs) and other investment vehicles have been a part of these calculations. Designed to save financial assets and invest them at home and abroad, they have been an essential policy tool for Gulf Arab economies to facilitate the transition from hydrocarbons-based economies to more diversified ones. They provided the mechanism through which finite commodity asset