QATAR'S DIVERSIFICATION: HOW FAR DO WE NEED TO GO?
Consumers in the US and across Europe are cheering as prices at the pump are falling ahead of the holiday season, making travel cheaper. This is of course on the back of falling oil prices – the WTI benchmark hit a new low of QR280.28 ($77) a barrel from
Diversification is to be pushed not only in the country's economic output. Financial diversification, through revenue from its sovereign wealth fund, will have a big impact on the composition of Qatar's budget revenue.
The change is the result of both cyclical and structural factors that are likely to persist, according to industry experts while the rapid change in energy prices highlights the importance of economic and financial diversification for Qatar.
But what exactly is driving lower oil prices? On the cyclical side, regional instability initially pulled up the price over the summer period with panic buying but the picture quickly changed when supply in troubled countries turned out to be higher than expected. Additional supply by Saudi Arabia along with a weaker than expected global economic outlook translated into downward pressure on oil benchmarks.
The bigger picture however has to do with higher production in the US, the world's largest consumer of oil, driven by new fracking technology that has caused the traditional supply-demand dynamics of decades past to break down: according to the Energy Information Administration, the United States' net import share of oil stands at around 30% in 2014 down from a high of 60% in 2005.
Is an oil price rebound in the offing? On the cyclical side, downward pressure due to weak demand is likely to persist in the first half of 2015, according to a recent report by the Internal Energy Agency. On the structural side, “there may be some slowing [production in the US], but it's not going to be dramatic if we stay around QR291.2 ($80) a barrel,” according to a senior Vice President at the Dallas Federal Reserve Bank ( NYtimes.com.)
Lower oil prices
Overall, the GCC will likely have to live with lower oil prices in the medium term. In the longer term, the 2024 forecast for the US is for its share of imported oil to fall to 15%, half of its current level, according to the US Energy Information Administration.
As mentioned earlier, these changing energy price dynamics – which are also at work in the natural gas sector – imply that Qatar's reliance on oil and gas needs to be reduced further. One measure of reliance on hydrocarbons is the revenue share of oil and gas in exported products.
Over 92% of Qatar's product export revenue is from mineral products ( gas, crude and refined petroleum products). For the remaining 8%, the biggest export items are chemical products (3%), plastics and rub- bers (2%) and metals (1%). The over-reliance on oil and gas implies that changes in energy prices have a big impact on Qatar's product export revenue.
But other countries in the Gulf have shown that countries' export performance can improve with the right initiatives in place. The UAE, for example, has managed to diversify its export base: mineral products account for only 68% of its product export revenue, followed second by metals (20%) and third, machinery (4%).
The UAE has managed to diversify its economy through various initiatives, not least of which is the creation of highly successful economic zones. As Qatar embarks on the creation of three new economic zones, the right policies can have a big impact on the country's product export performance, potentially boosting Qatar's non-hydrocarbon revenue share by nearly 25 percentage points.
But diversification is not only to be found in the country's economic output. Financial diversification, through revenue from its sovereign wealth fund will have a big impact on the composition of Qatar's budget revenue. The Qatar Investment Authority (QIA), estimated to be currently holding assets worth over QR618.8 billion ($170 billion), is a relative newcomer among sovereign wealth funds but has actively acquired equity participation in banks, real estate and commercial enterprises across the world. Oil and gas revenues currently contribute 64% of government revenue while investment income accounts for only 14%. As the QIA grows in size, revenues from its income generating assets will allow Qatar's government to become less dependent on the vagaries of the oil and gas markets.
Financial diversification is also indirectly linked to the domestic non-oil and gas sectors. Indeed, government revenue stemming from corporate profits and other sources of revenue currently constitute only 21% of overall revenue.
When compared to regional benchmarks, diversification in products exported through its economic zones can increase the government's revenue share from corporate profits. This would not only ensure that Qatar remains on a stable footing in a period of low energy prices, it would also allow the government to reduce Qatar's fiscal breakeven price for oil Overall, the GCC will likely have to live with lower oil prices in the medium term. In the longer term, the 2024 forecast for the US is for its share of imported oil to fall to 15%, half of its current level, according to the US Energy Information Administration.
BY DR TAREK COURY