ENERGY MACROECONOMICS IN 2016

Qatar Today - - DEVELOPMENT > VIEWPOINT -

The energy world is in the midst of fun­da­men­tal shifts. It is still un­clear how Bei­jing plans to man­age China's first ma­jor eco­nomic wob­ble in nearly three decades, sub­sidy cuts in Gulf coun­tries that have long en­joyed oil wealth are still un­der­way and the US has raised in­ter­est rates for the first time in a decade. Plus, the Saudi Ara­bian riyal fell to a record low against the US dol­lar in the one-year for­wards mar­ket in mid-Jan­uary and sta­te­owned Saudi Aramco, the world's largest oil pro­ducer, said it is eye­ing an ini­tial pub­lic of­fer­ing (IPO) this year. Ques­tions abound over whether the re­gion's eco­nomic go­liath is fall­ing. Europe is still post­ing min­i­mal eco­nomic growth and the ma­jor­ity of the BRIC economies (Brazil, Rus­sia, In­dia and China) are strug­gling to find their fis­cal feet.

All of these macroe­co­nomic fac­tors feed into what un­der­pins the char­ac­ter of the global econ­omy – con­fi­dence. The bear­ish sen­ti­ment means many in­vestors that have typ­i­cally rushed to fun­nel cash into oil and gas projects are now ten­ta­tive, in­clud­ing those in the Mid­dle East. Tight­ened bud­gets is one of the rea­sons be­hind Royal Dutch Shell's de­ci­sion to with­draw from a $10 bil­lion devel­op­ment of the Bab sour gas re­serves with Abu Dhabi Na­tional Oil Com­pany (Ad­noc), while To­tal is re­duc­ing its global work­force by 4,000 and the UAE's Shar­jah-based Dana Gas is cut­ting its head­quar­ter's work­force by 40%.

Per­haps con­fi­dence in the macroe­co­nomic out­look will im­prove as the year pro­gresses if China's econ­omy sta­bilises, the US' plans to in­crease in­ter­est rates be­comes clearer and the sub­sidy cuts in the Gulf help boost cof­fers.

China’s fis­cal trans­for­ma­tion

The trea­sury of the world's largest econ­omy faces a chal­leng­ing year and energy pro­duc­ers are not im­mune, but China's out­look is not as bleak as global head­lines sug­gest. The de­val­u­a­tion of China's cur­rency, the yuan, last Au­gust fu­eled fears that China's debt-driven burst onto the global stage over the last decade could crum­ble and take the bulk of Asia's energy de­mand down with it. But the Chi­nese econ­omy is still ex­pected to grow by around 7% in 2016 – al­beit the slow­est full-year growth since 1990 – and Bei­jing's dou­ble­freeze on China's small stock mar­ket in early Jan­uary pri­mar­ily af­fected sen­ti­ment, rather than ac­tual busi­ness.

Bei­jing's plans to start switch­ing to more so­phis­ti­cated mar­ket re­forms in 2016 could lead to a safer and con­sumer-based econ­omy – clar­ity that will ben­e­fit economies world­wide. Energy pro­duc­ers in the Mid­dle East are ex­pected to ben­e­fit from China's his­tor­i­cal trade links that have en­dured for over two mil­len­nia, as Bei­jing ramps up its One Road, One Belt pro­gramme along the new Silk Road. Trade be­tween the UAE and China is al­ready grow­ing at 16% an­nu­ally and China is now the UAE's sec­ond largest trade part­ner – vol­umes stood at $54.8bn in 2014. Bei­jing's aver­sion to wade into re­gional politics will con­tinue to charm trade part­ners like Oman, the UAE and Iraq and the his­toric Sino-Iran trade ac­cord will re­gain mo­men­tum fol­low­ing the lift­ing of sanc­tions on Iran in Jan­uary.

Saudi Ara­bia ter­ri­tory en­ters un­charted

Bud­get deficits, sub­sidy cuts and ini­tial pub­lic of­fer­ings are not terms usu­ally as­so­ci­ated with the King­dom. Saudi Ara­bia's oil-cen­tred econ­omy, where petroleum ac­counts for 80% of its rev­enues, will spend less this year, rapidly try­ing

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