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NUSACC forum analyzes impact of low oil prices
Diplomatic Pouch / March 18, 2016

By Larry Luxner

The recent plunge in worldwide petroleum prices is punishing the economies of oil-producing countries from Algeria to Oman — but it also opens up opportunities for U.S. companies in alternative energy, healthcare, manufacturing and other sectors.

That’s the takeaway from this week’s Fourth Annual Ambassadors Forum, which lured about 400 people, including 25 chiefs of mission, to the State Department’s Loy Henderson Conference Room.

David Hamod is president and CEO of the National U.S.-Arab Chamber of Commerce (NUSACC), which organized the March 17 event.

“There’s been a steady stream of bad news in the Arab world, but MENA [the Middle East and North Africa] is still one of the best places in the world for U.S. companies to do business,” he told the audience. “And the fact that we have over 400 U.S. companies here today suggests you see it the same way.”

Hamod, who next month will lead a week-long NUSACC trade delegation to Morocco and Tunisia, said Arab governments are indeed tightening their belts.

“At a time of low energy prices, Arab countries are looking for ways to reduce their overhead — cutting subsidies, eliminating projects that don’t make sense, and overhauling regulations that should have been challenged several years ago,” he said.

Anne Patterson, assistant secretary of state for Near Eastern affairs, said U.S. exports to the 22 countries that form the Arab League came to $71 billion last year, or just 4.4 percent of total U.S. exports in 2015. Likewise, U.S. imports from the Arab world stood at $88 billion, or only 3.7 percent of total U.S. imports last year.

“The decline in oil prices from $100 a barrel in 2014 to roughly $35 a barrel today has created an unprecedented level of uncertainty in our region, especially in the Gulf,” she said. “As a result, the budgets of our partners are under stress — a situation that might force unimaginable fiscal reforms. But these will ultimately benefit all countries with an improved business climate that will attract new investments.”

Washington’s top envoys to Bahrain, Kuwait, Mauritania, Morocco, Oman and Saudi Arabia — all of whom spoke at the March 17 discussion — support that view.

“Low oil prices are having a huge impact on Bahrain and forcing it to take some tough austerity measures,” said William Roebuck, the U.S. ambassador in Manama since January 2015. “The government has been cutting generous subsidies like electricity, water, diesel, kerosene and meat, though it’s proceeding with this gradually, in ways that do not impact heavily on the middle class and the poor.”

Bahrain’s situation is complicated because the government doesn’t have a tax system in place, “so they have difficulty generating revenue.” In addition, the country’s credit rating has been downgraded, pushing up borrowing costs.

“Yet even in the midst of this, the Bahraini government will continue diversifying the economy,” Roebuck said. “They’ve been working on this effort for a decade.”

In 2000, the oil and gas sector comprised 44 percent of the kingdom’s GDP. By 2012, that had fallen to 20 percent amidst efforts to develop Bahrain’s tourism, health care and banking industries.

On the other hand, Saudi Arabia, the world’s largest oil exporter, is still highly dependent on petrodollars. Last year, it reported a $98 billion budget deficit, while government revenues came to $162 billion — 41 percent less than the previous year.

“When times are good, everyone wants a piece of the pie,” said Joseph Westphal, the U.S. envoy to Riyadh. “But now, you have a country looking at borrowing money, seeking more financing on projects from partners, competing more on price, and more energized to find cost savings wherever it can. As Saudi Arabia diversifies its economy and tries to build manufacturing and attract more jobs, that will be in our interest.”

Westphal said President Obama plans to visit Saudi Arabia in September. Among other things, he added, “the president will meet with heads of state from all the GCC countries in Riyadh. This will be an opportunity for the president and the king [Saudi Arabia’s Salman] to reinforce ties — not simply on the economic side but at every level.”

Marc Sievers, U.S. ambassador to Oman, said that in 2014, oil production represented 45 percent of Oman’s GDP and 75 percent of government revenues.

“Extracting oil is more expensive in Oman than in neighboring countries,” he explained. “Oman has maintained production levels, even setting a record of more than one million barrels a day last June. However, it is not sustainable. In order to keep producing profitably, Oman has shifted focus to the least expensive wells and scaled back expenditures. Low oil prices are also having a huge effect on Oman’s fiscal situation.”

In fact, the sultanate will privatize some state-owned assets, though it plans to finance most of its deficit through borrowing on international capital markets. This won’t be easy, Sievers warned, because recent downgrades by Moody’s and Standard & Poor’s have driven up the cost of borrowing for the desert nation of 3.6 million — and have complicated Oman’s efforts to diversify its economy away from hydrocarbons.

“We are starting to see ripples throughout the broader economy and reports of layoffs in the oil sector,” he said. “While the overall number of jobs for Omanis increased in 2015, neither the public nor the oil sector currently has the resources to absorb additional workers.”

On the other hand, “the economic situation in Oman is not all bad. Oman has a stable banking sector — due to conservative regulations and a low ratio of non-performing loans — and low inflation. The non-hydrocarbon sector is growing at a moderate rate, and Oman has a well-educated workforce.”

Not all Arab countries are complaining about the collapse in fossil-fuel markets.

“Morocco has been a beneficiary of low oil prices,” said Dwight Bush, the U.S. ambassador in Rabat. “Indeed, Morocco has historically suffered from high oil and gas prices. In 2014, Morocco took the bold decision to limit subsidies on most petroleum products except butane, and under the leadership of King Mohammed VI, Morocco has placed sustainable development at the top of its agenda.”

On Feb. 4 in Ouarzazate, the king inaugurated the first phase of Noor 1, which will eventually become the world’s largest concentrated solar power plant. Upon completion, the 580-megawatt complex will provide clean electricity for more than one million people, helping Morocco reach its goal of generating 42 percent of its energy needs from renewable sources by 2020, and 52 percent by 2030.

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